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Wednesday, January 08, 2014

Lessons of the 1920s

This isn't a bad basic primer on the cause of the Great Depression and the connection between it and the beginning of the Great Depression 2.0.
The lessons of the 1920s are clear, and they bear directly on the build-up to the present crisis. Developed capitalism without social democracy and strong labor unions leads to productivity increases far outpacing wage growth, extreme inequality, insufficient working-class purchasing power, an unprecedented buildup of household debt and nowhere for profits to go but into capitalist consumption and financial speculation. With financial growth not reflecting comparable health in the productive economy, a bubble formed in stock market speculation and household debt grew faster than household income. By their nature, bubbles break. The popping of the speculative bubble brought about the stock market crash of 1929.

The crash and ensuing Depression afflicted what we have seen was a highly vulnerable economy. Because the economy had by the 1920s become industrially mature, growth no longer depended upon the breakneck expansion of the capital goods sector, but was now, and for the first time, fuelled by the production and consumption of consumer durable goods like refrigerators, radios, vacuum cleaners and, most importantly, automobiles. Consumption replaced investment as the driver of economic growth. (4) Robust growth would now require high wages.

With wages stagnant, working-class households’ ability to sustain the consumer durables boom became dependent, as it would again from the mid-1970s onward, on unsustainable household debt levels. Supplementing income-based purchasing power with credit had been a fact of life since the late nineteenth century, but the debt increments increased especially rapidly during the 1920s. The proportion of total retail sales financed by credit increased from 10 percent in 1910 to 15 percent in 1927 to 50 percent in 1929. When working-class purchasing power and household debt approached their limit by 1926-1927, the rate of growth of consumer purchases began to decline. Key growth markets like autos and construction became saturated and excess productive capacity became conspicuous. Production fell and profits were directed to financial speculation and bubble creation. The stock market and the economy responded accordingly. The Great Depression was at the door.

A comparable dynamic was in effect during the period preceding September 2008. From the mid-1970s to the year before the housing bubble began to leak, 2005, the gap between productivity growth and flat wages grew wider and wider. As in the 1920s, national income shifted steadily and increasingly to the top. Inequality approximating that of the 1920s grew. 1928 and 2007 were the highest inequality years since 1900. (Each year, not coincidentally, was followed by a major meltdown.) Workers once again resorted to debt to maintain living standards. The ratio of outstanding consumer debt to disposable income had more than doubled, from 62 percent in 1975 to 127.2 percent in 2005. Since 1995 the debt burden, measured by the percentage of household income pledged to debt service, had become increasingly concentrated in the lower three income quintiles. Financial speculation, which had accelerated since the mid-1970s, took off with a vengeance after 1999. Echoes of the 1920s were loud and clear.
That's a great piece of data I hadn't seen before, concerning the increase in the percentage of retail sales "financed by credit" from 1910 to 1929. It clearly shows the same debt parabola that we often observe before a period of credit contraction.

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79 Comments:

Anonymous Josh January 08, 2014 12:22 PM  

Developed capitalism without social democracy and strong labor unions leads to productivity increases far outpacing wage growth, extreme inequality, insufficient working-class purchasing power, an unprecedented buildup of household debt and nowhere for profits to go but into capitalist consumption and financial speculation.

Another way to look at this would be to replace the social democracy ABCs strong labor unions with sound money. That would fix ths litany of woes in the remainder of the sentence.

Anonymous lozozlo January 08, 2014 12:28 PM  

social democracy ABCs strong labor unions

What is a social democracy ABC strong labor union?

Anonymous civilServant January 08, 2014 12:32 PM  

"Excess capacity will be wrung out of the system by the liquidation or destruction of redundant plant and equipment. But what about excess labor capacity? [It] cannot be “wrung out” of the system like idle plants. They will be repressed. The powers that be have been putting in place for some years now, surely in anticipation of widespread social turbulence, the infrastructure of a police state."

Is there an alternative to such a police state?

Anonymous Josh January 08, 2014 12:36 PM  

What is a social democracy ABC strong labor union?

Should be and. Social Democracy and strong labor union.

I can typing, I promise.

Blogger JartStar January 08, 2014 12:36 PM  

My greatest concern is the two strata of society which has become more pronounced since the beginning of the Great Recession. There seems to be entire newly fomenting class of people who are outside of the "club" as it were who live paycheck to paycheck, shop at Walmart using SNAP, do not have access to health insurance, and tend to be obese, morbidly so many times, and live on short time preferences. The "club" is the middle class and up who have insurance, save for retirement, decent jobs with benefits, and live their lives responsibly for the most part. These two strata cut across racial lines to some degree and definitely across age groups as millions of Millennials are probably stuck in low income jobs for the rest of their lives.

