What to expect?

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" height=35 BGCOLOR="#000099" TEXT="#F7F7FF"> <div> <B>The Next Great Depression</B></div> <div> <A HREF="id63.htm" TARGET="_top" TITLE="Share and housing bust">Share and housing bust</A>   |   <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Crash Index</A>   |   <B>What to expect?</B>   |   <A HREF="id68.htm" TARGET="_top" TITLE="Biblical Financial Cycles">Biblical Financial Cycles</A>   |   <A HREF="id69.htm" TARGET="_top" TITLE="Conclusion">Conclusion</A>   |   <A HREF="id72.htm" TARGET="_top" TITLE="192931 and 200002">1929-31 and 2000-02</A>   |   <A HREF="id77.htm" TARGET="_top" TITLE="Barack Obama, Jimmy Carter and JFK">Barack Obama, Jimmy Carter and JFK</A>   |   <A HREF="id29.htm" TARGET="_top" TITLE="Parallels: 1920s and 1990s">Parallels: 1920s and 1990s</A>   |   <A HREF="id79.htm" TARGET="_top" TITLE="197476 20091?">1974-76 = 2009-1?</A>   |   <A HREF="id87.htm" TARGET="_top" TITLE="1930s,1970s and Today">1930s,1970s and Today</A></div> <div> </div> </td> </tr><tr> <td valign="top" height=445 BGCOLOR="#FFFFFF" TEXT="#080000"> <bR> <div> What to expect?</div> <bR> <div> <B>Share-price collapse</B></div> <bR> <div> "When the market leaders begin to lose relative strength even though the news is still very good, and buying strength and selling weakness no longer works, get out of stocks in general because the game is over" (Jessie Livermore, Famous early-20th century share trader).</div> <bR> <div> <B>1929-32</B></div> <bR> <div> ""Some of the people I know lost millions," Groucho Marx wrote in his autobiography. "I was luckier. All I lost was two hundred and forty thousand dollars. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>I would have lost more</B></FONT>, <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>but that was all the money I had</B></FONT>."</div> <bR> <div> "The stock market crash was painful, wiping out the life savings of millions of people and leaving some deep in debt" (Karen Blumenthal, <I>Seeds of the 1929 Crash</I>, wsjclassroom.com, November 2002).</div> <bR> <div> "The stock market crash of October, 1929, was but the beginning of an economic decline that continued with little interruption until the spring of 1933. Stock prices which had climbed to the most unwarranted heights now dropped to but a fraction of the former quotations. From September, 1929, to January, 1933, according to the Dow-Jones index, thirty industrial stocks fell from an average of 364.9 to 62.7 dollars per share, a group of twenty public utilities dropped from 141.9 to 28.0 dollars per share, and twenty railroad tocks declined from an average of 180.0 to 28.1 dollars per share. The same story could be told of bank stocks and ... tangible commodities. When the stock market decline finally hit bottom in July 1932, some $74,000,000,000, or five-sixths of thge September, 1929 value had disappeared" (Harold Underwood Faulkner, <I>American Economic History</I>, 8th Ed., (New York, Harper & Brothers, 1960), p.645).</div> <bR> <div> Continue later</div> <bR> <div> The Dow Jones high of 381.17 was on September 3, 1929. Low in July 1932...</div> <bR> <div> Dow passed 1929 high in 1954.</div> <bR> <div> <B>1973-74</B></div> <bR> <div> "... <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>from the January '73 high to the December '74 low, the Dow fell 45%</B></FONT>. So were Mr. and Mrs. "I'm OK, You're OK" okay with that? No way, they bailed out of the market ... and they stayed out for years" (Rob Peebles, <I>Random Walk: Brave Hearts</I>, prudentbear.com, January 23, 2004).</div> <bR> <div> Dow passed 1973 high in 1982.</div> <bR> <div> Low in Hoover recession - Low in Nixon recession.</div> <bR> <div> <B>A prediction becomes reality</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The Dow</B></FONT>, he [David Tice] predicts, <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>will fall "at least 50%"</B></FONT> from these levels...</div> <bR> <div> "Tice argues that the rally of the past four years is masking a long-term bear market that began in 2000 and won't end for at least another five years...</div> <bR> <div> "Tice argues that <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>the bull market is simply massive asset inflation caused by reckless lending and easy money</B></FONT>.<FONT SIZE="2" COLOR="#A040FF" FACE="Verdana" > </FONT><FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>Sooner or later, he says, it will have to be worked out of the system</B></FONT>" (Brett Arends, <I>Prudent Bear's Tice Says the Plunge Is Coming, </I>thestreet.com, May 4, 2007).</div> <bR> <div> From the Dow Jones Industrial Average closing high on October 9, 2007 to its closing low on March 9, 2009 the Dow fell 53.8%.</div> <bR> <div> This is the first stage of the Dow collapse, the next stage will resume after the end of the next major rally.</div> <bR> <div> This appears to be the pattern for the housing crash. The rhyme from the 1970s for today would have the first stage as 1973-75 and the second stage as 1980-82.</div> <bR> <div> <B>House-price collapse</B></div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"The depression-era drop in U.S. housing prices </FONT><B>wiped out the </B><I><B>total gain</B></I><B> during the inflationary boom</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" > dating back to World War I...</FONT></div> <bR> <div> "British data show a similar pattern in prices of private homes and farm land for the previous "Great Depression" that began in 1873. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>It too</B></FONT>,<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> wiped out the whole inflationary gain during the preceding boom</B></FONT>. Private houses in Britain rose in value by 13 percent from the period 1851-52 to their peak in the years 1876-77. They then declined by 19 percent over the next thirty-five years...</div> <bR> <div> "The value of British farm land also tumbled. Tax records show that rental values rose by 24 percent from 1846 to 1875. This entire gain was then wiped out, as values dropped by 37 percent over the next twenty years..." (James Dale Davidson & William Ress-Mogg, <I>The Great Reckoning</I>, Revised Edition, London: Sidgwick & Jackson, 1992, p.404).