Yes...but!

October 6 2008

Home > Columns >Yes...But! Year 8-48

Will it happen again? I mean the Great Depression that paralyzed North America in the Dirty Thirties, causing 25 percent unemployment.

Life had been good until 1929: and then, bang, the economy tanked. Why? John Kenneth Galbraith, famous Harvard professor in his book “The Great Crash 1929” blames bad distribution of income; bad corporate and banking structure; the fall in exports and a cut in taxes for higher incomes. Sounds familiar.

People then loved the stock market, participating through so-called Investment Trusts, which increased eleven-fold just before the crash. Then the stock market dominated the conversation: everybody talked about it, everybody made money. Just as until recently everybody became richer by the day in the housing market.

Writes Galbraith: “It’s the nature of a speculative boom that almost anything can collapse it.” And, yes, somehow there was a tipping point: October 24 1929 was the first of the days which history identified with the stock-market panic of 1929.

In those years there was no Deposit Insurance. Ben Bernanke, the current Chairman of the Federal Reserve, a former professor of Economics in Princeton, is an expert on the Great Depression.

One factor which made that very trying financial decade worse, was that a massive number of savers lost their money when banks failed. This lack of ready cash made it almost impossible to revive the economy. That’s why the FDIC, the Federal Deposit Insurance Corporation, last week increased its insurance limit from $100,000 to $250,000. In other words, the US government stands behind the banks to guarantee the safety of deposits to a quarter of a million dollars, so, even as banks fail – and they do and more will – Washington will reimburse people up to that amount.

In other words: the state has become the lender of last resort. The USA has become the USSR, which, before the Berlin Wall fell, meant The Union of Soviet Socialistic Republics. Now USSR stands for the United States Socialistic Republic. It could go broke. Germany did in 1924, then called The Weimar Republic, when it went through an inflationary period not unlike Zimbabwe today.
Can a depression happen again?

Fact is there always have been economic cycles. The late Robert Heilbroner, professor in New York, in his book, “Beyond Boom and Clash” wrote that “Competitive Capitalism lasted 175 years, from 1700 – 1875; the era of Monopoly Capitalism 55 years, from 1875 to 1930; Welfare Capitalism 43 years, from 1930 to 1973, and Planned Capitalism from 1973 to 2008, a mere 35 years.

We now have entered a new phase. The rescue packages for banks and investments firms look like Political Capitalism, with politicians calling the shots in the market place. That, to me, spells danger, also because other factors play a role.

In 1929 the world’s Gross Domestic Product was $1.5 trillion. Today it is $60 trillion, or 40 times more, while the population has only tripled. There are some $600 trillion in dangerous derivatives out there – ten times the total of all goods and service transactions in the world. Most of these are leveraged, that is dependent upon debt. I repeat Galbraith’s dictum: “It’s the nature of a speculative boom that almost anything can collapse it.” The Great Depression started without us knowing exactly why. This time it could be the implosion of these Derivatives, causing a debt deluge which may devastate us all.

Will it happen again? When a $700 billion nuclear money infusion fails to stop the Dow from sliding, you can bet your boots and everything above it that we are in for trouble, big time, also because of other natural, or shall I say, unnatural happenings.

In 1929 the state of nature was by and large pristine, after all, there were only a couple of billion people out there, each using about 10 percent of the resources per capita we use today: now we eat more, we drink more, we use more oil, coal, more of everything. We also must cope with Climate Change, and, while in the 1930’s oil was abundant, we now are running low.

Next week we are going to the polls. There is no doubt in my mind that we are at a threshold of immense changes, both economically and ecologically. Perhaps a deep depression. It’s no longer “Business as Usual.” Stephen Harper advocates more of the same. That is no longer an option. I believe that what the CAW, the Canadian Auto Workers, is recommending has merit: to vote strategically: where the NDP has a chance to unseat a Conservative candidate, do vote NDP; where the Liberals are a good possibility, vote Liberal.

I would add that where neither can make it, vote Green. I cannot stress too much that a clear message has to be sent to Ottawa.