Great Depression-Era Cartoon

Nothing has changed much since the last Big One.

Here's a cartoon from 1931.

"Sorry I have to reduce you to fifteen dollars a week but you can do your share in bringing back prosperity by buying, buying, buying."

There are a whole bunch more cartoons from the Great Depression era at this site.

Here's another good one:

"I see by the papers that everything is all right."

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Karl Denninger On Credit-Driven Ressession (and Swipe at Dennis Kneale)

On his Market Ticker on Tuesday, Karl Denninger took a swipe at CNBC's Dennis Kneale, whose harangue against bloggers has been widely disseminated over the Internet (like my post below). But his ticker also has a very good explanation of why the current resession may be very different from the previous recessions in the U.S., except for the Big One in 1930s.

Here is his take on "inventory-driven ressession" and "credit-driven recession". We are in the latter, credit-driven recession.

To Dennis Kneale: You're An Idiot (6/30/09 Market Ticker)
[emphasis is mine]

"Inventory-driven recessions are primarily about excessive industrial capacity for demand. That is, manufacturers and suppliers of services get too bullish about prospects, build too much capacity and inventory, and wind up engaging in a destructive price war in an attempt to "win". This drives down profits and ultimately forces the weaker firms out of business, ergo, recession - GDP and employment decline. Having cleansed itself of the excess, the economy recovers. The trigger for these recessions is often (but not always) an external shock such as the oil embargo in the 1970s or the collapse of the Internet fraud-and-circuses games in 2000.

"The second sort of recession is a credit-driven recession. Excessive credit creation - that is, loans going too far toward "fog a mirror" qualifications (and in some cases, such as the most recent event, actually reaching "fog a mirror") drives one or more asset bubbles. These pop when effective interest rates in the economy reach an effective level of zero, usually because the amount of leverage available becomes for all intents and purposes infinite (Bear and Lehman at 30:1, Fannie/Freddie at 80:1, AIG at god-knows-what, and duped "home buyers" buying with zero down for a true infinite leverage ratio.) This excessive credit creation drives a speculative asset bidding war which in turn causes prices to go sky-high for one or more types of asset."

"Recessions cannot end until the conditions that caused the recession are removed from the economy. This is elementary logic and obvious to anyone with an IQ larger than their shoe size.

"For an inventory recession growth returns when enough capacity is destroyed through layoffs and inventory selloffs to bring capacity and demand back into balance. Employers then hire new workers and the economy recovers.

"For a credit recession, however, there is a much larger problem: The reason real interest rates went negative is that debt has a carrying cost and consumes free cash flow; so long as the debt taken on in the credit binge remains the cash flow impact also remains.

"Default and bankruptcy clears excessive credit (debt) from the system - if it is allowed to occur. But if it is not, then the bad debt remains on the balance sheets somewhere and the cash flow impact remains in the economy. Employment remains weak, capital spending restart attempts falter as demand fails to return and credit quality continues to remain insufficient to support new credit demand."

So, when we see the inventory number reduced and unemployment number stop going down further, and we say "Look, the economy bottomed!", we are looking at TOTALLY WRONG PARAMETERS to assess our CREDIT-DRIVEN RECESSION.

Almost all economists being paraded on TV, or writing for big newspapers and magazines, take it for granted that the recession we are in is INVENTORY-DRIVEN recession, the one most of them are familiar with. If Denninger is right (I think he is), it doesn't matter if the inventory level is reduced to zero or the unemployment number stops going down. Until the bad debt is purged from the system somehow, there will be no recovery. As Denninger says, at best we'll be turning Japanese. At worst, worse than the Great Depression.

In addition, Denninger has this to say about U.S. consumers "saving": [emphasis is his]

"Consumers are not saving, they are paying down debt in a furious attempt to avoid defaulting on nearly $1 trillion in outstanding credit card balances that have gone from 11% interest to 29.6% along with OptionARMs that are experiencing a tripling of payments while the home's value is underwater and precludes refinance, all while consumers are being laid off by the hundreds of thousands monthly."

In other words, consumers are barely treading water. And the likes of Dennis Kneale are wondering why consumers are not spending, so that we can get out of this inconvenient pesky little recession. Hope and fortitude. LOL.

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Let's Pick A Name For Our Current Mess!

Dr. Walter Block at Lewrockwell.com is having a contest to pick a name for the economic crisis we've been in for some time now.

What Shall We Call the Present Economic Crisis: A Contest (6/19/09 Lewrockwell.com)

"Nomenclature first. Unless and until we know how to refer to the economic debacle of 2009, we cannot make much progress in solving it. We all know what to call the previous episode: The Great Depression. But, what about this present one?"

You can visit the site, take a look at the candidates (there are about 70-80 of them) and send him an email to vote.

The ones that caught my attention were:

• A Depression We Can Believe In
• Big Government Depression
• Fed's Second Depression
• We-Learned-Nothing-From-The-Great-Depression Depression

But then I like it simpler. So, Greater Depression is my first choice.

(I never, ever, not once, expected that I might be experiencing a Depression in person. Sigh...)

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What If It's "Slowing", Not "Quickening"?

What if it is not "quickening", as many people say on TV, on the stock message boards, on chats?

What if it is "slowing" instead? Instead of the current stock market being the equivalent of 1938 because things happen much faster now with all the information technology advance and tighter coupling of nations in the world...,

What if we are going even slower than in 1920's and 30's?

The financial firms continue to deleverage. Indicators that I see on the market indices, especially that of Dow Jones Industrial Average, are flat-lining. Dow ended last week modestly up, but it had amazing 5 consecutive days of ending the day almost exactly where it had started.


Bankers are not lending because they are afraid they won't get the money back; business (especially small to mid size business) is not investing because they don't see future economic growth potential; and individuals are stuck in their underwater houses and unable to move to a better place even if they want to. Everything is stuck. Mobility is lost. Money multiplier is below 1. Not even the fractional reserve banking is working.

Add to these the huge debts that the government is quite willing to incur and increasing tax burden that it is willing to inflict on the productive segment of the economy. Soon there will be nothing left that can breathe in and out, not to mention move a finger.

Let's suppose we are indeed slowing.

1929's stock market top on the closing basis was on September 3, 1929, and Dow Jones Industrial Average was 381.17. A short-term low came on November 13, with Dow at 198.69. That represents 48% correction of the index, and it took 2 months.

The Dow's most recent market top was in the week of October 9, 2007, and Dow was at 14,164.53. A short-term low came on November 20, 2008, with Dow at 7,552.29. That represents 47% correction, and it took 13 months.

For 1929 crash, the bottom came July 9, 1932, with Dow at 41.22, 89% correction from the 1929 top and it took 2 years and 10 months, or 34 months.

If Dow is going to ultimately correct as much as the crash of 1929 did, at the current pace it will take 221 months, or close to 19 years till it hits the ultimate bottom.

(2 months : 13 months = 34 months : x)
(2x = 13 times 34)
(x = 221)

Unfortunately, there's a precedent. Japan's Nikkei. From December 1989's top, it corrected 81% and hit the bottom just recently, in February 2009. (I am sure they hope that was the bottom.)

Japan's problem has also been financial deleveraging after the real estate bubble. (Sound familiar?) Active intervention by the government and the central bank (again, sound familiar?) did nothing but add to the deficit (we will see about this one, but don't hold your breath).

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