Now that we’re getting to about a year and a half into this bear market I think it’s about time we started considering the possibility of a repeat of The Great Depression. Just because this is kind of what you’re supposed to do when things are bad so as to avoid getting into the actual situation. Superstitious, I know, but voodoo doctors can probably give you advice at least as good as your local broker (not to mention your brother-in-law) as to what to buy/sell/hold, right?
Getting on with it, into the doomsday broth we can throw the following ingredients (statistics from Barron’s or Yahoo’s Finance site):
1 - The Nikkei 225 (Japan’s equivalent of the Dow Jones) is 11 years into its bear market and is now within 1000 points of the Dow, and actually declining, if you can believe it, faster than the Dow is, thereby threatening to cross it on what’s beginning to look like a trip to absolute zero. (It was 39000 or something at its peak in 1989 or 1990, and sits as I write this at 10713.51, about one-fourth its value 11 years ago. Scary.)
2 - The dollar has begun to decline. This can get very scary, because the U.S. is carrying a huge current account deficit and needs to attract foreign investment to balance the books. Should foreigners begin to suffer declines in their native currencies that are magnified by a decline in the dollar, you could see major capital flight out of the U.S.
3 - Copper, which was once described by James Grant, publisher of Grant’s Interest Rate Observer, as the commodity with a PhD in economics, had its biggest drop in three months last week out of economic fears, and is now down 18% for the year. (Source: Commodities Corner in the Barron’s of Sept 3.) Gold, in the meantime, hasn’t moved, which means that the rate cuts have yet to produce any sort of excess money sloshing around looking for a place to go. So much for all those rate cuts having any kind of an effect on the economy.
4 - The slowdown is worldwide. All of the major industrial zones are suffering. Japan’s unemployment is threatening to hit post WWII highs, growth is slowing in Europe, and the U.S. and Canada are of course staggering around. If everybody goes into a recession at once, we have the danger of a self-reinforcing downward spiral that would get us into a repeat of The Big One.
5 - The indexes: the S&P, even after being down more than 20%, is still 5.65 times more than the stated book value of its companies. The Dow’s book value ratio is actually higher today, at 7.57 times, than it was last year, when it stood at 6.86 times. This is because book value has been declining in that index even faster than the index, dropping from a value of 1638.10 to 1315.16.
6 - Nobody is talking about doomsday scenarios. In fact, the latest Investors Intelligence Poll shows 43.9% of investment advisors bullish, while 30.6% are bearish. Market bottoms usually happen only when the bears outnumber the bulls. Plus you get doomsday scenarios being talked about when people get really gloomy.
This is very scary. So I figure we here on the Straight Dope have an obligation to yell “The sky is falling”, so as to keep that big blue canopy up there, and keep us from having to learn how to polish apples.
Here’s some interesting stuff called Kondratyev Theory. This is named for a 19th century Russian economist who theorized that capitalist economies adhere to an approximately 54 year growth and fall cycle.
Here’s another link that goes into this, but here the name is spelled Kondratieff.
Caveats: this stuff is found on mostly alarmist and fairly kookie sites, i.e., the second site also has stuff about planetary conjunctions and Yugoslavia. Most financial people don’t seem to buy this stuff. However a preponderance of opinion only counts for popularity, not accuracy.
Myself, as far as economics, I tend to be a pessimist, so I like stuff like this but I probably wouldn’t plan my investments based on it. Use/ignore at your own risk/peril. 
Thanks pantom, for your interesting OP. It has struck me as pretty inevitable for as long as I’ve been thinking seriously about economics that the situation we’ve been in for the last decade or more wasn’t going to hold up forever. From what I’ve read, the only reason that the global economy didn’t tank back in the late 90s when the Asian “tigers” ran into trouble was that American consumers were content to ring up their credit card debt. Well, good thing they passed that bill making it harder to declare bankruptcy ;). Okay, assuming that you’re right and the recession is more like to develop into full-blow depression. What do you think can/should be done?
