Not the 1930s

Historian Humphrey McQueen writes:

Ten years after the Asian financial tail-spin and twenty since the Wall Street panic cut 30% off stock prices, central bankers are running up warning flags about the fragility of their global system. The International Bank of Settlements might be reserved about the likelihood of a crisis but it raised the stakes last June by using the D-word – a Depression of 1930s dimension - not just a recession like that of the late 1970s.

Returning from two years in Tokyo in April 1990, I waited for the bursting of its real estate and stock market Bubbles to bring down the world economy. Instead, Japan’s technocrats navigated through a protracted deflationary cycle by ignoring the advice of free market economists to deliver a short sharp shock of the kind that devastated post-Soviet Russia.

Having got Japan wrong, and not keen to join those commentators renowned for predicting eight of the last three recessions, I stopped asking “When will capitalism collapse?” Instead, I gave lectures titled “Can capitalism collapse?”

One theme in those talks has been that another depression will not be a replay of the 1930s. The first point to grasp is that the Wall Street Crash of October 1929 was a symptom of the depression, not its cause. The flood of funds into the stock market had followed the drying up of opportunities to gain average rates of return from investing in physical production. In brief, the effective demand for T-models had been met. Planned obsolescence and hire purchase were still in their infancy and so could not then provide a counter.

The stock market imploded because the ratio of share price to earnings passed the point where there were enough “greater fools” to buy over-priced stocks. As Warren Buffett learned at the time, the stock market is a voting machine, not a weighing machine.

A second difference from the 1930s is how much bigger the world economy is today. The force needed to stop its expansion will have to be much greater than around 1930-32. That mass might also allow the system to keep from stalling while growing at a lower rate. 

Connected to this increased size, the global order now has three principal centres, Europe, North America and East Asia, against only one and two halves 80 years ago. In the last 15 years, the global economy has sometimes got by on a single engine until at least one of the others restarted.
On top of these objective factors, there is a psycho-sociological reason why the start of another depression will not replicate October 1929. Too many people are watching that possibility. The danger spots become wherever no one with the power to act is looking.

Two points of similarity with the 1920s remain. First, any tripwire will again be in the financial sector, perhaps from protecting East Asian investments against the collapsing US dollar. Secondly, financial imbalances will be able to trigger a collapse because they are the result of another bout of excess manufacturing capacity. One instance of this over-supply is that if all the car plants in North America were to close down, those in the rest of the world would be able to roll out more vehicles than there is money to buy them (ie, “effective demand”).

So why is the productive system in this crisis? There are two interlocked reasons. First, each oligopoly plans to capture the largest possible slice of the market. In combination, therefore, all the corporations produce more units than there are buyers. The second explanation concerns why the demand is limited. This constraint arises because the bulk of consumers are wage-earners who are paid less than the value of the goods they produce. From the difference, corporations derive their profit. Debt has been a bridge over the gap between wages and the value of goods. Now, far fewer households can obtain or afford credit.

The system works when there are opportunities to invest that gain in profitable endeavours. We are now at one of the points where those outlets are far too few to absorb the money-capital. That the stock market keeps bouncing back is a mark of why the global system is in jeopardy. There is nowhere better to park the trillions of money-capital than in shares.

So what if it blows?
If it is dodgy to speculate about the timing of or the immediate trigger foranother global depression, several of its consequences can be predicted with almost 100% accuracy.

A collapse of real existing capitalism is not going to move the world one toenail towards a kinder place to live. On the contrary, a depression will make every problem worse.

On the economic front, oligopolisation will spike. The benefit of a depression to capitalism as a whole is, as Joseph Schumpeter recognised, as a gale of creative destruction. That means the destruction of many huge firms of the size of GM and Ford.

The impact of even a serious recession on generations who have never known more than mild deprivation will be much harsher than poverty was on the 1930s victims who had been weaned on frugal comforts, not expecting super-affluence. Far fewer will know how to feed themselves once they can no longer afford to dine out.

This material deprivation will provoke identify crises. Individuality has shrunk from being defined by what one creates, to what one makes, to what one owns and now to whatever gadget one has most recently bought. Self-esteem is reduced to the exchange of credit for a commodity which loses its prime use value by being purchased. What happens to the sense of self when the buying has to stop?

The political consequences will rip through civil society. Reflecting on the recession of the mid-1970s, the head of CRA, Sir Roderick Carnegie, warned that “A society raised on champagne tastes may not be a polite or a pleasant one if it is reduced to a beer income.”  That shadow over democracy is larger in the era of anti-terrorism.

The environmental consequences will be catastrophic. Although the burning of fossil fuels and the use of other non-renewables will be cut as a result of the slashing in effective demand, the corporations and the poorest alike will be driven to plunder the wealth of nature for survival. Emission targets and carbon offsets will be out of the window.

That skim through the consequences leaves us with a variant on the opening question: if capitalism can indeed collapse, can it also rise again? To approach an answer we must look again at the 1930s. The conventional belief is that Roosevelt’s New Deal rescued the US. In truth, the downturn of 1938 was as steep as that at the start of the deflationary cycle. What dragged the world out of depression was global war. That gale of destruction lost some of its creative promise at Hiroshima.