Are we headed for a 2nd Great Depression?

Great Debates
1

Okay, bear with me, people. I am not a historian. What follows is my interpretation of History as I know it.

Then:
The first Great Depression was caused by stock speculation and by many companies’ being overvalued, in addition to overproduction in industry. There wasn’t a market for many of the products that were being made, and corporate profits were built on sand. The income of the average person rose little, if at all, yet more and more expensive goods were produced that no one could afford to buy.

Now:
It is a well-known fact that many American businesses are moving their manufacturing to overseas, and selling the finished products at the same high prices in the United States. The result has been fantastic corporate profits. Since NAFTA, this process has accelerated with Mexico.

I have just finished reading Joh Ralston Sauls “The Unconscious Civilization,” and I can’t help but wonder: if all the companies that produce the things we buy move overseas, how will there be enough jobs for Americans to afford to buy these things in the first place? This is not xenophobic raving. Seriously, if I work in a car plant which is moved to Bangkok, well, now I am unemployed. Will I be able to buy one of the cars I used to make? Will I be able to buy ANYTHING that is expensive?
Although the causes are different, this state of affairs seems to mirror that of the U.S. right before the Great Depression. Consider:

THEN: Wild overvaluation and speculation in the stock market.
NOW: Dot-coms that have never turned a profit with values in the BILLIONS. Stock scams that are based on manipulating industry gossip. (Did anyone hear of that 15-year-old that made $200,000+ by doing the old pump-and-dump in various industry chatrooms?)

THEN: Overproduction and saturated markets.
NOW: New chain stores and malls opening every other week, with virtually no attempt to revitalize old centers of industry or retailing nationwide. When’s the last time a NEW auto plant was opened in Detroit? 1960?

THEN: Big companies making a ton of money, while the income of the average person rose little or not at all.
NOW: The same!

Again, I am not an expert. If someone is able to counter everything I’ve said, please do do. I put this on here in the hope of learning something.

2

open in the last 10 years.

Dot Coms are built on sand.

But the only real potential for a Depression is the large numbers of Baby Boomers cashing in their stock portfolios to fund their retirements.

Starting around 2008.

So, don’t put Social Security in Stock Market investment funds. Make sure your Congressman understands this.

3

The American economy has moved towards services rather than manufactured goods production. Despite the Dot-Com bubble there have been real gains in productivity. As you may have noted, the problem in the past several years has actually been worker shortages, not unemployment.

True but you can retrain to take a new job in some other sector of the economy. Mfg is not the only game in town.

That depends. Of course if you are unable to consume the imported goods that will effect the importer, and thus the producers and what they offer. As well as of course domestic producers. There may be two different answers to your implied question, one personal (maybe you’re a loser in the new economic framework) and one in the aggregate (most people are better off). Economic theory presumes that the winners should compensate the losers to have a total positive gain for the society.

Well, perhaps the over-valuation but as others have noted, even the death of mfging has been overstated. So Detroit loses out. Somewhere else gains. Also, the Great Depression was in no small part exacerbated by bad policy decisions in DC and around the world. Protectionist barriers, refusal to stimulate demand, etc.

4

IANA economist, but I recall reading once that the '29 crash had such a huge impact because the banks were heavily invested in the stock market. When the market crashed, their assets evaporated and they basically ran out of money. There was no FDIC at the time, so people with bank accounts lost their shirts, there was no money available for private investment, etc. Presumably, the safeguards now in place would prevent a recurrence of that, but you never know.

And while the crash was bad, it was a series of harsh tariffs (Smoot-Hawley in the US, for example) that actually accelerated the economic slide by setting off a round of global protectionism that strangled growth. I think that the economic policies of the 1930’s also didn’t recognize the role of government spending in stimulating growth, which made things worse.

One thing that does worry me now is the fact that so much of the current economic boom seems to be built on consumer debt. It is so easy to get credit now, and for so many people, their purchasing power seems to be a function of how much plastic they have in their wallets. I don’t know if this is good, bad, or neither, but it seems to be a pretty shaky foundation. Maybe some of the more economically knowledgeable members of the board can enlighten me.