Mandelstam: Actually I don’t myself think depression is on the way (at least most of me doesn’t. Pieces of me do, but I try to keep them out of sight). What I was attempting to say is that the thing I find scariest is that no one is putting out any doomsday theories. It’s hard to even find someone who’s mildly bearish. Which is very odd considering what has gone on in the stock market the past year and a half. Or did everybody get out before the fall?
Anyway, if this time around things do get hairy, my personal opinion is that the only safe haven would be that old standy and barbaric relic, gold. Because of the current account deficit situation (which of course isn’t made any better by all that credit card debt you mentioned). This would seem to be calling for a major devaluation of the dollar, which would lead to a major crisis of confidence since the dollar has become the world’s reserve currency. Of all the things that are happening to the U.S. economy, this one scares me the most. (There’s also the fact that it’s been falling for twenty years or so, which would certainly make it the contrarian investment.)
ShibbOleth: I wasn’t able to get anything decent out of that first site, but the second one’s interesting. They do seem to describe exactly what’s happened since WWII anyway. I don’t know whether they’re right about the events leading to the Great Depression, though. I’ll have to do a little independent research to see. Needless to say, I’m hoping they’re wrong.
We talk ourselves into a recession just as we talk ourselves into a boom.
I think it all comes down to confidence.
If people start spending less then unemployment goes up, people see this and spend even less etc.
At some point interest rates get really low and people say ‘i have nothing else to lose’ and start borrowing and investing etc. and things pick up.
It won’t be a real recession until unemployment starts going up and people on TV are shown leaving their homes because they can’t afford the repayments.
Watch as they complain about the economy BUT never complained when their property went up in value etc.
Amen, it’s all in your head. Many big companies are having layoffs while their profit margin goes up. What it comes down to is all the idiots who are selling now. Selling now is about the dumbest thing you could do. I wish I had a bit of cash right now because I would be buying like crazy in all the major companies that are low right now, like AOL Time Warner, Cisco, AMD, Intel etc… and then when things start getting better watch my stocks rise and split over the next ten years. Sure things might be rocky right now, but that would get me a really good deal. People are holding back because they don’t want to buy a stock that will go even LOWER, when, what they don’t realize is that NOT buying stock is what causes it to devalue.
Anyway, consumer confidence needs to be up for the market to be up. It’s like faith in god basically.
Erek
There’s definitely bears out there - check out:
I must be reading the wrong sources. I haven’t seen any articles in newspapers or magazines, or anything on the popular TV news sources warning of any danger. But the quote on the top of the “Online Articles to Read” section on that iTulip.com web site from Paul Volcker, former head of the Fed, was certainly blunt:
The fate of the world economy is now totally dependent on the US stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings.
Pithy if nothing else.
Re consumer confidence: somewhere along the way I read that this correlates strongly with unemployment. Nothing will shoot your confidence to hell faster than losing your job, and nothing will get it back for you quicker than finding a new one. (Love works this way too.)
Valid points that you make, pantom. Notwithstanding the fact that there are many irresponsible and stupid alarmists, too, there is plenty to worry about.
If things go in the dumper, how did they get that way, and what can be done to arrest the decline?
–It is said that JP Morgan got out of stocks prior to the crash after his shoe shine boy gave him stock tips. Echos of today? A decade ago, Japanese housewives were said to be preoccupied with the stock market.
–professional stock gurus spout nightly about the reasons why the market does this or that, explaining everything that happens. And they are taken seriously. If they are so *&^%% smart, why isn’t Warren Buffet listening to them? And why are so many listening? Does anyone else here think that the people who obsess on CNN-fn are a bit nuts??? Some of these analysts have gigantic conflicts of interest, and nobody is going to jail over all this.
–analysts base their picks on reported accounting numbers, but the “rules” for these numbers are always being changed and circumvented. We see “one time write-offs” in the high-tech sector that are explained as unusual events…so they don’t really count! Willy Sutton, were he alive today, would be a CPA!
That works to a degree, and in a short term. But there’s a few economists and general pundits out there who argue that we’ve been in a depression since 1973 and we’re scared to admit it, partly from fear of making the situation worse by destroying confidence in the market.