How long can this go on and in what form? It might last a long time with the US turning into a 3rd World Country with a tiny middle class and up with vast swaths of poor. LA is a very likely future for many major US cities particularly if they are run by the left. Report calls L.A. a city in decline, warns of crisis in leadership - latimes.com

Before anyone starts calling for or looking for a revolution with armed conflict take a few minutes to look at Syria and realize that if the conflict goes horribly wrong, that is what you and your children may have to deal with.

Anonymous Dick January 08, 2014 12:46 PM  

Vox -- are you honestly endorsing the crap shoveled by this guy? Quoting from your link:

"Historically, capitalism in deep and protracted crisis and without an organized and active Left generates the makings of fascism. If the Left remains dormant, we are in for big trouble."

Same poop as #FullCommunism
http://americanpowerblog.blogspot.com/2014/01/fullcommunism-rolling-stones-five.html

Anonymous jack January 08, 2014 12:49 PM  

I'm feeling a disconnect here with the idea of social democracy and strong labor unions required to balance capitalism contributing greatly to the crash of the 1920's.
Has not the social experiments rampant since FDR, and things like the auto unions and other unions steering corporate entities and governments local and national into such ruinous retirement obligations placing our current economic civilization to great risk?
I suppose that some protections are needed to shield the populace from the worse of the possible abuses from unchecked capitalism, or any other economic system you care to name. I also realize that there was a true crying need for strong unions in the early days of coal and the abuses of the factory systems with things like child labor.
I would love to see Vox write some sort of addition to Return to the Great Depression where discussion points to some method of establishing a balance from needed unionism and and social tweaks to counter the robber baron philosophy.
A balance that can be maintained and is immune to opportunistic changes by whoever might come into power.
Yeah, we have laws like the Sherman Act, and many others on the books that the power structure seem to obey or not as they please. The Market Ticker site publishes reams concerning those graft and corruption laws that are not even given much lip service these days; so, those interested can go there and explore Deninger's archives.
I hope the answer is not to force compliance by the fraud bullies of today from the barrel of guns; though that may be the only solution available by now.

Anonymous da truth January 08, 2014 12:53 PM  

Unions are just the mafia in hardhats (-- or nowadays, expensive suit coats)

Blogger James Dixon January 08, 2014 12:56 PM  

Agreed, Josh. Strong labor unions and "social democracy" do little to solve his observed trends. They may in fact exacerbate them. And the only way to fund the government employment which he insists is the only way to alleviate the problem would be take the right to create money back into the governments hands and simply print what was needed.

The real question he never answers is that if government spending is the answer, why should the government actually need to create jobs for people? Just give them the money and be done with it.

Blogger James Dixon January 08, 2014 12:58 PM  

> Vox -- are you honestly endorsing the crap shoveled by this guy?

Agreeing with an analysis of the problem does not equate to an endorsement of the solution provided.

Anonymous Josh January 08, 2014 1:02 PM  

Vox -- are you honestly endorsing the crap shoveled by this guy? Quoting from your link:

"Historically, capitalism in deep and protracted crisis and without an organized and active Left generates the makings of fascism. If the Left remains dormant, we are in for big trouble."


Look at what Vox quoted. It's a good summary of what caused the great depression. It's quite easy to say that someone got something right without endorsing everything else that person said. Stay away from binarism.

If someone wrote a good explanation for how a disease destroys the body, but then added that we could fix it with obamacare, would you reject the first part?

Anonymous stevev January 08, 2014 1:12 PM  

What I don't get... let's see if I can articulate it well.... is if 50% of retail sales were financed by credit in 1929, WHO backed by WHAT assets was issuing the credit? I have in mind the kind-hearted neighborhood grocer and that ilk. Eventually, though, that stratum had to rely on credit from their suppliers, on and on up the chain. Surely the warning signs would have been noticed by the number crunchers well be '29. In general, how does a society simply just let this trend accelerate and become untenable.
I'd never realized credit was available to that extent prior to the 1950's. Anecdotally, I remember how big a deal it was for my Dad to let my Mom open up a Sears Revolving Account in 1965, which was our family's first introduction to the idea of a credit card or account.

Anonymous stevev January 08, 2014 1:13 PM  

...well BEFORE '29...