5

I don’t know about another Depression, since hopefully America’s intellgensia is aware of the warning signs of that already, but we are definitely heading into a recession. I submit the following:

Recessions always in years ending in '1: 1991,1981,1971 blah blah blah
Preceeded by a stock market crash ending in the year '7:

1927, 1987, 1997

Rising gas prices: 1979, 2000

Declining consumer confidence

Insane stock specualtion combined with another natianal economy damaging speculation swindle:

Buying on margin, the S&L Crisis, and the Dot Com Scam

Add it all up: We are in for a tough few years

6

But what about something I heard to the effect that the income of the average American has hardly risen at all in real terms since the 1960’s? Is this even true? Does it matter?

7

It’s been a while since I studied Kondratiev waves but if I recall correctly we’re supposed to have another few decades before the next major depression.

Kondratiev’s Long Wave theory might not exactly be hard science, but it is pretty interesting. It has a little “Foundation” feel to it.

8

There is a big difference between a downturn and a depression like the 1870s or the 1930s. Whether or not the US has a recession in the next 5 years (likely but not certain) it is very unlikely to a depression on that kind of scale. A couple of reasons: [ul][li]Finance markets are a great deal more sophisticated now than they were then. They can fall a long way and still function. This means that even a large fall will not stop the real (ie non-financial) side of the economy working. []Probably more importantly the Fed will not make the same mistakes as it did then. Economists are divided on what caused the depression but just about everyone agrees that the Fed’s actions in severely reducing the monetary supply greatly exacerbated the problems. []In addition of course the Fed won’t let the banking sector collapse the way they did in the 30s. Given the banks’ role in credit creation, this also created deflationary pressure.[/ul]I won’t say too much about Lizard’s critique of the current state of the US economy, but[list][]There is a case to say that some stocks and the US dollar are overvalued. Adjustment when it comes may be somewhat painful but is unlikely to be catastrophic.[]The new economy is no less real than the old economy. Services are just as much valuable economic activity as big steel plants. []Losing some industries and some occupations is normal. It does not signal disaster. The US is shedding manufacturing jobs because it is cheaper to do those jobs elsewhere. Why? Not because you are uncompetitive or because they have low wages, but because the US worker now has skills and habits on average that suit different, higher paid, more productive jobs.[]As to who’s gaining, this depends on which “average” you’re talking about. Certainly the mean American has gained more than the median American. Most of the gains have accrued to fairly high income earners and certainly there are people who have been left behind, but the last 10 years or so would have to be one of the most impressive growth phases in any economy ever.[/li]
picmr

9

Rolls eyes… 1929 not 1927. Numerology is fun but worthless.

10

History repeats itself. The first time as tragedy, the second time as farce.

                                     Karl Marx

do economists know enough about technology to figure out if planned obsolescence is going on? John Kenneth Galbraith mentioned it one time in THE AFFLUENT SOCIETY in the late 50’s. how often do you hear economist mention it now?

Dal Timgar

11

What the hell does product obsolescence have to do with anything? Aside from the fact that it is the only thing about economics that you know about? Maybe there’s a reason economists never mention it. For fuck’s sake, can someone here start a thread about economics without you hijacking it with your incomprehensible theory about planned obsolescence?

The subheading under the Straight Dope logo is “fighting ignorance since 1973”, not “whining about planned obsolescence”. Perhaps your comments would be taken more seriously if you managed to actually connect them to the conversation at hand. Not that they deserve serious attention. Apparently, in your world, the SAE has been faking it for the last 30 or so years.

As to theuglytruth’s bad numerology, we had a stock market crash in '97? There was a recession in '91? As I’ve heard it, and from personal recollection, the recession was just about ending in '91 after a couple years. And weren’t there other recessions in the mid eighties and mid to late seventies?

Anyways, I doubt that the results of a stock market crash now would be as bad as they were in 1929. The Fed knows better than to make the truly bonehead moves they made in the 30’s. At the time, the Fed’s Board of Governors was trying to assert control over the branches, and was therefore following the opposite strategy of what the branch presidents reccommended. By doing this, they were basically purposely avoiding the proper actions, which probably had more to do with the numerous bank failures than the stock market crash did.

12

Okay, reading this thread I see a lot of "the Fed would know better"s and “Things are different now.” All well and good. BUT, how do we know that things can’t go wrong in an entirely new way? Maybe things could crash in a way never envisioned by anyone. Am I to understand that there is NO WAY this could happen?

