Will the Depression Make Everyone Poor?

If the World finds itself a good deal poorer in the coming years it will not be because the Depression made it thus. The Depression is only revealing the fact that everyone is poorer than they thought they were.

This is an important distinction that is lost on almost everyone. The Depression is happening because incomes are declining. Incomes are declining because the productive capacity of society is not as large as people imagined it to be.

Allow us to present a simple metaphor: Suppose you owned an apartment building. Suppose further you had two tenants: your hairdresser, and your stockbroker. Now suppose that instead of fixing the soft spot in the roof and the crack in the foundation, you took the rent and spent half of it on expensive haircuts and the other half on penny stocks. Then comes the day that the rain came in through the roof and through the foundation.

No problem, you say, as you've been creating a rainy day fund with your stockbroker by investing in penny stocks. Oops! The stock market crashed. Uh oh. Well, you'll just have to do all the work yourself, and get money for supplies by using the rent money, skipping the haircuts and further stock purchases.

Now the bad situation gets worse: because your stockbroker isn't making the commissions (largely on account of you) she once was, she is getting behind on the rent. So too your hairdresser - you were his best client - is also getting behind. This means you can't buy the supplies... so the rain will just keep pouring in.

We hope this metaphor isn't too obscure. It really does describe to an extent the pickle the world's economy is in. There are a complexity of reasons why capital and spending has gotten grossly misallocated for a long time before the consequences were revealed. It is well past the scope of this little post, but we plan to touch on some of it in the coming months.