Anonymous VD January 08, 2014 1:18 PM  

are you honestly endorsing the crap shoveled by this guy?

The historical facts? Yes. His prescriptions? No. It was primarily the 1927-1929 debt parabola that drew my interest.

Anonymous Inquiring Minds January 08, 2014 1:20 PM  

"The ratio of outstanding consumer debt to disposable income had more than doubled, from 62 percent in 1975 to 127.2 percent in 2005"

Does outstanding consumer debt include educational debt? Mortgage debt? This could be much worse than it first appears.

Anonymous Luke January 08, 2014 1:21 PM  

Sigh. I believe that "strong labor unions" were largely pointless at bringing about better working conditions in the U.S. Rather, competition amongst employers for employees did that.

Likewise, many otherwise middle-class types are doing negligible saving for retirement. (As a 52-YO father with 18-month-old twins, I figure on working til I die, myself.)

Anonymous Josh January 08, 2014 1:21 PM  

It's interesting that around that time you have GK Chesterton and Belloc pointing out similar problems. The world and humanity haven't changed much since then.

Blogger James Dixon January 08, 2014 1:31 PM  

> No. It was primarily the 1927-1929 debt parabola that drew my interest.

His analysis of the cause of the debt parabola (stagnant or declining wages for most people) seems accurate also.

Anonymous RedJack January 08, 2014 1:33 PM  

JartStar

Think of the lower of the two clubs as tinder for a fire. You can stack tinder and kindleing to the roof tops and not have anything happen. But one little spark can send the whole thing up in flames.

My company is looking to lay off people. Many of my former classmates and collegues in engineering have been out of work for a while. There is a feel of desperation out there.

Obama was supposed to be (according to some) the one who lit the fire. He has not.

I suspect the next storm will be one that they didn't plan on.

Anonymous civilServant January 08, 2014 1:37 PM  

His analysis of the cause of the debt parabola (stagnant or declining wages for most people) seems accurate also.

Declining wages drives lending?

Anonymous Josh January 08, 2014 1:43 PM  

No, they drive borrowing.

Anonymous Jake January 08, 2014 1:44 PM  

"His analysis of the cause of the debt parabola (stagnant or declining wages for most people) seems accurate also."

I don't think that was the case though. Not in terms of purchasing power. Just cause you're making the same monetary amount you made 5 years ago doesn't mean you're no better off than you were then. If prices are steadily falling (as I believe they were) that's just as good as your wages rising.

I get that Vox is pointing to the change in consumer debt as an important commonality and that's well and good. But someone talking about the great depression as if market forces led to making more stuff than people could afford to buy, and saying that the solution was stronger labor unions and social programs to force greedy employees to pay higher wages sounds like a crank. Recall how that prescription is EXACTLY what Hoover and Roosevelt did to try and fix the depression, and doing so turned a routine adjustment into 15 years of economic misery.

OpenID newrebeluniv January 08, 2014 1:45 PM  

That "excess productivity" metric is problematic. It reminds me of the Keynesian idea of buying up that excess with government spending in order to make productivity match consumption. It is also reflective of the economics in Orwell's 1984 where the purpose of continual war is simply to expend excess productivity on war materials that will be destroyed in combat.

It's bad modeling. The rise of consumer debt makes some sense but consumer debt was rising back then because it was new and lots of places were offering it for the first time. Today consumer credit has been falling for the past couple of years as an indicator of low consumer confidence and a "hunkering down" mentality.

--Hale

Anonymous Jake January 08, 2014 1:47 PM  

Lower interest rates are what drive debt. Lower the cost of debt and you move out along the demand curve... no different than any other good/service.

Anonymous civilServant January 08, 2014 1:48 PM  

His analysis of the cause of the debt parabola (stagnant or declining wages for most people) seems accurate also.

Declining wages drives lending?

No, they drive borrowing.


For every borrower there is a lender. While declining wages may lead to more attempted borrowing why would a lender lend into declining wages?

Anonymous Big Bill January 08, 2014 1:50 PM  

One may not agree with the author's proposed solutions, but one has to appreciate and welcome his understanding of the fundamental problem.

As I tell my lefty friends, the problem is concentration of wealth and capture of the government by the corporate interests.

Where we differ is in the solution. They want bigger welfare checks and more Federal and State make work. I want trade barriers and closed borders.

But we must begin building our coalitions on whatever common ground we have.

It is helpful to remember that Progressives were nationalists just a few decades ago. They were in favor of closing the borders to prevent corporations from driving down wages and maintaining tariffs to create more Jobs for Americans.