And I don’t agree that service jobs are as valuble as manufacturing jobs. Take Marion, Ohio, long a manufacturing bastion. Average pay in Marion in 1983: $16.73/hour. Average pay NOW, when all the plants have left and the biggest industry is the fast food joints: $10.25/hour. How is this improvement? There is NO WAY service jobs can provide the average blue-collar American with the standard of living he has grown accustomed to.

13

Bad policy decisions are always possible. The Great Depression II however seems unlikely due to better understanding of macro-economic policy and improved tools. Unlikely is not impossible.

Of course this says nothing about a severe recession for example. You’re making an error in assuming that excluding

Well, you should look at economic indicators. Depends on which mfg jobs and where vs which service jobs and where.

Marion Ohio is not the USA. It’s a single rust belt city. Mfg has moved to new locations, for better or worse, inside and outside the USA and new industries, service especially have come to dominate the economy. Service industry does not mean fast food joints, in also includes consulting, computer services, telecommunications services etc. Marion has apparently lost out, that doesn’t mean that all the US has.

Well, that may be so. Maybe. But then the aforementioned blue collar American needs to retool and work in white collar service industries. That’s the reality of market economics, creative destruction, aka change. Of course there should be assistance in this matter – but still education opportunities abound in the US.

14

what does planned obsolescence have to do with anything? ever heard of NET WORTH?

every household is an economic unit. it will have income, hopefully, expenses, assets, possibly liabilities. the assets minus liabilities equal NET WORTH. what are the assets and what happens to their value over time. according to one website a new car depreciates by 25 to 45% in the 1st year, lasts 12 years 128,000 miles. if the user only drives it 10,000 miles, why should it depreciate by at least 25%? because of yearly model changes. they make the car more expensive and cause greater loss thru depreciation. according to THE MILLIONAIRE NEXT DOOR 36% of millionaires buy used cars. if americans had spent money paying off mortgages at an accelerated rate instead of on cars for the last 50 years the economy would be in a totally different state.

i’m an electronics tech, you study a system to find the biggest flaw in the system. i say planned obsolescence is the biggest flaw, but it dependes on ignorance. i am attempting to cure it. what is your objection? you can always skip my posts.

http://www.spectacle.org/1199/wargame.html

Dal Timgar

15

There are four safeguards in place in the United States that will keep the next recession from turning into another Great Depression:[ol][li]Stocks can no longer be bought on margins of less than 50%. It is believed that large numbers of people owning stock on 10% margin played a substantial role in the stock market crash of 1929.[/li][li]Farms are subsidized. We might end up poor and unemployed, but we won’t be starving like we were in the early 1930s.[/li][li]The FDIC will keep most banks from going under, even if there’s a run on the banks and everybody withdraws their savings.[/li]The Federal Reserve made many mistakes in the early parts of the Great Depression which worsened the economy. They have learned from their mistakes.[/ol]

16

In a capitalist economy, there will always be winners and losers. When the motor car came along, blacksmiths lost out. Entire industries built around horses (stables, feed, waste cleanup, saddles, etc) either vanished or scaled back dramatically. Where did the jobs go? To the new industries. There was temporary pain in those selected industries, but we left the economy alone and it corrected itself.

It’s a good thing we didn’t have our present government attitudes then, or we’d still be paying blacksmiths to not make horseshoes, and the SMOA (Saddle Manufacturers of America) would be a powerful lobby that would not allow politicians to be elected if they threatened to remove saddle subsidies which were enacted at the start of the auto era, because it was accepted as a given that the family saddle business was an important part of the American Way of Life that we must not let die.

<sarcasm mode off>

If it is cheaper for companies to manufacture cars overseas, then its in our best interests that they do so. That way we get cheaper cars. Auto workers in the U.S. may lose out, but then workers in EVERY other industry do better because they can buy cheaper cars. And the auto workers may have benefitted last year from cheaper shirts, because shirt-making moved overseas at the expense of the domestic textile industry.

In the long run, we get all get goods more cheaply, and the economy becomes stronger. Our standard of living rises. But yes, there will be ‘losers’, and people in those industries will have to re-train, move to where the jobs are, or retire. C’est la vie.