The argument runs that growth has been illusory in first-world countries for the last 30 years because none of what we’ve been doing actually produces anything. Production is shifting to the third world.
Our focus has shifted to speculation – on currency and on property. We’ve also tried to turn weapons into a commodity, but whereas most forms of production have a multiplier effect – a road isn’t just work for a construction company, but something trucks can transport goods down – weapons destroy, rather than create, the infrastructure of an economy, when they’re used at all.
Our workforce has become manager- and service-industry-based. In other words, we’ve evolved an economy mostly around people telling other people what to do. We buy money as if it was a thing and play the stakes at the real-estate roulette wheel. But the actual means of production, the purpose of any economic system, has left for other countries. We make very little nowadays. Instead we have a sort of illusion of activity, faked growth, an elaborate numbers game.
I think our economic problems are a little too serious at this point to be solved by a religious ecstasy of marketplace confidence. And even if we solve the structural problems in our economy, there’s always the ethical problems generated by our current economic direction (but since that would be a hijack, I’ll abstain from elaborating )
Hamish if you have the time I’d be interesting
in seeing you open a new thread for the digression that you don’t want to put here.
tj
(Supposedly President Clinton’s favorite saying)
All our industrial manufacturing base is severely eroded. The steel industry is ailing. Auto manufacturing has had, obviously, serious inroads from overseas. There are no domestic manufacturers of Televisions. Stereos, Cameras, VCR’s, all gone, practically. Kind of sad. Some have even turned this dilemma into a National Security issue, arguing that a long, drawn out industrial style war akin to World War II wouldn’t even be possible in America today. We don’t have the capability anymore, so they say.
LCD’s aren’t, to my knowledge even manufactured in the U.S. anymore, largely due to cheaper costs overseas and environmental regulations domestically. I knew the Dot Com bubble was a crock, and it had an odor, but I was surprised how long it lasted. Wish I would have had the guts to short the market. At least we can get back to some sort of sanity for a few decades.
Disclaimer: Long freaking post here. Also, this post may have flaws, as I am basing it on parts of an education 2 to 7 years old, as well as including personal theories. No materials are cited, so caveat emptor, kids.
First, the stock market. The stock market may be the most over-emphasized part of the economy. It has been overemphasized since the Great Depression because most people think the crash of 1929 caused the Great Depression. The Crash of '29 was actually caused by some fundamental flaws, not the least of which was trading on margin, and also by a serious world wide recession/depression. Could the market crash today? Probably. A fundamental weakness today is day trading. Professional investors know that when the economy slows, stocks of consumer driven companies are going to sag. They diversify portfolios with stocks that historically perform reasonably well regardless of economic conditions, such as utilities. Day trading is like gambling for a lot of people. They get a rush from speculating, buying and selling on a whim to make huge profits in the very short term. If day trading is pervasive enough, that speculation has likely caused an overvalued market. When that market follows a natural correction, it gets blown out of proportion by the speculators. This would compound a natural down cycle for the stock market. This may be part of what the Japanese stock market has been experiencing (Part, not all). This next statement is not going to be popular amongst the masses, but the markets run better when your average Joe does not have easy access to them. They do not have the expertise to protect themselves.
Just the same, if the market were to crash, would that immediately hasten depression? Probably not. The spending of the rich and retired may curtail as a result, causing some serious recession ripple effects. Fortunately, we have learned a bit from the past, and are doing a better job of intstitutionally isolating ourselves from stock market crashes. Stock markets don’t drive recession/depression. They usually react to them.