Or, as I tell my lefty friends, I am happy to pay more for goods if it will employ my chump, moron fellow Americans. I am not happy paying more in taxes to give them more welfare. Most folks, I suspect, would agree. We don't need cheap Chinese shit if it empoverishes our people, guts their morality, creates a permanent underclass, and eventually extinguishes our culture and nation.

Blogger James Dixon January 08, 2014 1:53 PM  

> If prices are steadily falling (as I believe they were) that's just as good as your wages rising.

He claims that the weren't: "Productivity advances did not lead to higher wages; wages were no higher in 1929 than they were in 1922. Nor did they bring about falling prices; industrial concentration made for “downwardly sticky” prices."

Of course, he could be wrong.

Blogger James Dixon January 08, 2014 1:56 PM  

> While declining wages may lead to more attempted borrowing why would a lender lend into declining wages?

Because at higher credit card or normal payday loan rates you can make your principal and a nice profit back long before anyone declares bankruptcy. And you can always lobby some idiot President and Congress to make consumer credit harder to discharge in bankruptcy.

Anonymous Dick January 08, 2014 2:00 PM  

""Productivity advances did not lead to higher wages; wages were no higher in 1929 than they were in 1922. "

Wages in 1922 bought a horse and buggy. In 1929, you got a car.

In 1922, you got a tin can and string. In 1929, you could afford a telephone.

This guy is a Leftist putz.

Blogger Outlaw X January 08, 2014 2:01 PM  

I'll just say from what I was told expect deflation across the board. Wages, prices, credit contraction and living standards. Vox is going to win the deflation argument, and it isn't going to be pretty. Stagflation will spike then fall like a rock. At first retirees will be pissed, then later doing well until everything they have is taken. then everyone will be the rat looking to jump ship or windows from high floors (don't do that).It will get better in time. Save, Save, Save!

Anonymous civilServant January 08, 2014 2:03 PM  

While declining wages may lead to more attempted borrowing why would a lender lend into declining wages?

Because at higher credit card or normal payday loan rates you can make your principal and a nice profit back long before anyone declares bankruptcy. And you can always lobby some idiot President and Congress to make consumer credit harder to discharge in bankruptcy.


Well then it seems that the "debt parabola" was generated by lending practices and not by stagnent/declining wages or even by borrowing as such.

Anonymous VD January 08, 2014 2:03 PM  

While declining wages may lead to more attempted borrowing why would a lender lend into declining wages?

Ask any of the lenders who have loaned money since 1973. It's a numbers game. And if all else fails, they can get Congress to declare the loans cannot be discharged in bankruptcy, as is now the case with school loans.

Wouldn't it be wonderful if home loans, and car loans, and credit card loans couldn't be discharged in bankruptcy either? Think how many more loans could be made!

Anonymous Josh January 08, 2014 2:04 PM  

Wages in 1922 bought a horse and buggy. In 1929, you got a car.

In 1922, you got a tin can and string. In 1929, you could afford a telephone.


What you're doing is exactly what the CPI does when they point to improvements in products as a reason to declare that prices aren't really rising.

Anonymous VD January 08, 2014 2:04 PM  

Well then it seems that the "debt parabola" was generated by lending practices and not by stagnent/declining wages or even by borrowing as such.

It was generated by spending. There is neither borrowing nor lending without spending.

Anonymous Josh January 08, 2014 2:09 PM  

Well then it seems that the "debt parabola" was generated by lending practices and not by stagnent/declining wages or even by borrowing as such.

You're still not getting it. The change in lending practices is a response to increased demand for credit. It's not the cause of that demand.

Anonymous Jake January 08, 2014 2:11 PM  

"He claims that the weren't: "Productivity advances did not lead to higher wages; wages were no higher in 1929 than they were in 1922. Nor did they bring about falling prices; industrial concentration made for “downwardly sticky” prices."

Of course, he could be wrong."

Could be, I'm not prepared to defend a claim either way, but even if he's right his solutions of "we should have done this" don't address what he claims was the problem.

Economics is very complex, I don't think this guy's really looking at a lot of the picture. He sees a few data points that tend to support his personal views (i.e. employers should be forced/cajoled into paying employees above-market wages and government taxation and benefits should be used to benefit some classes and punish others as desired by... leftist academics I guess) and says "ah HA! there's the problem and the solution!" In reality the problem is/was probably several steps back along the chain of causes and effects and the solution he supports is exactly what was tried, with terrible results.