</div> <bR> <div> "The collapse of the housing bubble ... will soon face average American consumers with the fact that their consumption standards of the mid-2000s, were way out of whack with income levels that had reached only a mid-1980s trendline (given perhaps ten, not thirty, iterations of 2%-3% growth off the mid-1970s base). <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" >To bring income and consumption back into balance, average Americans will have to fall back two decades in terms of standard of living</FONT>, which would still put them back at Western European levels of today. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" >But such a pullback would represent "the modern 1930s."</FONT></div> <bR> <div> "That's because the original 1930s took American consumption back to 1910s levels, which then represented "prosperity" by prevailing global standards. But that was a big comedown for an American public that had just experienced the 1920s, which gave a glimpse of a prosperity that would be experienced in the 1950s by their children, but not by themselves.</div> <bR> <div> "Likewise, the Internet Boom of the 1990s gave adult Americans of the time a glimpse of the world that their children will inherit for their middle age - in the 2020s - as the Boomers get ready to shuffle off this mortal coil. Like the peers of Moses, who saw the Promised Land but never got to enter it, Americans will wander the desert for two generations until their children are ready to take the big step. (And yes, I believe that those children will fight the modern "battle of Jericho" to get there.) But getting from here to there will not be a pleasant experience" (Tom Au, <I>The Modern 1930's</I>, dailyreckoning.com, April 25, 2007).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Business Investment in Deflation and Depression</B></div> <bR> <div> "In American economic history, there is no greater puzzle than the persistent failure of investment activity during the depression of the 1930s to generate a full recovery. What investment did take place during the decade was limited by the low demand for output... cyclical recoveries require an increase in investment expenditure large enough to make additions to productive capacity, create jobs, and expand output... This is the essential paradox of the thirties. Consumption was constrained... The solution, a recovery in net investment, was not forthcoming, because of inadequate demand" (Michael A. Bernstein, <I>The Great Depression, Delayed Recovery and Economic Change, 1929-1939</I>, Cambridge: Cambridge University Press, 1987, p.1).</div> <bR> <div> [See below "<B>Delayed Recovery - Structural change</B>" for 1930s, 1970s and the future].</div> <bR> <div> "The Depression of the 1930s was the most severe in American history, in terms of unemployment and the fall of output. Popular culture credits the New Deal with rescuing the economy from collapse. This is wrong. The National Bureau of Economic Research dates the recovery to March 1933. The stock market rebounded from the nadir of depression in July 1932. The recovery from the New Deal was instituted from 1933 forward was actually less robust than the recoveries from previous depressions. It was not to the actual outbreak of World War II in Europe, a decade after the depression began, that U.S. industrial output exceeded its 1929 highs. From 1929 to 1939, adult unemployment averaged 18 per cent" (Davidson & Rees-Mogg,  p.347)</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Japan - Modern example</B></div> <bR> <div> Japan experienced a credit-induced industrial investment boom and share and property bubble in the late 1980s. The stockmarket peaked at the end of 1989 and then trouble began. Japan's post-bubble experience highlights a self-feeding deteriorating buiness environment.</div> <bR> <div> "As product prices fell, corporate profitability fell. Consequently, wages and bonuses were cut back and unemployment began to rise. Consumers, with less money in their pockets and less certainty about the future, began to reign in their consumption. Less consumption dealt still another blow to profitability. Share prices fell along with consumption and profits. Very quickly, businesses were forced to curtail new investment. Demand for loans declined because existing capacity was already excessive, and because excess capacity made further investment unprofitable. As each weak part of the economy inflicted damage on all the other parts, aggregate demand in the economy fell, but the industrial capacity remained in place. Interest rates fell, but that did not help. Businesses will only borrow and invest if the rate of return they expect to make on their investment exceeds the rate of interest they must pay to borrow funds. In Japan's post-bubble economy, the excess capacity was so great that almost any new investment would have resulted in a loss - not a profit. Even when interest rates fell to just above 0%, business were no interested in borrowing, due to the dearth of profitable invesment opportunites...</div> <bR> <div> "Falling prices are very hard on corporate profitablity. Deflation also makes it more difficult  for business to service their debt, since each year they must achieve higher turnover just to compensate for the falling sales prices" (Richard Duncan, <I>The Dollar Crisis</I>, Singapore: John Wiley & Sons, 2005, pp.154-155).</div> <bR> <div> "While paper wealth vanished, money borrowed on the fantasy of spiralling asset prices had to be repaid in an economy brought back to reality. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>Debt remained, contractual and binding</B></FONT>" (Peter Hartcher, <I>The Ministry</I>, (Sydney: HarperCollins<I>Publishers</I>, 1997), p.84).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Length of Depression - History's examples</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>A recession is a downturn that automatically rights itself, normally after little more than a year</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>A depression requires longer to play itself out</B></FONT>. In a deep slump, the economy may unravel for years. The contraction of 1929 took three and a half years to hit bottom in the United States... The fall was so severe that the United States did not surpass its 1929 output until 1939. The depression of 1837 deepened for four years before the recovery began. After the economy started down in the depression of 1873, it continued to fall for five years, five months" (Davidson & Rees-Mogg, p.371).