The True Victim of the Depression

We read an article from the International Herald Tribune which we found laughably uninsightful. Mr. Stephen Schwarzman, CEO of Blackstone Group, remarks that the world has lost about 40% to 45% of its wealth. Our cynical side wonders if he is covertly commenting on his personal portfolio, but we assume he is being honest in his estimation of the drop of the world's 'wealth.'

Even if Mr. Schwarzman's number is accepted as reasonably accurate -- which we do -- his comment is purely nonsensical: the 'wealth' he refers to was never real. It was perceptual wealth; it existed only because at least two people at the peak of valuation said it did: the credulous buyer, and the less-credulous seller. This fast-evaporating 'wealth' was patently illusory, as it had all the substance and reality of a mirage.

Beyond this basic falsehood of Mr. Schwarzman's comment lies the big, black truth that no one likes to think about. Depressions are not necessarily about destroying wealth; rather, they destroy excess. Excess demand, excess consumption, excess space, excess production, excess capacity, excess valuation, excess credit. These are the things upon which a depression feasts; nothing so trite and pedestrian as perceptual wealth. The most destructive feat of a depression, though, is how effectively it can eliminate productive capacity of an economy.

Within this destruction, though, is a major problem. All depressions of the past have occurred when energy was not a limiting factor. The populace did not wonder where the energy to renew the economy was going to come from. It was tacitly assumed, and rightly so, the energy necessary to rebuild economic activity was abundant.

We opine such a comfortable assurance is not present in the 2007 Depression. Demand destruction in world-wide oil consumption is a given, and some have mentioned that it is an end to the Peak Oil debate. We beg to differ: this destruction has guaranteed Peak Oil is upon the world (whether from the limits of Nature or the limits of Humanity is immaterial). The oil industry -- from whence the lifeblood of industrial civilisation flows -- is in danger of irreparable harm, as Simmons & Company International reports.

With the severe downturn in oil use, many oil wells, rigs and refineries are being spooled down... permanently. Most of this equipment is utterly antique, and can never be restarted at any cost; it is too rusty and too run-down, and needs to be replaced. On top of that, vast swaths of the industry's ageing workforce are retiring, and there are not enough new workers adequately trained to replace this loss of hard-earned talent.

At some point in the not-too-near future, the hard and unyielding ceiling of oil production capacity will become painfully apparent. By Simmons & Co.'s estimation, it will take upwards of $100 trillion to rebuild the world's energy production facilities, and make them a viable entity for the future. We have the suspicion that the money, the interest, and the labour will never be found. Too many people seem to believe that the oil industry is a profit-squeezing monster - instead of the abused and starving industry in danger of utter collapse it is.

Better Chicago than Detroit

It's happening, dear Reader: we're seeing more and more posts in the blogosphere which sound more and more like us. It seems that a --presumably -- growing number of people are coming around to something like our point of view. "What are the odds of a depression?" whines a piece from the Wall Street Journal; "How government prolonged the Depression" reports another WSJ article.

We feel nervous about all that; in order to be remotely accurate, we believe we should be saying the exact opposite as the rest of mainstream society. With all the hubbub about depressions and such, we wonder if we should be changing our tune... but we'll get back to that.

One thing we haven't seen the mainstream talking much about is the decay of the major cities of the United States. These cities were once America's leading centres of population and culture... now they tend to be more husk-like than anything. This is a significant trend in the United States, which we feel accurately reflects the decay in the quality of living conditions in this country. It's probably not changing anytime soon.

President Obama promised the Citizenry change, and change, of a sort, he will probably bring. But let us point out what he will probably do: he will do what he can to support the Chicago-isation of the United States. Let us be frank, here: Chicago is a town run for the comfort and convenience of the government workers; Mayor Richard Daley rules with an iron fist; every welfare recipient is a voter (who votes the 'right' way).

But -- and we have to grit our teeth here -- it's not that bad. We've visited Chicago, and we could live there, if we had to... and we probably wouldn't even become terribly suicidal. The way we look at it, things could be more like Detroit: no comforts and conveniences, no iron fist, no 'right way' voters. Add to that: no future. Chicago, for all its faults, is at least limping along as a city, and is a place a person could live. Detroit is a catastrophe, a city where people can't seem to leave fast enough.

To tie everything together, we still think the 2007 Depression has a long way to run. We don't expect to see a bottom anytime soon, but we are getting a pretty good idea of what it might look like: the United States will be run Chicago-style, and the Wall Street Journal will have the headline: "Will this Depression ever end?"

Mania and Depression

Mania and depression refer at once both to psychological states and to economic conditions. The parallel has long been observed, and is somewhat apt. The primary divergence between economy and psychology lies in the depression phase. Economically, the depression itself is primarily the consequence of actions taken during the mania. Or put differently, economic mania and depression are related as cause and effect. Psychological mania and depression, also referred to as bipolar disorder, are merely two phases of mood, related by a common underlying cause.

What was the mania that caused the 2007 Depression? Obviously, the 'housing bubble' was part of it, with its attendant mortgage-backed securities - a classic case worthy of Extraordinary Popular Delusions and the Madness of Crowds. But could the whole of the collapse be pinned on housing?

We propose that several structural economic flaws introduced during the 1929 Depression created an unbalanced economy and several long-lasting manias, the consequences of which will now need to be dealt with. Failure to reform these flaws will result in further economic collapse. Successful reformation will set the stage for economic recovery. We will be discussing these flaws and their resultant manias in this and future posts.

As an example, one flaw we would call Make-Workism. Among developed nations, this is most acute in the USA, as it does not officially believe in socialism. Where socialism would create public-owned enterprises to provide essential services (railroads, sanitation, water, electric power, low-cost housing, and so on), in the USA, government tends to avoid competing with private business and instead provides services that provide little or no economic benefit, e.g. shoddy education, prisons galore, unimaginably bloated military-industrial complex, airline luggage inspectors. The make-work strategy really took off during the 1929 Depression, and now employs a substantial portion of the population.

Make-Workism created a mania in government-directed activity because, like all manias, it seemed to work for a time, and gathered great popular support, largely as a result of generous pay packages, and well-funded lobbyists. Hardly anything valuable has been created by this mania, and much that is destructive. With the prospect of collapsing tax revenues, and the imminent bankruptcy of several US states and many municipalities, this mania may well be at an end. Do not look to see the public sector shrink gracefully though.

Did We Say 2008? Hahahahaha...

It's now official, folks: according to the National Bureau of Economic Research, the United States is in a recession... which started in December 2007. Actually, the recession is really a depression, but that's a detail; the illusion that things are just 'slow' has been eradicated, a year into the problem. Whatever the case, we wish the Depression a happy first birthday!

It is customary to name a depression after the year in which it started, so officially the United States is in the 2007 Depression. We resist the temptation to retcon our previous posts to fit the present circumstances, but we will use 2007 Depression from now on. It is the way this depression will be remembered in the history books, and who are we to argue with history?

Now that the economic situation is 'official,' let's look at what this may mean. One thing we feel is certain: fear is going to be much stronger than before. As an example, news has broken that credit card companies are thinking of cutting $2 trillion in consumer credit. Although we aren't convinced the banks will actually do this, it's a sign of increased tension and fear.

Fear will also help drive President-elect Barack Obama's sweeping social programmes with neck-snapping speed. In the manner of President Franklin Roosevelt before him, we believe Mr. Obama will be coming out swinging... and one doesn't want to be in his way. We fear his new policies, like Roosevelt's inept and destructive New Deal, will only serve to worsen and prolong the 2007 Depression.