Anonymous Dick January 08, 2014 2:12 PM  

"What you're doing is exactly what the CPI does when they point to improvements in products as a reason to declare that prices aren't really rising."

Not quite. It's not like hamburger meat or bread or gasoline are improving at the same rate as smart phones.

Anonymous Josh January 08, 2014 2:14 PM  

Could be, I'm not prepared to defend a claim either way, but even if he's right his solutions of "we should have done this" don't address what he claims was the problem.

No one here is discussing his solutions. They're self evidently terrible.

Anonymous Josh January 08, 2014 2:18 PM  

Not quite. It's not like hamburger meat or bread or gasoline are improving at the same rate as smart phones.

Are you aware that they account for consumer substitution in some of their formulas?

Anonymous Dick January 08, 2014 2:29 PM  

"Are you aware that they account for consumer substitution in some of their formulas?"

So do you trust those formulas or how they "account" for substitution? Because I don't. What's your point?

All I know is that if i can't afford a car or phone... but then 7 years later -- with the exact same wages -- I'm driving around and calling up mom, then the value of my wages went up. Driving > walking. Phones > tin cans and strings.

Anonymous Josh January 08, 2014 2:34 PM  

Driving > walking. Phones > tin cans and strings.

You realize that both cars and phones had been in use before 1922, don't you?

Anonymous REG January 08, 2014 2:36 PM  

In my school classes in 1948-9, we were taught that it was the boom, profits and wages were high. Working men wore suits to work, changed into coveralls to work, 20 dollar shirts. Henry Ford was noted for saying that he raised wages so that his employees could afford to buy what they built. Roaring Twenties, no credit cards, banks that said you had to prove you didn't need the money before you could borrow. Later I learned that the Federal Reserve came in during the late twenties and because the Reserve couldn't manage the flow when needed, creating cash shortages at the wrong time, things went to hell in a handbasket. The same emergencies had been handled by the banks on their own, but, the feds created a bottleneck.
We have something similar today; only with credit bubble, Fed not restricting flow, not boom as the set up. And I agree with you, today's high credit is a killer. Ah well, education is better today.

Blogger JCclimber January 08, 2014 2:37 PM  

I heard Robert Reich on the radio (60 minutes perhaps) this week, he seemed to be discussing this very thing. Unbelievable how these lefties can see the problem, and the causes of the problem, and then double down on solutions that didn't work in the past and certainly won't work now.

They won't work for several reasons, but two main reasons are that they don't address the root causes and they don't take into account that people will change behavior in response to government actions. They really think like puppet masters, "if I pull this string and push this lever, then all people will respond in exactly the way that we intend".

Is this caused because they cannot examine real world facts out of subconscious fear that it will destroy their paradigm? Or is it caused because they have never left their little liberal bubbles never gone among the poor and middle class, never really observed how people REALLY respond to disincentives?

Anonymous Josh January 08, 2014 2:41 PM  

Is this caused because they cannot examine real world facts out of subconscious fear that it will destroy their paradigm? Or is it caused because they have never left their little liberal bubbles never gone among the poor and middle class, never really observed how people REALLY respond to disincentives?

It's both, plus the eternal solipsism of the liberal mind. They honestly expect everyone to act like them.

Blogger James Dixon January 08, 2014 2:42 PM  

> Well then it seems that the "debt parabola" was generated by lending practices and not by stagnent/declining wages or even by borrowing as such.

As the inverse of what you said, for every loan there is a borrower.

> All I know is that if i can't afford a car or phone... but then 7 years later -- with the exact same wages -- I'm driving around and calling up mom, then the value of my wages went up.

That doesn't appear to have been the case in either period we're discussing.

Anonymous JI January 08, 2014 2:52 PM  

So we need more social democracy and stronger labor unions, Vox?

Anonymous freestater January 08, 2014 2:52 PM  

Check out the debt Parabola that Mish just put up on his blog about Spains debt expansion and contraction.

http://globaleconomicanalysis.blogspot.com/2014/01/household-and-non-financial-credit-in.html

Anonymous Josh January 08, 2014 2:53 PM  

So we need more social democracy and stronger labor unions, Vox?

You're an idiot.

Anonymous Ferd of Provence January 08, 2014 3:02 PM  

"How long can this go on and in what form? It might last a long time with the US turning into a 3rd World Country with a tiny middle class and up with vast swaths of poor. LA is a very likely future for many major US cities particularly if they are run by the left. Report calls L.A. a city in decline, warns of crisis in leadership - latimes.com "

LA was/is imploding as we see on the National scene with the rabble voting themselves in more and more freebies. The Mexican Mayors of LA will try to keep a lid on it for awhile with the enhanced Police State but it will probably devolve into Syria.