</div> <bR> <div> "<FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>Don't expect a recovery in less than three to four years</B></FONT>... The recovery will not begin until all the bad news has been faced. This will take a matter of years, not months... a recovery...will not happen until all the bad debt has been washed out. And that means all the bad debt. The insolvent banks will have to be liquidated or reorganized before this can occur. And insolvent governments will have to shed tasks and obligations, and reliquefy economies with sound money" (Davidson & Rees-Mogg, p.516).</div> <bR> <div> The Great Depression maybe divided into three periods, contraction, expansion and contraction. The Hoover recession ran from August 1929 to March 1933, the three and a half years mentioned above. The economy expanded from March 1933 to May 1937. The Roosevelt recession ran from May 1937 to June 1938.</div> <bR> <div> "... early in 1933 ... the US banking system came to a virtual standstill in the last weeks of the Hoover presidency... The damage [of the Depression] was enormous, though it was patchy and often contradictory. Industrial production, which had been 114 in August 1929, was 54 by March 1933. Business construction, which had totalled $8.7 billion in 1929 fell to $1.4 billion in 1933. There was a 77 percent decline in the production of durable manufactures during this period... Unemployment had been only 3.2 percent in 1929. It rose to 24.9 percent in 1933 and 26.7 percent in 1934. At one point it was estimated that (excluding farm families) about 34 million men, women, and children were without any income at all - 28 percent of the population. Landlords could not collect rents and so could not pay taxes. City revenues collapsed, bringing down the relief system, such as it was, and city services. Chicago owed its teachers $20 million. In some areas schools closed down most of the time. In New York in 1932 more than 300,000 children could not be taught because there were no funds. Among those still attending, the Health Department reported 20 percent malnutrition. By 1933 the US office eduction estimated that 1,500 higher-education colleges had gone bankrupt or shut. University enrollments fell, for the first time in American history, by a quarter-million... Total book sales fell by 50 percent..." (Paul Johnson, <I>A History of the American People</I>, London, Weidenfeld & Nicolson, 1997, p.620).</div> <bR> <div> "By 1936 all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained stubbornly high. In 1937, the American economy took an unexpected nosedive, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. In two months unemployment rose from 5 million to over 9 million, reaching almost 12 million in early 1938. Manufacturing output fell off by 40% from the 1937 peak; it was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15 per cent lower than it had been at the peak in 1937. In most sectors hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose consumers' expenditures declined, leading to further cutbacks in production..." (<I>The Recession of 1937</I>, en.wikipedia.org/wiki/Recession_of_1937).</div> <bR> <div> "The real recovery from the boom atmosphere of the 1920s came only on the Monday after the Labor Day weekend of September 1939, when news of the war in Europe plunged the New York Stock Exchange into a joyful confusion which wiped out the traces (though not the memory) of October 29. Two years later, with America on the brink of war itself, the dollar value of production finally passed the 1929 level for good. If interventionsim worked, it took nine years and a world war to demonstrate the fact" (Johnson, pp.632-633).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Hedges against deflation</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>"All debt must be paid off, refinanced or reneged on. I think we'll see a mixture of all three," </B></FONT>says Richard Russell, editor of newsletter Dow Theory Letters. "When this economy runs out of gas, handling the giant edifice of U.S. debt will become a crushing problem"" (Jonathan Chevreau, <I>Debt loads are soaring</I> <I>$22,000 per capita and counting</I>, nationalpost.com, October 25, 2003).</div> <bR> <div> "But if Australia suffered deflation, what would you do to protect yourself and your family against the vagaries of this downward spiral?</div> <bR> <div> "The most important thing to do would be to get rid of as much debt as you could. Deflation means you end up owing more money in real terms than you borrowed to buy an asset that will be worth less.</div> <bR> <div> "It would certainly not be the time to buy property, but if you already had a mortgage, you should sell any other assets you own and pay off your home loan.</div> <bR> <div> "Similarly, you should clear your credit card debt. There's not much point buying on credit and paying interest on that purchase when that price would be lower in a month's time.</div> <bR> <div> "In fact, deflation requires you to defer all non-essential purchases for as long as you can...</div> <bR> <div> "In a deflationary environment it is much better to be a lender than a borrower and the best place to invest your money is in government bonds" (Gillian Bullock, <I>Threat of depression rises again</I>, The Sun-Herald, January 11, 1998, p.60).</div> <bR> <div> "Associate professor Steve Keen, of the University of Western Sydney's school of economics and finance, says that because super funds have pumped so much money into the sharemarket, any widespread switching by fund members could have a big effect on the market. Mr Keen, it must be said, has a gloomy view of the road ahead for markets and the economy and recently switched his own super to cash (<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>although he would have preferred to invest in government bonds if his fund had offered that option</B></FONT>)" (Annette Sampson, <I>Hitting the switch when super stumbles</I>, smh.com.au, April 5, 2008).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>What Do You Do with Your Money During A Deflation?