Thursday, September 18, 2008

The Next Great Depression

I have been thinking about how a major depression in the near future would be different from how it was leading up to the Great Depression. I am convinced we are looking at a grid-up situation, at least for the foreseeable future.

Communications has moved from the telegraph and telephone to the speed of light. Cell phones with automatic stock alerts allow us to constantly monitor the markets 24 x 7. If one major company fails, the effect immediately propagates throughout the world. It's a far cry from waiting for the newspaper boy in 1929. This means the markets react quicker to rumor and innuendo just as fast as facts. Tuesday the market bounced 130 points on the rumor the Fed was going to bail out AIG. The market could have plummeted another 400 points if the rumor was they were going to be hung out to dry.

The markets and the companies in them are more connected than they were in 1929. Virtually every company has derivatives in multiple other banks, which ties them all together. Also, the lines between banks, insurance companies, etc. have been blurred. In the running merger mill, every bank has a morgage branch, with a investment firm and an hedge fund. One bank failure is much more of a big deal now than it was in the past. These banking firms are so intertwined the failure of one has immediate and serious repercussions to dozens of other banks. One bank in 2008 is equal to hundreds of 1929 banks.

How people traded stocks is completely different than in 1929. First off more people have direct access to the market through the brokerage firms. Now you can buy and sell stock with the click of a mouse. The stock market started out with the sale of stock based on long trends, as it was a pain in the butt to buy it. Day after day you would see that US Steel was doing well, so you'd mail your broker to buy some shares. Now, you can instantly buy and sell with the click of a mouse. Daytraders were never envisioned by the original traders on wall street. You can now make a living trading millions of stock for a few tenths of a percentage, just by buying and selling any and all stocks. It's amazing the system hasn't just fallen apart from the sheer complexity.

Markets are now global, rather than national. In 1929 most stock was bought and sold for American companies by American companies. Nowadays, it's a global economy, with foreign companies investing huge sums of capital in America. Now the economy is a global issue, as the Federal government is slaved to the interests of foreign nationals because their government have invested so heavily in American firms. Would China seize American assets in China if they lost $500B because the US nationalized the company? How about $1T? What would Bush do to placate them?

We, as Americans, have a false sense of security that we have robust and strong system of checks and balances to prevent anything bad from happening to the US markets. It's all hogwash, but Joe SixPack thinks we do, and perception is reality. So the masses will blindly follow this administration straight into bankruptcy mindlessly believing that it could never happen. This blind faith has it's purpose, as it can act as a shock-absorber, allowing markets to recover before Joe runs out of beer, and really panics.

All this combines into a few observations. I think that the media and administration will keep saying all is well until it catches up to them and the markets collapse as much as the market freezes will allow. Two or three days of that and the fun will really start, as the dollar inflates as foreign investors desperately try to pull their money from American markets to get Yuan or Euros.

During this fiasco I expect Joe SixPack to suddenly wakes up and head to wally world to buy bread, beer, and a shotgun only to find everything empty, doors closed as the JIT inventory system collapses. Or Joe gets a pink slip at work. Unable to find work and with the Fed printing more and more money to support the ever-growing numbers on unemployment. Hyperinflation sets in, and it's a matter of time before violence breaks out in major cities one by one as people fight for food.

Most Americans are no where as self reliant as we one were. We are an urban society now, far removed from out agricultural and industrial roots. Joe Sixpack doesn't know about gardens or animal husbandry, he's a widget maker on an assembly line or a sales associate. The average American doesn't know how to debone a chicken. Perdue does it for them. Slaughter a cow? Most would lose their lunch at the thought. Joe SixPack doesn't know how to turn a tree into lumber, fix his car, or build a shed. The lack of knowledge will have a direct and lasting impact as the average American is slaved to Uncle Sugar to provide for his needs.

If the economy crashes, then another factor to recovery is the lack of "frontier". In 1929, you could pick up the family and head to California to find work on public projects, mining, timber, or farming. The west didn't suffer the dust bowl, as the soil wasn't as depleted as the Midwest. We no longer have a frontier to go to for work. there is Alaska, but it cannot sustain a large migration of workers, the infrastructure is not there to keep them alive during the winter. With nowhere to go to get work, the population will stay put. Idle hands are the devils workshop so I expect most to turn to petty crime to feed their families. It's not too hard to take it to the next level, and steal to make your life easier...

We also don't have the same family structure as we did in 1929. I'm the poster boy for the nuclear family, as I have a brother and my Mum. That's it. I got a lot of family in the south, but they don't know me from Adam. Most of my friends don't have regular contact with aunts, uncles, cousins, etc. either. Lacking this support network will make people more desperate. This makes for more people to turn to Uncle Sugar, when the could have been supported by their families.

An obvious fact is there are a lot more of us then there was. We are packed into denser blocks of people, which makes it easier for tensions to flare over dwindling resources.

The attitude of the average American has changed drastically. Most people feel entitled to food, water, shelter. They don't feel they need to earn it with Section 8, Disability, Welfare. If you have the idea you're entitled to something you are more likely to take it when you are no longer given it. This will be the single largest cause for violence in the cities.

To sum up. I expect the crash to be sudden, with the market freezes doing squat to stop it. Hyper inflation will happen as Uncle Sugar tries to buy it's way out of the depression. Violence will start in the cities, drawing the national guard and law enforcement resources into the inner city, leaving the suburbs to burn. With no where to go, most people will try to weather the economic storm home. The Golden Horde probably will not happen. Our collapse will cascade throughout the world, with Japan, China, and Europe feeling the worst of it. The Russians have a more recent history of bread lines, so they will do a lot better than we will.

The dust bowl was a major factor in the famine during the Great Depression. In the Future modern fertilizers allow us to grow more per acre, but once the fertilizer is too expensive, I expect food production to drop, and the cities will have trouble keeping the population fed. This will spark many riots, as one race feels the other race is being better fed.

It's a bleak outlook, but we can get through it and prosper if we keep our wits, families and friends around us and we prepare.


Staying Alive said...

Bullets, Beans, Band-aids, and your Buddies. Get the hell out of the cities. It's gonna get ugly in there!


Mayberry said...

I'll second that. Tryin' like hell to get there....