Best advice now is run for the hills. Find a place you can survive and grow food with your AR close by you. Maybe France is looking better as they look to throw out the immigrants infesting them. Nationalism will trump PC!!

I have wondered if the zombie and walking dead shows of the last decade are somehow a metaphor and warning for the good guys?

Anonymous allyn71 January 08, 2014 3:05 PM  

"So we need more social democracy and stronger labor unions, Vox?" - JI January 08, 2014 2:52 PM

Yep, you lefties finally got him. Vox has seen the error in his ways and this article is his coming out party for full throated support for Marx's philosophies.

Workers of the world Unite!

Anonymous Noah B. January 08, 2014 3:09 PM  

"So we need more social democracy and stronger labor unions, Vox?"

Hair of the dog.

Anonymous Josh January 08, 2014 3:11 PM  

I have wondered if the zombie and walking dead shows of the last decade are somehow a metaphor and warning for the good guys?

Yes. Zombie apocalypse is a way for swpls to be preppers without being called weird or racist.

Anonymous John Regan January 08, 2014 3:20 PM  

At a macro level the phenomenon is in large part a product of risk management.

An employer who pays his workers more is taking the risk that the increased labor expense will render the business less profitable, or unprofitable. It's not entirely a function of personal stinginess, but of risk aversion. Although those two things are related. But that's a different topic.


So the risk averse employer is content to let the financial sector and his employee absorb this risk. He keeps wages and salaries stagnant, his employees begin borrowing, the lenders lend, and the risk of all this is borne by the borrowers and the taxpayers/government.

Put differently, one feature of all this is the renunciation of the obligation to fairly compensate employees, which sets them up to be fleeced by lenders and the government.

It's not easy to be fair - that is, to be just. That's why it's a cardinal virtue.

Blogger James Dixon January 08, 2014 3:27 PM  

> Put differently, one feature of all this is the renunciation of the obligation to fairly compensate employees, which sets them up to be fleeced by lenders and the government. ...It's not easy to be fair - that is, to be just. That's why it's a cardinal virtue.

Exactly.

Anonymous Josh January 08, 2014 3:28 PM  

Put differently, one feature of all this is the renunciation of the obligation to fairly compensate employees, which sets them up to be fleeced by lenders and the government.

Who decides what's fair?

Anonymous Stilicho January 08, 2014 3:45 PM  

For every borrower there is a lender. While declining wages may lead to more attempted borrowing why would a lender lend into declining wages?

In addition to the reasons given to you above, the lender can also bundle such loans into collateralized debt obligations and sell them to yield chasing investors.

Blogger James Higham January 08, 2014 3:49 PM  

Trouble is - war follows that.

Anonymous Consumer Debt Watch January 08, 2014 3:50 PM  



zerohedge headline


95% Of Total Consumer Credit Lent In Past 12 Months Is For Student And Car Loans

OpenID newrebeluniv January 08, 2014 4:04 PM  

Yes. Zombie apocalypse is a way for swpls to be preppers without being called weird or racist.

SHHHHH!! Not everyone needs to know this.

--Hale

Blogger James Dixon January 08, 2014 4:10 PM  

> Who decides what's fair?

Ah, that's the rub, isn't it? Each individual in a position to do so must use their own best judgement. The culmination of which forms a market for employees.

Most businesses now seem to follow the principle of "what the market will bear" wrt wages though, and have abandoned any pretense at making a fair judgement.

Anonymous Noah B. January 08, 2014 4:20 PM  

If they want a social safety net, they should eliminate property taxes entirely for most homes, small farms, and small businesses.

Anonymous DonReynolds January 08, 2014 4:43 PM  

I have said it here before and I will say it again. George W. Bush was the Calvin Coolige of our times and Obama is the Herbert Hoover. (The parties may be reversed, but this would be consistent with the fact that the parties themselves HAVE been reversed too.) What follows is even more radical than anything we have ever seen before. How else could you describe the FDR years? And as with FDR, the only restraint is the US Congress and the US Supreme Court. God help us.

Blogger Outlaw X January 08, 2014 5:02 PM  

Bring back Allodial title now!

Anonymous TWS January 08, 2014 6:04 PM  

So when is the Jubilee?