</B></div> <bR> <div> "Step one is to get out of all of the investments that have traditionally gone down during a deflation. The first one is the stock market. The second one is the real estate market. The third is the market for risky bonds - bonds that have been issued by debtors who are less than pristine in terms of their long-term ability to pay the interest and the principal. Those are the areas that most people are invested in and are dangerous today. Some people are over-invested in fringe areas like collectibles and commodities, which also go down in deflations.</div> <bR> <div> "Number two...The only way to get safe is to put your money either in a bank that has extremely high liquidity, and there are a few in the world, a few that exist only to safeguard your money. Or, and I think this would be the second best solution, is to take it out of the banking system and, at least for the time being, lend it directly to the U. S. government by buying treasury bills" (Bob Prechter, <I>Interviews Worth Reading</I>, elliottwave.com, September 10, 2002).</div> <bR> <div> Lending to the U.S. government may be a mistake.</div> <bR> <div> "...<FONT SIZE="2" COLOR="#6000C0" FACE="Verdana" > </FONT><FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the biggest downgrade yet to come could be for U.S. government deb</B></FONT>t. With the U.S. dollar breaking below long-term support, a significant near-term decline looks likely. Over the next few years a 50% markdown in the value of the dollar seems like a "best case" scenario. As this disaster unfolds, and U.S. interest rates soar as a result, <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" >S&P and Moody's may finally be forced to recognize the truth and lower their ratings on U.S. treasuries</FONT>. <FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>If they are honest they will cut the rating all the way to junk!</B></FONT>" (Peter Schiff, <I>Time to Face the Music</I>,<B> </B>321gold.com, July 13, 2007).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Social mood change - credit revulsion</B></div> <bR> <div> When the social mood is positive credit grows and when the social mood is negative it slows. The examples provide the background for the following section on the failure of monetary policy in a era of deflation and depression.</div> <bR> <div> <B>1920s-1930s</B></div> <bR> <div> "The employed American factory worker had a third more real purchasing power than in 1914. Nor did he have to save to buy, as his father had done. He could have his automobile, radio, refrigerator and washing machine on the new installment plan" (Harold Evans, <I>The American Century</I>, (New York: Alfred A. Knope, 1999), p.182).</div> <bR> <div> "There were two major short run shocks to consumer spending that enervated the U.S. economy after the panic of 1929: the impact of the downturn on incomes, and the stress placed on consumer credit markets that had serious consequences for durable goods industry. From 1929 to 1933, disposble personal income, indexed in constant dollars, fell from $229.5 billion to $169.6 billion - a decline of 26.1%. The level of $229 billion was not reached again till 1939. Moreover, extensive destruction of the value of assets also occurred after 1929. The impact on demand for goods and services was obviously enormous...</div> <bR> <div> "The downturn also destroyed the easy conditions in consumer credit markets that had been one of the hallmarks of the prosperity of the twenties. Total consumer credit fell forty-one index points from 1929 to 1933. In addition to the consequences of a restriction in consumer credit for new purchases of durable goods, deflation increased the real burden of debt. It appears that by the mid-thirties, consumers were so concerned with liquidating the relative large debt incurred at the start of the decade, and so wary given the experience of the crash, that the aggregate marginal propensity to consume fell. Some have argued that this alone explains the recession of 1937 and the continuation of the depression itself" (Berstein pp.171-172).</div> <bR> <div> The "decline in money demand after 1929" was a primary contributor to "low money market rates"... "Bankers ... maintained high excess reserves  and claimed thare was an abject scarcity of investments. Critics charged that the banks were overly cautious... The timidity of the banking system appears to have been general and widespread. Indeed, the 1939 [availability of bank credit] survey found that over half of the reasons given for credit refusals by banks were "bank policy"; only a third were because of "the borrowing concern"" (Berstein, p.111).</div> <bR> <div> <B>Japan 1980s-1990s</B></div> <bR> <div> Japan provides an modern example of a negative change in social mood for both businesses and consumers.</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The "Golden Age" of modern Japan [1973-90] was marked by high capital stock growth and high TFP </B></FONT>[<B>total factor productivity</B>] <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>growth</B></FONT>...</div> <bR> <div> "Japan's gross investment in capital stock has decelerated sharply since the bubbles burst in 1990 and mean that the stock of capital has aged substantially. Capital deepening was running at above 6% when the bubbles burst in 1990, and is now growing at below 2%...</div> <bR> <div> "[It is] not clear if the banking crisis was the dominant problem in the 1990s. The prevalent view is that the economic stagnation in the 1990s in Japan was caused primarily by a "credit crunch". However,<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" > </FONT>growth accounting suggests that growth in Japan slowed because of a drastic slowdown in TFP [total factor productivity] growth, not because companies did not have access to credit. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The nominal cost of credit was lowered to zero, yet corporations saved rather than invested</B></FONT>. Capital deepening slowed, but TFP growth collapsed as well. <FONT SIZE="2" COLOR="#008000" FACE="Verdana" ><B>In short, broken banking system was not the primary and the only important impediment to growth in the 1990s</B></FONT>..." (Stephen L. Jen, <I>USD/JPY and Total Factor Productivity Growth</I>, morganstanley.com, November 18, 2005).</div> <bR> <div> "In Japan ... the greatest real estate boom ever seen had, by the late 1980's, led to calculations that the grounds of the Imperial Palace in Tokyo were worth more than the state of California.