Huxley, Friedman and Roosevelt
Perhaps the deepest truth I know of, is an utterance that comes to us long lost from an English novelist of the 19th Century by the name of Aldous Huxley, who said “That men do not learn very much from the lessons of history is the most important of all the lessons that History has to teach.” Today we live in a literal proof of a society misunderstanding of the profound nature of this observation, at least economically speaking. In 1929, on the day the stock market crashed, the headline of Variety read, Wall Street Lays an Egg. Thats timid compared to whats already been said about today’s circumstances. The fact is though, Variety like today’s media, has it all wrong.
It was the economist Milton Friedman who best summed up the cause of our present-day economic woes with his thoughts on what caused the Great Depression, saying “The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy,” Change came from an usher as desperate as were the times. Just four short years later, in his 1933 campaign speech, Roosevelt said, “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.” And try they did.
Day in the Life
Such brute force as proposed there, howsoever, will serve ill the very different America of today. How different is it? In some ways very different, in others respects not at all.
- Food Shortages: The Tri-State Observer reports that the US has no remaining grain reserves…
According to the May 1, 2008 CCC inventory report there are only 24.1 million bushels of wheat in inventory, so after this sale there will be only 2.7 million bushels of wheat left the entire CCC inventory,” warned Matlack. “Our concern is not that we are using the remainder of our strategic grain reserves for humanitarian relief. AAM fully supports the action and all humanitarian food relief. Our concern is that the U.S. has nothing else in our emergency food pantry. There is no cheese, no butter, no dry milk powder, no grains or anything else left in reserve. The o°©nly thing left in the entire CCC inventory will be 2.7 million bushels of wheat which is about enough wheat to make 1?2 of a loaf of bread for each of the 300 million people in America.”
Here is a direct link to that report.
- Energy Crisis: Fox News asks, “Are We at Risk of a Global Recession Because of Oil?”
- Environmental and Natural Disasters: Some of these Oil spills, Ozone depletion, Earthquake related Tsunamis, a European heatwave that killed over 37,000 in 2003, and Hurricane Katrina just to name a few.
It sounds as if I’m describing doomsday but I’m not. I’m describing today, the 1930s, the 1970s, and I might as well be describing any day at random. The fact is these things happened before and will again. And Huxley’s lesson will continue to escape most of us just as it has done and will continue to do.
Not everyone comes as late to History class fortunately, some realize this and try and find new, more useful ways to look at the past. And some manage to apply what they learn. Current Macroeconomic theory suggests consumers and businesses of Great Depression era relied on cheap credit. Consumers did so purchasing goods, while businesses did so investing in production. This economic behavior fueled rapid, short-term economic growth, creating swells of debt. When prices deflated, growth essentially collapsed. As the corporations and consumers both defaulted on loans, unclaimed, full inventories further deflated prices. The corporations laid off workers reducing consumer spending, eventually creating a kind of self-sustaining cycle, and later the wave of defaults shook banks. Confidence plummeted in corporations, the markets, and finally the banks themselves, creating a ‘run on the bank.’ This suggests a way to look at today.
Today, we face very alike conditions. A systemic networked banking system creates investment banks such as Bear Stearns, called “too big to fail”, that require 30 billion dollar rescues when the same debt-fueled growth cycle causes just their collapse. And while that may have plugged one very apparent hole, the overall cycle will continue.
Starting in 2003 until sometime in 2007, the economy saw the same sort of rapid, short-term growth across a majority of markets, favoring housing, equities and derivatives, relying on the same kind of cheap, plentiful credit used prior to the Great Depression. Today different from the 1930s, that cheap credit has been delivered by sharing the debt amongst banks and further wrapped up as derivatives securities — this, and inter-bank lending creates the systemic connection between banks potentially making them too big to fail.
Before long though, debt-fueled growth causes confidence scares; loans come to term and defaults drive the flow of money out of lenders and spenders and into things like commodities, where the cycle enters the next phase. The new and higher commodity prices push down the equities and other securities and raise costs. The whole tree begins to poison, spreading one branch at a time.
Back to the Future
The future cannot be known but the past is not as limited. Thus, I feel confident in the future I see ahead, so mindful of the past. I say next, we’ll begin to hear about other lenders, spenders and connected investment vehicles; as CNN has only just put it, there are more perils ahead. Problems will crop up with automobile loans and students loans as well the securities that are related. The government may step in or reduced auto sales might help ease certain energy prices; the oil bubble might burst, leaving just food and other inflation to deal with. The student loan market is already drying up though and the government is already getting involved.
Despite the panic in the markets and all the volatility, I’m confident, though I realize quite sadly, to know our future, we needn’t look into any sort of crystal ball, but instead right where Huxley would suggest, using eyes focused backward in time.
This chart, released April 10th, 2008 by the American Geological Institute, shows oil by the barrel priced over the last seven years in the US dollar, the Euro dollar, and gold by the ounce. Oil on the commodities market is only ever priced in US dollars, so to get a clearer picture of how the price of oil trends, it is important to include and compare other units such as currencies and even other commodities as is done here. This is because, the dollar pricing itself could be having the most significant impact on the price of oil units. This seems to be the case today.