Now, the dollar. Keep in mind that if values of the dollar and foreign curriencies all fall, the result is inflation. Strength of currencies is relative to one another. In other words, if the value of the dollar and the value of the euro both fall 15%, they still have the same strength to one another they did before devaluation. As a rule, all the world’s currencies aren’t going to weaken at the same time. Their strength is determined by exchange with one another. What I am now about to say is speculation on my part. Weakening the dollar right now may not be bad. The strength of the U.S. economy, and U.S. spending power, may have kept the world economy afloat in the late nineties. The U.S. economy seems to me to be like a rubber band, though. We spend and spend and spend during good times, because based on our incomes, we feel comfortable doing so, that we can afford it. However, we end up stretching ourselves until a portion of us overspend our capabilities, then tighten the belt to catch. At that point we are stretched to our fullest spending capabilities. Then everything begins to contract. Companies cut back, and more people can’t afford what they already spent. Others cut back in anticipation tight finances. Things contract until there has been a period “slack”, if you will, and then we start to stretch that rubber band again. Weakening the dollar would hopefully bring money back into our economy from foreign investment and foreign consumption, which would hopefully allow us to begin growing our economy again. If it is true that our economy spurs on the world economy (which I think is only part true), then bringing money back into the U.S. may be a good idea. Unfortunately, the reverse effect would be less domestic spending on foreign goods, so long term this may not be great.
The U.S. losing production power is another issue that is overstated. Does it hurt the earning power of a portion of the population? Yes it does. Does moving production overseas increase spending power domestically? Yes it does. Does moving production overseas create more spending power in those countries? Yes it does. The fact of the matter is economies need to evolve in order to continue growing. The reason the cashier at Wal-Mart can afford any thing Nike or Levi is because it is being produced overseas. If it were made here, that cashier may be earning more in a Nike Plant, but the increase in the price would be exponentially more than their increase in wages. In addition, those overseas production sites may pay low by our standards, but they pay a great deal more than farming did, allowing those people to purchase things they could never afford before, but that we take for granted. This opens up new markets, and allows increased economic growth here and in developing countries. What happens in a mature industrial nation like the U.S., though, is the economy must evolve to the next level. In our case right now, a service economy and an information economy. Education and specialization takes on a much more important role in the economy, and unfortunately that leaves a lot of people who would have worked production in the past out of the loop. Now, just because production goes overseas does not mean all the money does. Most of the profits go right back to the developed countries the companies are based out of. This makes corporate taxes a sticky issue, but that is another thread.
Now, after I’ve said all that, are we headed towards doom? Who the hell knows. The global economy is so complicated, no one person can understand. What I will say is that things are economically tentative right now. The right kind of push, say a world wide energy crises, a world wide inflation problem, or a serious natural disaster in the wrong place at the wrong time could do it for us.
And just to address a couple of loose ends. Militarily we are set up to out technology the world right now, not out supply the world like WWII. Less production capacity would theoretically be necessary, because we would receive fewer casualities. And weapons of destruction actually are economy revivors. No country leaves destroyed infrastructure destroyed. They rebuild with loans, and bank that the increased economic activity will increase what they take in in taxes, which will allow them to pay off the loans. Or else the U.S. rebuilds it for them.
Sorry for the book I wrote, And I make no claims that my thoughts are infallible.
Tejota, Hamish’s post was after all a doomsday scenario. Exactly the kind of thing we need to get the market going up again, which was the point of this thread.
From Jibby7:
For Tedster and Hamish: You can’t keep doing the same things over and over again and expect to progress, obviously. It’s true that losing production has many costs, a lot of them hidden. For instance, my dad, when myself and my brother were babies, got our furniture by going to the back of a factory that produced baby furniture and buying the factory rejects. He didn’t have the money to buy retail, but this way he got furniture for us that was serviceable and that he was able to afford. This is an option not available to the poor today for the most part, because those factories are now all in the Far East or Mexico.
But his children have the following jobs:
Me: computer programmer.
My brother: gemologist (buys and sells colored gems and diamonds.)
My sister: teacher.
All of these jobs pay considerably to the north of your average factory job.
Obviously, none of us are hurting because production jobs have moved overseas. My brother and I are in fact beneficiaries of globalization as we both work for large international conglomerates in our respective industries.
Doomsday won’t arrive simply because progress has happened.
What is true is that we don’t even have a trade surplus in services anymore, which is why our current account deficit has ballooned. Now that’s something to be scared about.