</div> <bR> <div> ""That was followed by 15 years of falling prices," said Richard Jerram, an analyst for Macquarie Research who is based in Tokyo. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>In Central Tokyo, he said, apartment prices probably fell 70 percent to 80 percent from top to bottom</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Even with rock-bottom interest rates, many thought it foolish to buy a home that was virtually certain to lose value</B></FONT>...</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"Mr. Jerram said a typical Tokyo apartment of 70 square meters, or about 750 square feet, now costs about 40 million yen, or around $330,000. That is affordable to many, given that</FONT> <B>fixed-rate mortgages are available at 2 percent interest rates</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >.</FONT></div> <bR> <div> "But those who bought in the past came to regret the decision. "You could have paid $1.5 million a few years ago," Mr. Jerram said" (Floyd Norris, <I>Remorseful or Not, Buyers Start to Return to Japanese Real Estate</I>, nytimes.com, December 3, 2005).</div> <bR> <div> "<FONT SIZE="2" COLOR="#008000" FACE="Verdana" >Money supply itself actually never contracted in Japan</FONT>. Instead, it grew very slowly for quite some time. <FONT SIZE="2" COLOR="#6000C0" FACE="Verdana" >However, bank credit outstanding contracted for 60 months in a row</FONT>. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" >Clearly there was a credit contraction</FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" >How did money supply still manage to grow? </FONT><FONT SIZE="2" COLOR="#008000" FACE="Verdana" >Fiscal deficits were ramped up immensely</FONT>, <FONT SIZE="2" COLOR="#6000C0" FACE="Verdana" ><B>roads to nowhere were built, and the Bank of Japan monetized all of it</B></FONT>..." (Michael Shedlock, <I>Inflation Monster Captured</I>, globaleconomicanalysis.blogspot.com, December 19, 2005).</div> <bR> <div> "Japan's government ... has been dis-saving for a decade. Japanese politicians like to blame failed Keynesian stimulus packages; in fact, the country's budget deficits were caused mainly by economic stagnation. With growth weak and prices falling, tax revenues plunged. For the past ten years the budget deficit has been running at an average of 6% of GDP, and <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Japan's levels of government debt are now by far the highest of any rich country</B></FONT>. But even record budget deficits and falling household saving could not counteract the scale of corporate thrift" (The Economist, <I>A survey of the world economy</I>, September 24, 2005, pp.10-12).</div> <bR> <div> Goverment debt as a percentage of GDP was 61.1% in 1991.</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The Organization for Economic Cooperation and Development puts public debt at 170 percent of Japan's $4.6 trillion economy</B></FONT>. Every little rate increase adds to the cost of servicing obligations that are by far the biggest among developed nations" (William Pesek, Jr., <I>Theater of the Absurd Surrounds BOJ's Decision</I>, bloomberg.com, January 17, 2007).</div> <bR> <div> Using the above figures Japanese government debt is 7.82 trillion dollars.</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The government ... does not want the [central] bank to stop its huge monthly purchases of government bonds, equivalent to two-fifths of all debt issuance</B></FONT>. A sudden end to those purchases would push bond yields up and, with them, the government's cost of servicing its debt.<B> </B>As it is,<B> </B><FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>debt-service consumes 22% of the annual budget</B></FONT>..." (The Economist, <I>Land of rising prices</I>, December 25, 2005, p.25).</div> <bR> <div> "It is often remarked that Japan is a rich country, whose citizens have greater wealth than any other. At first sight this is entirely true. Japanese households have a wealth to income ratio which is 100% greater than that of any other G5 economy. Unfortunately this wealth largely represents the debts of the corporate and government sectors and is thus largely illusory.</div> <bR> <div> "A country is not wealthy when one half owes debts to the other half that it can never repay" (Andrew Smithers, <I>Japan's Past Decade - Bad Luck or Policy</I>, smithers.co.uk, December 22, 2003).</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Even now - fully five years into economic recovery - Japan has yet to distance itself from the risks of a deflationary relapse</B></FONT>...</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>To the extent that Japan's progress continues to be heavily subsidized by the weakest currency and the lowest nominal interest rates in the world, it is hard not to underscore the still fragile state of its turnaround</B></FONT>.</div> <bR> <div> "Yes, it finally has a sustainable recovery in the real side of its economy. But that is not enough - especially if it turns out to be more of a cyclical rebound than <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>a structural healing</B></FONT>. <B>Japan is still somewhere in between its old system and a yet-to-be-defined new system</B>" (Stephen S. Roach, <I>Germany Outshines Japan</I>, morganstanley.com, February 20, 2007).</div> <bR> <div> <B>Future</B></div> <bR> <div> "Liz Bingham at Ernst & Young said: "These insolvency figures reveal that the number of people entering personal insolvency continues at a staggering rate. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Debt, it seems, has never been more fashionable</B></FONT>"" (Ashley Seager, <I>Record numbers become insolvent as personal debt soars</I>, guardian.co.uk, May 5, 2007).</div> <bR> <div> "<FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>At some point ... consumers will refuse to take on more debt and/or banks will refuse to lend consumers credit as the value of assets behind the loans plunge</B></FONT>. Consumer bankruptcies will soar as various credit bubbles implode. Furthermore, in a world awash in overcapacity there will be no reason for corporations to borrow. That is why the Bank of Japan failed to defeat deflation and that is why Bernanke will fail as well" (Michael Shedlock, <I>Inflation Monster Captured</I>, globaleconomicanalysis.blogspot.com, December 19, 2005).