Anonymous Roundtine January 08, 2014 7:31 PM  

They're not lending into declining nominal wages, they are lending into declining real wages. The inflation is hiding economic changes and causing people to continue patterns of behavior that have become self-destructive. It is the same way that a business which determines that a new venture is profitable at a 5% rate of interest, will decide to go forward with it when they can obtain credit at a 3% rate in the market due to a credit bubble. Or maybe a farmer determines that new equipment can raise his output by 10%, and he decides to buy when interest rates fall below 5%. Initially there is a big boom in the economy, farm prices rise due to the boom as well, even though output surges. Later, when the bust comes, there is massive overproduction and prices collapse.

Or look at China today. Non-performing loans (bad debts) are still less than 1% of loans in the Chinese banking system. If they have an outright recession, that number is going to be double digits and destroy the banks.

Anonymous YIH January 08, 2014 8:30 PM  

I noticed that recently. The ostentatious outside the home Christmas displays mere muted this year.
As was New Year's eve. In the past it was like the 4th of July with all the fireworks*, this past New Years Eve it was rather quiet.
When money is tight, you can't really afford to explode money can you?
*I don't know about the fireworks laws in Italy, FL is weird about that, using fireworks (unless by FL law you are deploying them ''for agricultural use'', I kid you not, they are illegal) yet I can buy and sell them (as long as I make the buyer sign a waiver saying they will be used ''for agricultural use only, to scare crows away from crops'').

Anonymous YIH January 08, 2014 8:42 PM  

And yet Tom Kratman still can't understand why we ''cattle'' (goyim) can't say everything you do is good.
SPOILER: It's because your people hate Christians (even though we bent over backwards to accept you) just as much as you hate muslims.

Anonymous JI January 08, 2014 9:37 PM  

JI: "So we need more social democracy and stronger labor unions, Vox?
Josh: You're an idiot."

Why am I an idiot? I was thinking I was a jackass, but I could also be an idiot. Did I misunderstand what the author was getting at? I'm not going to dispute that I'm an idiot; I just want to know what I overlooked.

I mean, Vox's first sentence was favorable toward this piece, which starts off saying that capitalism, without strong social democracy (whatever that is) and labor unions, will give some pretty bad outcomes. Okay, that could be correct, I really don't know. But the phrase "social democracy" reeks of liberal feel-goodiness, and I've witnessed firsthand the abuses of labor unions. So am I wrong to sarcastically question if the author, and Vox by his reasonably good recommendation of the article, is suggesting more of the same?

That said, I enjoyed the article, read it a couple of times, and think I learned something.

Anonymous rtp January 08, 2014 10:57 PM  

Did you actually read this Vox?

I love your work but I can't believe you would ever say anything so demonstrably wrong as endorsing this socialist nonsense.

Yes, consumer credit increased up to the depression but the idea that it was responsible for it is lunacy. Let alone the idea that social democracies could never possibly have a depression.

Every word of this screed was lunacy. Indeed, the amazing thing about Keynesianism is that it is a lunatic answer to a question that nobody asked. No depression has ever been concentrated on the consumer goods sector. None. As credit contracts the price of all goods may well fall but capital goods prices always fall much further and faster than consumer goods prices. In the Great depression credit contraction was so extreme that consumer goods prices fell by 50 per cent - a staggering amount from our perspective - but capital goods prices fell by 90. In other words consumer prices were 5 times as expensive after the collapse vs capital prices. So how on earth could anybody suggest that raising "aggregate demand" (which is an even more absurd notion (demand is by definition how much of something you will sacrifice for something else, you can't aggregate it)) would fix the problem?

In line with Austrian business cycle theory all recessions are concentrated in the capital goods sectors. Consumer goods sectors get caught up peripherally when you have a credit crunch but the main game is always capital goods prices (stocks, commodities etc).

Blogger Opened Eyes January 08, 2014 10:59 PM  

JI makes some good points.

Blogger James Dixon January 09, 2014 6:10 AM  

JI, rtp, Opened Eyes: I repeat: Agreeing with an analysis of the problem does not equate to an endorsement of the solution provided.

Anonymous Luke January 09, 2014 6:51 AM  

Noah B. January 08, 2014 4:20 PM

"If they want a social safety net, they should eliminate property taxes entirely for most homes, small farms, and small businesses."

Would also need those properties to be largely immune to theft by frivorce, LEO trumped- up asset forfeitures, misused eminient domain, regulation (environmental/endangered species/CA-style "for the poor" takings), Section 8 destroying property values, sting operations against nonrenters/nonsellers to diversities, etc., to be effective.