And globally if doomsday were to arrive, especially because of a sudden devaluation of the dollar, the crisis will be exacerbated by the effects of the a) the euro and b) countries that have dollarized their currencies, because these countries have in effect given up on trying to figure out what their domestic production is worth on the international market.
Point being that yes, Jibby7, if both the dollar and the euro go down 15%, not a lot has changed. But if the dollar goes down 15% against the euro, will that be justified in both slow-growth Germany and fast-growing Holland? Before the euro, one could expect that the mark and the dollar would have stayed close to each other in value while the guilder would have soared against both. Now, that effect has been cancelled. With who knows what weird consequences.
Pantom-
I’ll be honest-I do not understand how the Euro will affct things. My natural reaction is to compare Euro countries to REGIONS of the U.S., but that doesn’t exactly compare. The Euro is in its infancy. It will have it’s growing pains. I’ve only a limited education in economics. How the Euro will affect things regionally in Europe, I have no clue. But ain’t that what makes economics fun?
By the way, thanks for the response, Pantom. I was afraid my long windedness would kill the thread once I posted. I’m just a rookie here, after all.
No one knows what is going to happen, the economy is not manufacturing based anymore BUT does this matter ?
I think for the past 30 years most economies have been ‘false’ but credit, political pressure etc. has kept things going.
As long as the money keeps moving about things are ok.
I remember when everyone said we should be more like Japan, ha ha… where has all those ‘good’ schools and ‘hard work’ got them now eh !!!
Looks like i was wrong, as unemployment is going up then it is all real.
Interesting posts everyone. Pantom (and other econo-Dopers), how much of the problem is to do with the fact that what we really have is a global economy and for too long it has rested precariously on the buying power (or credit card power)of American consumers. When your Dad bought the furniture off the reject lot, the furniture factory worker could also buy the furniture. While it’s true that many families, like yours, have benefitted from the service opportunities here in the US, it’s also true that as manufacturing jobs have shifted to the developing world (and corporate profits have risen), manufacturing workers have ceased to be able to purchase the products they manufacture. Just the other night on the radio I heard some pundit saying that the problem with the economy is oversupply. As everyone has said one way of curing overproduction is layoffs (which lead to unemployment, loss of consumer buying power, and loss of confidence). But another way to cure the problem would be to boost demand. Does anyone visualize some kind of way to encourage corporations and their investors in invest in the health of the world economy by paying their overseas workforce the kind of wage that allows them to buy?
Well, I’ve posted this many times before, but the only way that’ll happen is with a little bit of blood.
Not a Marxist by any means (as you’ll see from the below), but for workers to get more they’ll have to fight - by way of union organizing. Problem here is that there’ll always be a cheaper place to make something, and I don’t know how you solve that problem. Especially when you’ve got places like China (allegedly Marxist, as in workers’ paradise. A very bad, very sad joke.) that for all practical purposes outlaw non-government sanctioned unions - which is to say anything that isn’t a company union. When you’ve got a big country that says “do what you want” when it comes to workers, well, this kind of kills any incentive an employer may have to come to terms with any organizing effort that may be happening in his factory.
Come the revolution (or counter-revolution, depending on your POV) in China, there may be some hope. But until that last communist bastion collapses, there is none.
On another topic: maybe we should start a pool on when the Nikkei will cross the Dow? It’s certainly getting close…
Nikkei: 10271.4
Dow: 9605.51
as of Sept 10, at midday in Japan. Last time this happened, I’ve read, was back in 1957.
Well, I’ve posted this many times before, but the only way that’ll happen is with a little bit of blood.
Well, pantom, this seems an appropriate moment to ask if you know whether anyone–some indefatigable utopianist–has thought of some non-violent alternative. Do you know if any progressive economists have come up with strategies. How about a punishing tariff against countries that don’t have certain labor standards in place?
Too impossible to administer? Too politically untenable? Too hard to determine standards equitable for each place? Ideologically out-of-synch with free trade? Plain old dumb idea?