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Monetary Policy and the Great Depression</B></div> <bR> <div> "In spite of what Bernanke says, <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the Fed does not "print" money</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>It must loan it into existence</B></FONT>, <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>but this requires willing borrowers</B></FONT>" (Michael Nystrom, <I>The Specter of Deflation</I>, bullnotbull.com, December 28, 2006).</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Personally, I was never a spender</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>I guess it's because I come from a different world, the world of the Great Depression </B></FONT><B>-</B><FONT SIZE="2" COLOR="#008000" FACE="Verdana" ><B> </B></FONT>this was the world in which a dollar was hard to come by and a good dinner cost 75 hard-earned cents. It's difficult to break old habits, and I'm talking about habits like turning off leaky faucets or making sure all the lights are out before you go to bed. <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>I never could get used to spending more than I was earning or taking out loans on a car or buying a house with a mortgage attached</B></FONT>" (Richard Russell, <I>The creature from another world</I>, 321gold.com, July 12, 2006).</div> <bR> <div> To take action to prevent deflation and debt-liqidation misses the point. [continue later]</div> <bR> <div> "... debt deflation is a particularly malign economic beast, which emerges when people curb their spending in an effort to pay off their debts. Those very spending cuts cause prices to drop, and force up the real value of debts, creating a vicious spiral. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>As the experience of America in the 1930s and Japan in the 1990s shows, central banks can do little about this, because they cannot set interest rates lower than zero</B></FONT>" (The Economist, <I>Inflated expectations</I>, July 3, 2004, p.68).</div> <bR> <div> ""The Federal Reserve policy of cheapening credit through the purchase of government bonds has been unable to make a dent in the conservatism of borrower or bank lender, in short, every anti-deflationary effort has yet to provide positive results"" (Editorial, Barron's, July 11, 1932, quoted by Bob Hoye, <I>How a currency can fight the Fed</I>, prudentbear.com, March 31, 2004).</div> <bR> <div> "Cheap money made no difference - the Federal discount rate was never more than 1.5 percent after 1935 - but they kept on hoping that "confidence" would return" (Evans, p.225).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="073297b0.png" border=0 width="553" height="379" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> (Evan F. Koenig & Jim Dolmas, <I>Monetary Policy in a Zero-Interest Rate Economy</I>, dallasfed.org)</div> <bR> <div> "Federal Reserve cut the short-term nominal interest rate from 5 percent in 1929 to ½ percent in late 1932. However, inflation fell even faster. Consequently, the real interest rate - the difference between the nominal interest rate and the inflation rate - actually increased, rising from 3½ percent in the spring of 1929 to a peak of 15 percent in late 1931 and early 1932. Monetary policy was, effectively, becoming tighter and tighter in the early 1930s, rather than easier and easier. </div> <bR> <div> "As a result, industrial output fell by a whopping 50 percent relative to trend..." (Evan F. Koenig & Jim Dolmas, <I>Monetary Policy in a Zero-Interest Rate Economy</I>, dallasfed.org).</div> <bR> <div> "The contraction [1929-1933] shattered the long-held belief, which had been strengthened during the 1920s, that monetary forces were important elements in the cyclical process and that monetary policy was a potent instrument for promoting economic stability. Opinion shifted almost to the opposite extreme, that "money does not matter"; that it is a passive force which chiefly reflects the effects of other forces; and that monetary policy is of extremely limited value in promoting stability" (Milton Friedman & Anna Jacobson Schwartz, <I>A Monetary History of the United States</I> (Princeton: Princeton University Press, 1963), p.300). Note Friedman was summing up a view that he disagreed with; Friedman was wrong and his disciple Ben Bernanke, the present Federal Reserve Board Chairman, will soon find this out for himself).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>BACKLASH AGAINST INTERVENTIONISM</B></div> <bR> <div> When the social mood becomes negative proposed 'rational' solutions by governments and central bankers will be confront by 'irrational' human nature.</div> <bR> <div> "The combined opposition of business interest and conservative elements left the government with the rather blunt instrument of compensatory spending - an instrument ill-suited to the pecular stress afforded by secular structural changes [see below]. Moreover, such fiscal spending was and is particularly vulnerable to short-run political whim and logrolling, with the result that stagnation of the seventies, as in the thirties, government action was stiffled, misdirected, and certainly not endowed with long-term vision. The weakness of government action in the seventies is more surprising given the intellectual and experiential knowledge won in the thirties and subsequent decades" (Bernstein, pp.222-23).</div> <bR> <div> "<I>Revolt of the Middle Classes</I></div> <bR> <div> ""Printed and spoken abuse of government is seen and heard on all sides"  - Carl Sandburg, 1932</div> <bR> <div> "In 1929, retrenchment was once again the predominant popular reaction, although it did not find immediate expression in the policies of government. The initial popular reaction to the depression after 1929 was to blame it on excessive government spending. Most citizens who worked in the private sector were obliged to deflate their living standards and household budgets in line with the contraction of the economy. Governments did not retrench as much as had previously been the case. Partly this was because Herbert Hoover was an advocate rather than an opponent of government action to dampen the business cycle. Hoover encouraged local governments to spend. He tried to keep wages up, including those for government employees. Nonetheless, there was a strong push to cut public expenses. Government spending was a small portion of the economy in 1929 by 1990 standards. Yet most citizens believed that they were getting little for their tax dollars. There were angry cries to slash spending. Harold Bettenheim, editor of <I>American City</I> magazine, an opponent of budget-cutting, observed:</div> <bR> <div> "It has become fashionable to decry government and taxes. Demands for indiscriminate budget-slashing are the order of the day. So-called economy leagues are springing up all over the country. Embattled taxpayers are organising strikes. Fluent orators are taking to the air to attack governments and the costs of government.