Good luck with that before the collapse and post-dieoff reset.

Anonymous David of One January 09, 2014 8:03 AM  

Here's related data from a source one wouldn't necessarily expect ...

http://www.satnews.com/story.php?number=1022340666

Anonymous John Regan January 09, 2014 10:00 AM  

@Josh:

Obviously everyone decides for himself what is fair. Or in the example, every employer decides what it is fair to pay his employees.

But here's the point: not so much who decides, but how do you decide what's fair? It is not an easy thing to do. It requires taking lots of factors into account. It requires - indeed it IS - the practice of a virtue, a cardinal virtue.

It is most emphatically not, to explain by contrast, a simple matter of determining what the 'market' will bear and going with that. In other words, an employer who pays his employees as little as he thinks he can get away with in market terms is not a fair or just employer.

Does an employer have a natural obligation to be fair and just to his employees? Of course. Paying your employees as little as the market will bear is disregarding that obligation. Explicitly stating that you pay your employees as little as the market will bear is worse than that - it is renouncing the obligation to be fair.

If we renounce the obligation to be fair to one another we have a big social problem right there. It will manifest itself in a million ways great and small, and only one aspect of it is that people will not be compensated fairly for their labor, which of course leads to social pathologies like borrowing for personal expenses, which then gets out of hand and leads to depressions.

So the way out is for everyone to forgive everyone else because we have all screwed this up and - or course - that is only fair. In other words a jubilee.

And then we have to recover our sense of self-government, recognize our obligation to be fair to one another, our non-delegable duty to do so, our very real responsibility to do so, and not try to pawn it off on someone else, which usually winds up being the collective, which then absorbs everyone into its soft tyranny.

Though it often doesn't remain soft.

In sum, debt bubbles are a function of massive irresponsibility on a personal level that precedes the lending and borrowing. The irresponsibility is the disease; the lending and borrowing are the symptoms.

Anonymous John Regan January 09, 2014 10:25 AM  

I'll just finally say two things about that Counter-Punch article, which I agree is quite good.

First, advocating for high - or at least higher - wages is essentially another way of saying we need a jubilee, the only problem being that raising wages basically can't be done by law or by any other method, whereas debt cancellation can be done by law very simply.


Second, if you read the Keynes letters to FDR the point I made before - about personal responsibility being transferred to the collective - should be much clearer in this context. Keynes is essentially saying that the government must take over responsibility for the economy because people aren't up to it. He may have been right, as far as it goes.

And just as a footnote, I might add that in the Keynes world view the government becomes a kind of God substitute, suggesting that depressions also are linked with a loss of religious belief, a failure of faith on the individual level. Then again, traditionally in Christian civilization government and religion were linked.

See how long footnotes can get? So much to say about this subject.

Anonymous rtp January 09, 2014 6:40 PM  

James, read my comment again. Even if Vox wasn't endorsing the solutions offered in the article it doesn't detract from the fact that this article is completely wrong-headed.

Consumer credit is a SYMPTOM of the problem (ie too much credit not backed up by real savings). Yes, when the credit crunch comes it will cause more pain for many people (and joy for others), but that is not what will CAUSE the recession brought about by the credit crunch.

If you are looking at the consumer credit market as being the epicentre of recessions then regardless of whether you endorse Keynesianism or not you will never get the right answer because you are asking the wrong question.

Anonymous Anonymous January 10, 2014 1:58 PM  

It is important to distinguish between consumptive debt (government borrowing and debt-financed consumption) and productive debt, such as bonds issued to finance production.

The first category is destructive to capital; the second category is formative.

Underconsumption does not cause economic depression. Malinvestment in the capital goods industry is what produces the problem. Rtp's analysis is much closer to the mark than the author's, which seems to be little more than an attempt to justify Keynesianism.

MALTHUS

Blogger Tom Kratman January 11, 2014 12:43 AM  

"And yet Tom Kratman still can't understand why we ''cattle'' (goyim) can't say everything you do is good.
SPOILER: It's because your people hate Christians (even though we bent over backwards to accept you) just as much as you hate muslims."

YIH, just out of curiosity, what the fuck are you talking about?

Blogger Tom Kratman January 11, 2014 12:43 AM  

"And yet Tom Kratman still can't understand why we ''cattle'' (goyim) can't say everything you do is good.
SPOILER: It's because your people hate Christians (even though we bent over backwards to accept you) just as much as you hate muslims."

YIH, just out of curiosity, what the fuck are you talking about?

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