Friday, February 23, 2018

What Caused the Great Depression? (Rubber-Band Man)

Could rubber bands trigger another depression?  Not by themselves, no.  But they are a sign.

Another day in the Trump administration, and another anti-dumping complaint filed at the International Trade Commission.  I wrote before about the ITC and why it is important - more important than who is "in" and who is "out" in Trump's inner circle this week.  While the Times and the Post keep you up-to-date on that oh-so-important White House gossip, real policies are being made behind-the-scenes - real policies that will affect you more than who Trump threw a lamp at yesterday.

And they really aren't behind-the-scenes, either.  It is just that the news today wants to report on juicy gossip because we all click on it, and that sells ad space.   Well, maybe we used to click on it.  Myself, I find the stories boring and repetitive.   "This week, the Russia investigation has new bombshell revelations that won't amount to much, and [fill-in-the-blank] trusted Trump adviser is on the outs!  He may resign by the end of the week!  Stay tuned!"   But nothing ever comes of this, at least not so far.   Meanwhile, down at 4th and D streets, a panel of Administrative Law Judges just increased the price of washing machines by 50% and nobody in the press notices.  I'm glad I bought mine, two weeks ago, needless to say.

What caused the great depression?   And are the same forces at work today?   Disturbingly, I think so.  As others have noted, there was no one "cause" of the great depression, but a "perfect storm" of falling farm income, an over-inflated stock market, and a tariff war that clamped down on world trade.

Long-term underlying causes sent the nation into a downward spiral of despair. First, American firms earned record profits during the 1920s and reinvested much of these funds into expansion. By 1929, companies had expanded to the bubble point. Workers could no longer continue to fuel further expansion, so a slowdown was inevitable. While corporate profits, skyrocketed, wages increased incrementally, which widened the distribution of wealth.
The richest one percent of Americans owned over a third of all American assets. Such wealth concentrated in the hands of a few limits economic growth. The wealthy tended to save money that might have been put back into the economy if it were spread among the middle and lower classes. Middle class Americans had already stretched their debt capacities by purchasing automobiles and household appliances on installment plans
There were fundamental structural weaknesses in the American economic system. Banks operated without guarantees to their customers, creating a climate of panic when times got tough. Few regulations were placed on banks and they lent money to those who speculated recklessly in stocks. Agricultural prices had already been low during the 1920s, leaving farmers unable to spark any sort of recovery. When the Depression spread across the Atlantic, Europeans bought fewer American products, worsening the slide.
When President Hoover was inaugurated, the American economy was a house of cards. Unable to provide the proper relief from hard times, his popularity decreased as more and more Americans lost their jobs. His minimalist approach to government intervention made little impact . The economy shrank with each successive year of his Presidency. As middle class Americans stood in the same soup lines previously graced only by the nation's poorest, the entire social fabric of America was forever altered.
It was a boom time for the STOCKHOLDERSTOCK PRICES soared to record levels. Millionaires were made overnight. Sound like the stock market of the 1990s? Try the New York Stock Exchange on the eve of the GREAT CRASH in 1929.
Although the 1920s were marked by growth in stock values, the last four years saw an explosion in the market. In 1925, the total value of the NEW YORK STOCK EXCHANGE was $27 billion. By September 1929, that figure skyrocketed to $87 billion. This means that the average stockholder more than tripled the value of the stock portfolio he or she was lucky enough to possess. 
In his LADIES' HOME JOURNAL article, "Everyone Ought to Be Rich," wealthy financier JOHN J. RASKOB advised Americans to invest just $15 dollars a month in the market. After twenty years, he claimed, the venture would be worth $80,000. Stock fever was sweeping the nation, or at least those that had the means to invest.
Fueling the rapid expansion was the risky practice of buying stock on margin. A MARGIN PURCHASE allows an investor to borrow money, typically as much as 75% of the purchase price, to buy a greater amount of stock. Stockbrokers and even banks funded the reckless SPECULATOR. Borrowers were often willing to pay 20% interest rates on loans, being dead certain that the risk would be worth the rewards. The lender was so certain that the market would rise that such transactions became commonplace, despite warnings by the Federal Reserve Board against the practice. Clearly, there had to be a limit to how high the market could reach.

Stop me if any of this sounds familiar.   Today we have ordinary people speculating in the market, using margin trading.  Ordinary people are "banking" on unregulated Bitcoin and then wondering where their money went when an unregulated "exchange" loses it to hackers.   Agricultural prices and farm profits are at a 12-year-low.  The evil 1%'ers control 1/3 of the money in the economy, so that the low-paid working class can't afford to buy the products their companies are making - but are borrowing more and more money to do so - and defaulting in record numbers.  And after years of record growth, the stock market suddenly explodes - and contracts - the same instability pattern we saw right before "black Friday" in 1929.  The parallels are frightening.

The article is missing a couple of points, however, and one of them is the Smoot-Hawley tariff act of 1930.  And many economists think this was the final nail in the coffin that sealed the deal and lead to the great depression - and extended its effects.

Republicans were always, since Lincoln's time, for "God, Country, and the Tariff!" which meant they favored Northeastern business interests.   In recent years, however, the GOP has moved away from tariffs, correctly figuring out that they don't encourage trade and industry, but stifle it.   A country cannot "go it alone" in a "we first" environment.  You have to trade, so that people buy your products while you buy theirs.   But a new President has different ideas.

Today, the Smoot-Hawley tariff act is still around, but in a new form.  We still have the 20% "chicken tax" from the 1960's, that slaps a tariff on imported small trucks in retaliation for a European chicken tariff.  This illustrates how hard it is to get rid of tariffs, once they are implemented.   We also have the International Trade Commission, which will instigate a "section 201" proceeding as well as anti-dumping complaints.   A company can allege that its industry is harmed by imports and/or that importers are "dumping" products for below cost to harm their industry.   If the panel of Judges at the ITC agrees, an import duty may be assessed to even the playing field.  If the President signs off on this, duties can be imposed, which in turn, raises prices for everyone.

President Obama did this with Chinese-made tires.  Unfortunately, when these sort of tariffs are enacted, they don't result in the US industry gaining market share or making more profits.  Instead, everyone raises prices across the board.   If a Chinese-made tire now costs $200 instead of $100, then the Goodyear people can raise the price of their comparable tire to $200 and make more money.   Going after market share might seem like the logical thing to do - by keeping your price at, say, $150.  But in terms of overall profit, you are better off selling fewer tires for a higher profit margin.  And since the consumer no longer has a lower-cost alternative, they have to pay more.

Today, we are seeing this last piece in the depression-puzzle falling into place.  Today, it is something as apparently trivial as rubber bands.   But this sort of complaint illustrates how easy it is for domestic industries to enact protectionist tariffs, particularly with a new administration who is unabashedly "America First!"    And so far, American industry feels emboldened - trade complaints at the ITC are up 81% since Trump took office.

Maybe rubber bands aren't the end of the world.   But you add in washing machines, and solar panels (the latter basically killing off the solar business in the US by making panels so expensive they no longer make economic sense) you start to see where this is going.  Higher prices will lead to inflation.  American workers - even with raises in a low-unemployment era, won't be able to afford goods.  And reciprocal trade tariffs will make US-goods and crops unaffordable overseas.  The 1% will see their investments falter, as the companies that they own and invest in, won't have customers for their goods.

But I suspect, like Joseph Kennedy in 1928, they are already pulling out of the overheated market - letting the small investor with their dreams of avarice, take the fall.

Will history repeat itself?   I guess we'll find out.

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