</div> <bR> <div> "The American Municipal Association, an organizaton of city governments, lamented that "there are a great many people with whom the need for economy in government has become an obsession or mania that they have become violent and destructive opponents of all government." Historian James T. Paterson remarked, "As tax revenue dwindled and unemployment increased economy in government became a magic word."</div> <bR> <div> "In short, the initial reaction to the depression was a political demand to cut government spending. Candidates elected to governorships in 1930 and 1932 were generally advocates of economy in government. Paterson reports, "Retrenchment dominated the governors' messages of 1931 and thereafter"... The national mood of retrenchment...helped elect Roosevelt... It was only after the economy had stabilized and the household sector ceased having to lower its own consumption that demands for retrenchment began to slacken" (Davidson & Rees-Mogg, pp.422-423).</div> <bR> <div> <B>Characteristics of Depressions</B></div> <bR> <div> * Creditor countries are more stable than debtors.</div> <div> * Market drops are most severe in the most advanced countries.</div> <div> * The more asset prices have been inflated during the boom, the further they tend to fall when it ends. </div> <div> * The longer the depression, the more traumatic its effects in altering orientations towards work and the </div> <div> future.</div> <div> * The deeper the drop in income, the more pronounced the rise of delusional thinking and </div> <div> conspiracy theories, and the more violent the retribution against scapegoats.</div> <div> * Booms have reached their greatest extremes during power transitions.</div> <div> * <B>Old pattern, old structures, old ways of doing things, even old patterns of settlement, are subject to far-reaching change</B>.</div> <bR> <div> * (Above points: Davidson & Rees-Mogg, p.370).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Delayed Recovery - Structural change</B></div> <bR> <div> <B>1930s</B></div> <bR> <div> "The low-cost Model-T, with its internal combustion engine powered by cheap gasoline, was the <I>big-bang</I> opening the world of the automobile and of mass production and mass consumption" (Carlota Perez, <I>Technological Revolutions and Financial Capital</I>, (Cheltenham: Edward Elgar, 2002), p.3).</div> <bR> <div> By 1929 there was one car for every five people.</div> <bR> <div> "When they weren't driving, they were talking... by 1927 40 percent of the homes had telephones. By 1927 every third home had a radio, two-thirds had electricity. Scheduled air services had started. There was nothing like it anywhere else in the world" (Evans, p.182).</div> <bR> <div> "I want to suggest in this study that the difficulty experienced by the American economy in the 1930s was an outgrowth of secular trends in development. By the 1920s, the economy had entered an era characterized by the emergence of dramatically new demand patterns and investment opportunities foreshadowed and indeed encouraged a shift in the composition of national output. But such a qualitative transformation created impediments to the recovery process in the thirties. These impediments derived from the difficulty of altering technology and labour skills to meet demands for new investment and consumer goods at a time of severe financial instability. In this sense, long-term growth mechanisms played a major role in the cyclical problems of the interwar period" (Bernstein, p.20).</div> <bR> <div> "The fact that certain industries actually prosperred and recovered quickly after the trough of 1932 does not mean that demand could be quickly or easily restored. The lower firm incomes and sales that resulted from the crisis of 1929-32 made the dynamic industries incapable of growing quickly enough to absorb the unemployed from the mature and declining industries A generally low level level of G.N.P. thus limited the impact that the more vibrant sectors could have on aggregate investment and employment. Hence recovery was delayed" (Bernstein, p.144).</div> <bR> <div> <B>1930s and 1970s</B></div> <bR> <div> "On a day like any other <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>in November 1971</B></FONT>, a small event in Santa Clara California was about to change the history of the world. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Bob Noyce and Gordon Moore launched Intel's first microprocessor</B></FONT>, the precursor of the computer on a chip. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>It was the big-bang of a new universe, that of all-pervasive computing and digital telecommunications</B></FONT>. Chips were powerful, they were cheap and the opened innumerable technological and business possibilites" (Carlota Perez, <I>Technological Revolutions and Financial Capital</I>, (Cheltenham, Edward Elgar, 2002), p.3).</div> <bR> <div> "... in the 1970s, the performance of the American economy was somewhat similar to that of the 1930s. In both decades, the growth of the gross domestic profit ... fell after years of robust expansion. Unemployment reached disquieting levels, and the attendant downturns were persistent rather than transitory...</div> <bR> <div> "The development and growth of new industries and products were too slow because of a combination of demand-side problems, supplyside shocks, and policy difficulties...</div> <bR> <div> "It would be foolish to suggest that in absolue terms the performance of the American economy in these two decades were similar... The thirties and seventies were decades that marked major disruptions in the process of growth in the American economy...