The Folly Of A Depression Thesis

As I spend more and more time pondering the actions of our Treasury and Fed, along with the last Depression and the actual steps taken by various administrations (most specifically Hoover and FDR), I come to the conclusion that those who claim to know so much about it, and how to prevent it, are in fact either talking out their ass – or worse.

Yes, this means you Ben.


…It is commonly thought that FDR “got us out of the Depression”. This is abjectly false. In fact, it was not until World War II that we exited The Depression, and no meaningful recovery in economic activity occurred prior to that time. Roosevelt’s interventionist actions in the economy made the problem considerably worse, compounding errors by imposing wage and price controls among other things. The “New Deal” was in fact responsible for deepening the economic malaise and prolonging the misery, as it refused to acknowledge and force into the open the investment that had caused the collapse in the first place.

…We have several things working against us this time around, and few things working for us, compared to the 1930s. Here’s a short list:

●
In the 1930s we were resource-independent. Today we are near-absolutely dependent on foreign oil. We import about 2/3rds of our consumption, and while Canada’s supply is probably assured irrespective of our economic condition, the same is not true for the net creditors to the United States, particularly Arab nations. They both can and might cut us off, and so may Venezuela.

●
In the 1930s we had debt owned by foreigners, but nothing like today. Today we require about $2 billion in foreign capital per day to remain solvent as a nation at the government level. This has been almost-entirely financed through the purchase of cheap foreign goods from China and oil from the Middle East. If either of those sources of foreign capital flows are disrupted, things get very bad very fast. There is no reason to believe that either of these blocks of nations will continue to provide this funding as our consumption of their goods decreases and thus their need to recycle dollars disappears.

●
In the 1930s we had heavy industry out the wazoo in America. Today we have very little. Yes, we produce more now here than ever before – but as a proportion of what we consume, it is at all-time lows. What this means for us is that as those trade imbalances disappear prices are going to go up as the “recycling” trade goes away and production is forcibly repatriated here to the United States. (The alternative, a refusal to repatriate that production, is far worse, as that will result in a currency dislocation that will produce the same sort of price increases but no wage improvement for Americans. Down that road lies really serious trouble for us.)

● On the good side, we have technology we didn’t have then. This means we may be able to find efficiencies that were the stuff of fancy 50 or 100 years ago. The counter-balance to this is that the really big efficiency gains are likely behind us, having been gained in the 80s, 90s and the first part of the 00s.

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