Tuesday, November 25, 2008

The Coming Great Depression: Intersecting/Reinforcing Trends

Longtime readers are already familiar with this chart
taken from my book Weblogs & New Media: Marketing in Crisis which depicts four intersecting/reinforcing longterm trends: (see chart below)

1. Peak oil, or the depletion cycle/end-game of the global economy's complete dependence on inexpensive, readily available petroleum/fossil fuels.
2. The cycle of credit expansion and contraction (approximately 60-70 years), which is now beginning the transition from unsustainable credit expansion (bubble) to renunciation of debt (credit collapse) and global depression.
3. The generational cycle (4 generations or approximately 80 years) of American history which leads to nation-changing social, political and economic upheaval. (The American Revolution: 1781 +80 years = Civil War, 1861 +80 years = 1941, World War II + 80 years = 2021)
4. The 100+ year cycle of price inflation and stagnation of wages' purchasing-power which began around 1901 is now reaching the final stage of widespread turmoil, shortages, famine, war, conflict and crisis.

Here are some good source books on each trend:

Oil depletion:
Beyond Oil: The View from Hubbert's Peak
The Party's Over: Oil, War and the Fate of Industrial Societies
The End of Oil: On the Edge of a Perilous New World
Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

Generational Cycle:
The Fourth Turning

Price Cycle:
The Great Wave: Price Revolutions and the Rhythm of History

Two fine books which integrate various trends:
The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes by Michael Panzner

Bottom line: the coming Depression is not like the Great Depression of the 1930s-- it's much worse because the crisis is not only financial in nature. To take but one example: as Jim Kunstler points out, in 1929 the U.S. was the Saudi Arabia of the world, sitting on vast easy-to-pump reserves of oil. Now the U.S. imports 2/3 of its petroleum.

Several other negative trends must be added to the above list:

5. Demographics + Stupendous government entitlements = fiscal implosion. There really is no secret here: the entire edifice of government entitlements for the elderly is still based on the demographics and longevity statistics of 1932: high birth rates and a small percentage of the overall population who were over 65 years of age (i.e. few retirees).

The nation's demographics are astoundingly different now--and as a result, completely unaffordable. The elderly (defined as those who qualify for government entitlements) are not 2 or 3% of the populace but 12-15%. Where there were ten workers to support every retiree in the 1940s, now there is 2.5 workers per retiree, and that ratio-- already a demographic impossibility--could fall to 2/1 as Baby Boomers retire in their tens of millions and as the Depression decimates the job market.

When Social Security began, the pension amounts were very modest; now, 1/3 of the program's immense benefits don't even go to retirees but to offspring, (death benefits), disabled workers and benefits paid to mentally ill citizens--coverage which extends far beyond the program's original scope.

Medicare began in the late 1960s as a small $2 billion program and has ballooned into a program which will soon exceed the Pentagon in money disbursed.

Once they leave office, every politican of both parties admits that this entitlement train wreck really needs to be addressed soon--blah blah blah.

(A good book on the topic: While America Aged: the Next Financial Crisis)

Bottom line: unlike the 1930s Depression, all levels of government are now facing the fiscal impossibility of paying benefits based on unrealistic/dated demographic models.
Which brings us to

6. Mission creep: entitlement programs have expanded far beyond their initial scope and estimated cost structure. In addition to Medicare and Social Security "mission creep," consider the veteran's Department. In 1930, the U.S. Armed Forces were considerably smaller and Veteran's benefits far more meager than today's forces and benefits. No one anticipated a world war or a Cold War which would require millions in uniform for 50+ years. Put 3 million citizens in uniform for decades and guess what, you get rapidly rising veteran's benefits.

The move to a volunteer armed forces also ramped up costs considerably; draftees were far cheaper (one side benefit of involuntary servitude to the government).
The politics of "mission creep" are straightforward: everybody loves getting more at no extra cost in taxes. Politicos know that giving voters more benefits without raising taxes is a sure vote-getting strategy, and in a growing economy juiced with deficit spending, the day of reckoning was easily put off--until now.

Astute reader Dan K. disagreed with my expectation of a Coming Depression; he foresees another attempt at reflating the economy. here is an excerpt from his cogent comments:

"However, I fear 'change' may slowly get trampled by the minions. In which case we will not get Depression (though no matter what path they all take we will continue to get asset Deflation), but a long bout of ever increasing stag-flation and most probably hyper-inflation.
If you think about it in the broader context, any government would rather inflate it's way out of debt than deflate. Certainly under deflation taxes cannot be raised and penance to the governmental coffers will surely decrease. So we must at least TRY to get inflation back again. Even if it is only 1-2%. Even if we all know it is truly unattainable for the knight, the Fed, the round table or anyone else to control the printed money once it makes it into the broader economy.

That is the war we will eventually lose -- the inability to control the inflationary spiral we will create to win the current battle. The Hindenberg Fed will hit the tower at some point, and all will come crashing down. And the knight will hope that happens some 8 years from now when the next knight comes to rule the territory and he moves on to warmer and more hospitable climates."

Here is Dan's entire essay: A Knight's Tale in 3 Acts.
Thank you, Dan, for making the case for renewed inflation as a temporary "solution" to the downspiral of the global economy.

From the point of view of yesterday's entry, This Week's Theme: The Coming Great Depression, I would say that the tremendous appeal of printing "funny money" and inflation is based on the deeper problem which is wealth is not actually increasing in the U.S., it is declining.

Rather than face the need to reduce unproductive spending and consumption, we have chosen (not necessarily consciously, but chosen nonetheless) to fill the widening gap between our production of goods and services and what we consume with "funny money" which has created an illusion of "growth" via layers of inflation and currency depreciation.

Thus in my view, the starting point is not the manipulation of money supply and leverage, but the fundamental disparity between production and consumption. If we were actually increasing our wealth via reduced spending and growing productivity of goods and services, then there would be no pressure to create an illusion of "growth" and "wealth creation" via the legerdemain of currency, money supply and leverage manipulation.

Here are a few other titles a propos to the topic:

Collapse: How Societies Choose to Fail or Succeed
While America Aged: the Next Financial Crisis
The Dollar Crisis: Causes, Consequences, Cures
Tragedy & Hope: A History of the World in Our Time
The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

And did I pitch my own book yet? Weblogs & New Media: Marketing in Crisis

Thank you, John B. ($20) for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.

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