In case you think I’m being cold-hearted, you might like to know that I was almost bankrupted when the industry I was in (commercial BBS software) was destroyed almost overnight by the rise of the internet. It took me years to dig out from under that. I never ran to the government begging that they ‘do something’ to protect my little niche in the marketplace. It’s a good thing the commercial BBS industry wasn’t larger, or it might have had the clout to gain ‘protection’ for itself. How would you like to pay a tax on all internet transaction to help prop up my failed business? How about regulations that protect the BBS industry by requiring that all financial transactions go through dedicated phone lines instead of the public 'net?

This is exactly what has happened when larger industries with political clout feel threatened. Half the building regulations in force today have nothing to do with safety, and everything to do with protecting the jobs of construction workers at the expense of homeowners. Try to unload a commercial shipment from a dock in New York without using Union labor. Try to start a new Cab company in a major city. These industries are now ‘protected’ by our benevolent government.

THIS is the kind of stuff that threatens prosperity. Not free markets.

17

Tracer, all those things you said may be true, but all those things were said prior to '87 when everyone said another stock market crash like '29 would never happen again. But of course it did, twice as bad, because of things that didn’t exist in '29.
Now, actually, the economy went through far worse in the years '80 - '82 than it did after the crash of '87, and without an accompanying crash. So the thing to keep straight here is that the economy could go down without a crash in the stock market. It could instead be a long, slow bear like the one that started in '72 and didn’t really end until August '82.
All that said, there’s just no way to predict another Great Depression. You could easily construct a doomsday scenario at just about any time. Today it would look something like this:

1 - Today, as in the late twenties, the U.S. is prospering while the rest of the world is faltering.
2 - Japan is now the largest creditor nation, and looks like its teetering on the edge of bankruptcy. Its government bonds have been downgraded by Moody’s and S&P.
3 - Back here in the U.S., our prosperity has been accompanied by a large and growing current account deficit: in last year’s 2nd quarter this amounted to 81.2 billion, and has risen to 106.1 billion in this year’s second quarter (according to Barron’s, which publishes this statistic in every issue). Greenspan has repeatedly said that this continuing and growing deficit is simply not sustainable.
4 - The euro continues to weaken. What happens if it just gives up and crashes?

A few years ago, when our own government deficits looked endless, you could have constructed another, and different, doomsday scenario.
There’ll always be something to worry about. One of these days there will indeed be another Great Depression, just as in '87 there was another crash. Be prepared, but don’t worry too much: when it happens, it’ll be bad, and it’ll be just as bad whether you worry or whether you don’t.
What I’m trying to say is, it’ll seem like the end of the world, but it won’t be. It won’t be any fun to live through, though.

18

I think this is significant. Many of the people in my wife’s and my social group average $60-75K each. That’s well over 120k for the married couples we know. Yet they are all in debt up to their eyeballs. In debt for things that depreciate like suv’s, big screen televisions, and expensive vacations. Throw in a mortgage and that’s real debt! And these people make more money than the average bear. Now thrust this kind lifestyle onto the $15/hour crowd (and that’s exactly what is going on. I see tons of $35,000 trucks being driven by 23 year old laborers) and you’ve got a country full of major debtors. When the economy hits a speed bump (and it will) there will be a lot of loans and credit cards defaulted. If that speed bump turns into a major downturn…then what? With folks not able to pay for what they already have, they won’t buy more. No more buying means less production, unemployment, and so on and so on. I think there could be another depression brought on like this. I really do!

19

I’d just like to give a quick reply to Sam Stone’s sarcastic comments. I’m wondering if he has considered that the wonderful governmental attitude of the time would have allowed people to starve during that “temporary pain” if they couldn’t adjust quickly enough. Promoting unprofitable businesses because of their political clout is one thing; throwing some to the wolves so others can increase their prosperity is another. A fact that our current governmental attitude reflects. Occasionally anyways.

Although I suspect that the blacksmiths did fine. Knowing how to use tools is a handy skill during industrialization. Normally skilled labor has the least problem finding work. I would hazard a guess that many became mechanics.

20

Well, if the Euro continues to weaken, Europeans will continue to improve their terms of trade. A strong currency is not ipso fact a good thing! No matter what national sentiment may feel --we’re strong cause our currency is strong-- it hurts exports (all things being equal). To the extent the Euro is probably under-valued this may be something to be corrected – and too much lost value of course would drive up European energy prices…

Well, enough of currency…