In 2012, we find ourselves looking for parallels to our situation. (What did they do, did it work, let’s do it again.)
History, however, doesn’t repeat itself exactly. It does rhyme, however, and so looking for ideas in the past is useful.
But you need to know where you really are when you do it, and not just focus on one thing.
In some ways, we are in three different points (all of which give us ideas) — and yet we can’t just do what one previous period did, because the solutions they used conflict with each other.
The 2007-2008 global financial crisis, for instance, was compared to the 1930s. Indeed, many wrote of it as the Second Great Depression.
Central bankers dusted off the thinker of how to escape that period, John Maynard Keynes, and flooded the world with debt to “stimulate” the economy and pick up the GDP slack created by retrenching consumers and industry and slowing net exports, and made credit cheaper so that lending would again take place.
This is classic deflation fighting. But it was the wrong answer, because although banks were failing and employment was falling while investment to create new work was slim to non-existent, we weren’t in the 1930s (even though some of the effects are similar).
We were in 1907. That, too, was a banking crisis. One where the stability of the entire system was at risk.
You may have vaguely heard of it. It’s the one where JP Morgan (the man) called his peers together, told them they were ponying up to the bar and recapitalizing the system, held it together until the panic passed.
What we faced in 2008 was a sudden sharp loss of trust in the entire system. We suddenly didn’t believe the filings, didn’t believe the law was being observed. We believed there was deep rot at the core of every firm — none were safe.
No one knew if triggering the credit default swaps would suddenly show no one had any assets. Meanwhile the foreclosures had started two years earlier. People with fully paid up homes (no mortgage on them) were receiving foreclosure notices. The courts were accepting the robosigned documents and the assertions of financial institutions over black letter law.
That set off panic (as it should have).
What should have happened — 1907 style — was to unwind the big institutions in an orderly manner. (We need banks, we don’t necessarily need these ones.) Establish safe utility banking institutions for the average person and business to use. Bracket off the dead instruments. Let the shareholders and bondholders take the hit (you expect the reward, you run the risk: it’s called capitalism.)
Instead, we socialised the risk, paid out even more rewards, and institutionalised law-breaking, basically saying “no one need worry”.
Why would I want my money in the hands of thieves? (Is it any wonder the average person has left the markets?)
Why would I want to expose my enterprise to a sudden demand for payment for no reason? (Is it any wonder businesses won’t expand?)
So we drift.
There’s actually two other periods that describe our situation. One we may remember; the other we won’t.
The one we won’t is the Long Depression that started in 1873 and ran almost to 1900. It was deflationary — a long period of falling prices, where cash was king and worth more each day (and only a fool went into debt, since it got steadily more expensive to pay the interest). This was also a period of rapid commercialisation of inventions, and migration from sector to sector in the economy (then, agriculture to factories and rapid city growth).
We’ve been in a similar long slow deflation since the period we may remember: since 1973, in fact.
In the 1970s, we didn’t have the new round of commercialisation yet, and we remember it as a time of rising costs, high inflation, union strife, interest rates that ran to 20% and a general grind. More on why in a moment.
By the time 1980 came, though, the commercialisation of technologies developed in the 1960s and early 1970s was coming on stream. Microprocessors, personal computers, information technology in corporations, office automation, a wave of medical instruments and tests, a wave of pharmaceuticals … a long list.
To avoid the deflation, we financialised our economy. We started creating financial instruments of all sorts. We made the buying and selling of whole facilities and firms the essence of management, not the day-to-day running of things. Despite the technologies to democratise decision-making, we restricted authority in organizations.
Bubbles erupted. Overbuilt commercial in the late 1980s. The dot-coms in the 1990s. Housing in the 2000s. All a result of financialisation.
What underlay the 1970s malaise was the world’s (then) largest oil producer hitting its peak of production. That was the United States. Even as little as a 2% drop in annual production was sufficient to allow OPEC to seize control, for nations around the world to suddenly nationalise their oil facilities, to quadruple the price overnight.
By the time Alaska’s Prudhoe Bay came on stream, decline in the existing fields had outraced its addition.
Thatcherism in Britain was underwritten by North Sea oil — the other “last discovery” of any size.
When Jimmy Carter called changing energy use, and the mix of energy sources in use, a task that was the “moral equivalent of war”, he was absolutely correct. (Done then, we wouldn’t be where we are now, where global production hit the peak plateau in 2005 and production hasn’t grown since [though demand does].)
Since we’ve fixed nothing — not from our 1970s wake-up call, not from our 1930s wake-up call, not from our 1907 wake-up call — and since underlying our economy is the continuing 1873 wake-up situation, all the debt we’ve piled on has just created a bigger fuel pile for the next spark to ignite.
We’ve taken our situation and now prepared the way for a truly vicious and long Deflationary Depression, coupled with hyperinflation in food (we eat a lot of oil) and fuel.
Time to look to our localities, because the tide is flowing out hard and fast for anything big.
Our worlds are about to shrink.