Well, hello again!
To be honest, I sort of feel like one of those ridiculous weather forecasters standing on
the dock as a hurricane whips through.
Yes, economic numbers are bad.
Yes, it’s likely to get worse before it gets better.
At this point, the likelihood we’re headed into a recession is basically a given.
Why aren’t we there already?
Because a “recession” is generally described as a period of two consecutive quarters when
GDP goes down-- simply put, too little time has passed to make it official.
There have been 33 recessions in the US since 1854, with 4 occurring after 1980.
So, while they’re not a whole lot of fun, they are a pretty normal part of the business
cycle.
But lately, you may have heard another word floating around.
Depression.
Oh my...!
Ok ok, before we start freaking out, let’s get a clear picture of what a depression actually looks
like and see what history has to teach us about softening the blow.
Let’s start with the text-book definition of what an economic depression is.
Ha!
I tricked ya...there actually isn’t one!
The National Bureau of Economic Research is responsible for officially declaring the start
or stop of a recession.
But neither they nor any other agency declares a “depression”.
It’s just considered a longer, more dramatic form of recession.
How long, and how dramatic?
Depends on who you ask.
But one popular definition requires a drop in GDP of over 10%, and a duration longer
than 2 years to really be called a “depression”.
There are some pretty striking similarities between the 1930’s and 2020.
For example, at the peak of the Great Depression, unemployment rates hovered around 24.9%, and
those who kept their jobs saw their salaries cut and hours reduced.
As of late May, unemployment in the US is hovering close to 28%, according to the U6
rate covering the broadest definition of unemployment.
There’s also a clear uptick in behaviors linked with self-sufficiency.
You don’t have to scroll far to see a picture of a home-baked bread or newly planted veggie
garden.
Philip is pickling everything in sight and I feel I have finally achieved the level of
Sourdough Sensai.
My meemaw learned the same lessons from the Great Depression.
She was famous for her budget stretching “surprise” casseroles, that let nothing go to waste.
But unlike in my house, she purposely never had fresh bread, always frozen, since there
was no risk of it going to waste.
Didn’t seem to slow her down though, she lived to the ripe old age of 99.
P: On the eve of World War 2, many feared our nation would be plunged into a second,
deeper financial crisis.
But instead, the following decades turned out to be an era of unprecedented prosperity!
How was that achieved?
First: government spending.
President Roosevelt’s “New Deal” used federal funds to put millions of unemployed
people back to work building the nation’s bridges, roads, parks, and cities. and subsidized
home-ownership through the creation of the Federal Housing Administration.
And in order to meet the needs of the war effort, the Government bought vast amounts
of military supplies from private companies, and heavily invested in domestic manufacturing.
This double-injection of funds from the government is widely credited with lessening the length
and severity of the Great Depression.
Upon returning from the war, millions of service members utilized the GI bill to attend college,
helping to essentially “create” a true middle class in America.
Compared to these massive projects, The CARES act--while a necessary first step, is only
a fraction of what could be done in the future.
Second: Devaluing our currency.
Yes, you heard that right -- weird as it may sound, devaluing the dollar played a big role
in getting us out of the last mess.
By breaking the strict tie of dollars-to-gold, the government could freely print loads of
new dollars that were worth less.
Between 1933 and 1937 the money supply increased 42 percent.
In his book “Lords of Finance”, Liaquat Ahamed observed “Most economists now agree
90 percent of the reason the U.S. got out of the Great Depression was the break with gold."
We’ve already begun the devaluing process in response to the Pandemic, by the Fed creating
hundreds of billions of new dollars in March, thus lowering the value of the dollar.
Why does this help?
Simply put, a country with a weaker currency will be more competitive in global markets.
Though, there are downsides, like ticking off your trading partners.
Many countries have recently taken issue with China “manipulating” their currency to
gain a trade advantage.
But if you do this too much, you risk creating hyper-inflation, though experts uniformly
agree we’re nowhere close to that happening in the US.
A third factor in turning the tide of the depression was technological and business
innovation.
Even in the depths of a financial crisis, new innovators emerge -- sort of like new
seedlings sprouting after a forest fire.
Obviously, this is no justification for the destruction COVID is wreaking, but historically,
temporary downturns have accelerated breakthroughs.
The period between 1929 and 1941 is widely considered the most technologically progressive
of the 20th century.
We might look back at this as a time when remote learning and telecommunications took
a huge leap forward.
A fourth strategy was one not used by government agencies or big business, but ordinary citizens:
thriftiness.
I think it’s best summed up in the Depression-era mantra , “Use it up, wear it out, make do
or do without.”
This is a stark contrast to our modern, first-world, “throwaway” culture
of replacing cars, phones, and computers every couple of years.
In the 30’s, blue and white-collar families alike kept community “thrift gardens”
whenever possible.
They mended their own clothing long before considering buying something new, and opted
to play card and board games over more expensive entertainment.
And for those unable to make ends meet, the use of government welfare programs became
so normalized that much of the social stigma fell away.
Things might feel really grim right now.
But there is power to change the course of the future, and it lies in the hands of governments,
companies, and even individual citizens.
Only time will tell how we’ll look on the other side of this, but history shows us that
we get to play some part in how the story ends.
And that’s our two cents!
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