</div> <bR> <div> "The difficulty experienced by the American economy in both decades grew out of secular trends in the economy's development. Preceding both crises, the economic system encountered new demand patterns and investment and employment opportunites. These patterns and opportunities were linked with a shift in the composition of national output. But such reorientation wealkened the recovery process in decades. A sluggish recoupment was the result of altering technology and labor skills to meet the new demand for investment and consumption goods at a time of severe financial restriction occasioned by the stock market and O.P.E.C. shocks..." (Bernstein, pp.207, 209, 210-211).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Industry, Workforce and Society in the future</B></div> <bR> <div> <B>Industry</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>We are in the early stages of the creation of a new industry, reminiscent of computing in the early 1970s</B></FONT> when companies began to adopt it in earnest. There was plenty of resistance. The systems were difficult to operate and seemed to be set up for nerds. The economic benefits were questioned. There were privacy and regulatory worries. Yet in time the rough edges were smoothed and everybody benefited" (The Economist, <I>Telecoms - The hidden revolution</I>, economist.com, April 26, 2007).</div> <bR> <div> "It is hard for anyone - politicians most of all - to picture how wireless will be used, just as it was with electric motors and microprocessors, two earlier stand-alone technologies that have been built into a plethora of devices. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Wireless technology will become a part of objects in the next 50 years rather as electric motors appeared in everything from eggbeaters to elevators in the first half of the 20th century and computers colonised all kinds of machinery from cars to coffee machines in the second half</B></FONT>. Occasionally, the results will be frightening; more often, they will be amazingly useful" (The Economist, <I>When everything connects</I>, economist.com, April 26, 2007).</div> <bR> <div> The Economist in <I>Telecoms - A world of connections</I> states that the 'structural change' ahead "will be tricky" and "it will not be easy".</div> <bR> <div> <B>Workforce</B></div> <bR> <div> "The next society will be a knowledge society. Knowledge will be its key resource, and<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B> </B><B>knowledge workers will be the dominant group in its workforce</B></FONT>..." (Peter Drucker, <I>A survey of the near-future -</I> <I>The Next Society</I>, economist.com, November 1, 2001).</div> <bR> <div> "They are ... people who do much of their work with their hands (and to that extent are the successors to skilled workers), but whose pay is determined by the knowledge between their ears, acquired in formal education rather than through apprenticeship. They include X-ray technicians, physiotherapists, ultrasound specialists, psychiatric case workers, dental technicians and scores of others...</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="verdana" ><B>Within two or three decades, knowledge technologists will become the dominant group in the workforce in all developed countries, occupying the same position that unionised factory workers held at the peak of their power in the 1950s and 60s</B></FONT>" (Drucker, ibid.,).</div> <bR> <div> <B>Society</B></div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"... [the suggestion is that]</FONT><B> the greatest changes are almost certainly still ahead of us</B>.<FONT SIZE="2" COLOR="#000000" FACE="verdana" > We can also be sure that the society of 2030 will be very different from that of today, and that it will bear little resemblance to that predicted by today's best-selling futurists. It will not be dominated or even shaped by information technology. IT will, of course, be important, but it will be only one of</FONT><FONT SIZE="2" COLOR="#006600" FACE="verdana" ><B> several important new technologies</B></FONT><FONT SIZE="2" COLOR="#000000" FACE="verdana" >. </FONT><FONT SIZE="2" COLOR="#FF0000" FACE="verdana" ><B>The central feature of the next society, as of its predecessors, will be new institutions and new theories, ideologies and problems</B></FONT><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >" (Drucker, ibid.,).</FONT></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Viewing the future</B></div> <bR> <div> Creating a model for viewing the future would incorporate, informed by the information above, technological, financial, societal and war cycles within the larger hegemonic cycle. It was observed above that "booms have reached their greatest extremes during power transitions".</div> <bR> <div> For America this boom has been a major 'turning point' in its hegemonic cycle. America entering the 'mature' phase of its cycle now faces its greatest challenges since becoming a nation.</div> <bR> <div> Thomas Au commented above that:</div> <bR> <div> "Like the peers of Moses, who saw the Promised Land but never got to enter it, Americans will wander the desert for two generations until their children are ready to take the big step. (And yes, I believe that those children will fight the modern "battle of Jericho" to get there.) But getting from here to there will not be a pleasant experience".</div> <bR> <div> The Thomas Au comment, for students of Bible Prophecy takes on particular significance in that the Seventh Seal of Revelation and, what is erroneously referred to as, the Battle of Armageddon, that is the second stage in World War 3 in secular terms, is patterned on the events leading up to and including the ancient "battle of Jericho".</div> <bR> <div> America will experience a crisis generation, similar to the 1930s and 1940s. But before briefly looking at that in the "Conclusion", the next page addresses "Biblical Financial cycles".</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <A HREF="id68.htm" TARGET="_top" TITLE="Biblical Financial Cycles">Next Page</A>           <A HREF="id67_m.htm" TITLE="What to expect?">Top of Page</A>            <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Previous Page</A>            <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Crash Index</A>           <A HREF="index.htm" TARGET="_top" TITLE="Future Watch">Home Page</A></div> <bR> </td> </tr></table></body>