Recognizing Parallels When they Slap You In the Face with a Haddock
Sharon March 31st, 2008
Nearly every financial report that discusses how bad the economic situation is going to be reports two facts. 1. Ben Bernanke is a student of the Great Depression, which means we’re safe from making the same mistakes twice. 2. Clearly, we aren’t in the same situation as the Depression, because after all, the situation isn’t the same. Consider today’s essay in “Fortune” which repeats a mantra I’ve noticed over and over again - remember, things aren’t nearly as bad as in the Great Depression.
“No, Meltzer isn’t saying that a Great Depression - 25% unemployment, social unrest, mass hunger, millions of people’s savings wiped out in bank collapses - is upon us. Nor, for that matter, am I. But the precedent is unsettling, to say the least. You can only imagine how unsettling it is to Federal Reserve chairman Ben Bernanke, a former economics professor who made his academic bones writing about the Great Depression.”
This is supposed to reassure us - and, despite acknowledging the danger, to point up the radical differences between the Depression period and the present. And I suspect for some people it works.
The problem is, the parallel is a false one. The statistics that the commentators are citing are statistics from deep in the middle of the Depression from 1933 when unemployment really was 25%, and they are holding them up against our present situation - at the very beginning of a financial disaster. Observing that the Great Depression isn’t upon us isn’t very helpful, because at the comparable stage of the Great Depression, those things weren’t upon us either.
For example, when the stock market crashed in October of 1929, a news report observed that “the vast majority of Americans remain unaffected.” Two months after the stock market crash, Secretary of the Treasury Andrew Mellon said, “I see nothing in the present situation that is either menacing or warrants pessimism.”
Unemployment did not instantly rise to 25% - in March of 1930, it was 3, 250,000 (and this is some months after the crash). By 1931, however, a year and a half into the crash, it had doubled to above 7,000. By 1933 it would double again. But again, at a parallel point in time, unemployment was comparatively reasonable (high by our present standards, but fairly typical for the period).
Meanwhile, those who were lucky enough to keep their jobs found themsleves at first in a decent position - as Don Lescohier reports in Common’s _History of Labor in the United States_ “The first impact of the Depression of the ‘thirties did not affect the wages structure. It cut the earning of millions through unemployment and part-time work before it affected wage rates. It was not until the last quarter of 1930 that appreciable downward changes in manufacturing wages occurred.” Yet again, the first ripples in the financial centers didn’t actually translate right away. But by 1932, wages in Ohio had fallen by nearly 60%.
In that sense, the current system may be worse than the Depression - while wages haven’t declined, buying power has declined much more precipitously than it did in a parallel period during the Depression. For example, in the news today, food stamp use is approaching record highs - that is, while unemployment remains comparatively low and wages are still stable. This is not a good sign.
On the other hand, there are parallels we might want to look at. For example, in Harper’s Magazine in 1933, a lawyer from Mason City, Iowa wrote about the housing bubble that preceeded the collapse,
“Farm prices shot sky high almost over night. The town barber and the small-town mercahant bought and sold options until every town square was a real estate exchange. Bankers and lawyers, doctors and ministers left their offices adn clients and drove pell mell over the country to procure options and contracts upon this farm and that, paying a few hundred dollars down and expecting to sell the rights before the following March brought settlement day. Not to be in the game marked on as an old fogy, while paper profits were pyramided and Cadillac cars and pleasure trips to the cities took the place of Fords and Sunday afternoon picnics. Everyone then maintained that there was only a little land as fertile as the fields of Iowa, Illinois and Minnesota, and everyone ought to get his part before it was all goine. Like gold, it was limited in extent and of great potential value. Prices skyrocketed from $100 to $250 and $400 per acre without regard to the producing power of the land.
During this period insurance companies were bidding against one another for the privelege of making loans on Iowa farms at $90 or $100 or $150 per acre. Prices of products were soaring. Everyone was on the highroad, not only to comfort, but to wealth and luxury. Second, third and fourth mortgages were considered just as good as government bonds. Money was easy and every bank was ready and anxious to loan money to any Tom, Dick or Harry on the possibility that he would make enough in these trades to replay the loans almost before the day was over.”
I bet you thought we invented housing bubbles ;-). But again, the bust didn’t happen instantly. There were foreclosures in 1929 to be sure, but the wave of property taking occurred primarily in 1931 and 1932.
Right now the media is starting to warn that there “might” be a real Depression. But they are quick to say that now isn’t much like 1929 - and we are buying it, because most people’s relationship to historical events is pretty sketchy - when talking on a long historical scale, the fact unemployment really began to get bad 2 years after the stock market crash is a blurry fact, the difference of a typo in numbers. Who cares whether it happened in 1930 or 1931, the depression is the depression. But the thing is, if you were living it, watching things unfold, it looked to people just like it looks to us now - a few steps forward, some good news, a few steps back, a bit of bad news. And in the interval between one piece of history (the stock market crash) and another (unemployment peaking) were four miserable years of life gradually sliding down. We understand history in chunks, but we live in history day to day, and everyone who lives in history experiences it that way. We forget that at our peril.
Telling us that it isn’t as bad as the mid-point of the depression isn’t just useless, it is misleading, and intentionally so. Compare the worst to the not so bad, and things don’t look that bad. But compare where we are now to where we were at a comparable period of the Depression, and things begin to look worse - and more accurate.
I can only hope that Ben Bernanke is a better student than the people who write these articles. But of course, he has even more incentive to tell us that things aren’t really so bad.
Sharon
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http://www.voanews.com/english/2008-03-31-voa17.cfm
Anyone laying in a year’s supply of rice now?
We hope for the best, but prepare for the worst, right?
Speaking of which, L and I are making progress in switching to a cooperative bank (FDIC (Fed) and DIF (State). Our old bank was a cooperative but went public a few years ago — not something we’re comfortable with, see their stocks go up and down in the market. The new bank invests in community programs, and is conservative in approving folks for loans and mortgages. It has all the same features like online banking and bill-pay.
Also, it has a branch closer to us than the old bank, so saving money on gas doesn’t hurt either
We’re also going to switch from universal life to term life insurance. The in-laws are doing it too.
The scary thing is that in the 1930s energy (oil) was cheap and plentiful and would remain so for a long time and American scientific/industrial dominance and superpower status was just really just getting into stride.
There was absolutely no reason for a prolonged depression in the USA (or probably anywhere), yet it took WW2 to finally break the West out of the Depression.
Now, there are plenty of reasons (peak everything, climate change, overpopulation, the complete looting of the financial sector, etc, etc) to expect a depression that will just get worse and worse.
I really hope Sharon is wrong about where we are because if she isn’t it is really, really scary.
Sharon, I’ve been dying to get home so I could let you and everyone else here know what’s happening with food prices in Colorado.
This week my daughter has spring break, so she came to help me do our major monthly shopping and to buy extra for our pantry. Take a deep breath and sit down before proceeding.
Safeway is selling 48 ounce bottles of cooking oil- vegetable, corn, and canola- for over $7.69. Crisco (I don’t buy it but I’ll admit to being in rubbernecking mode) was $7.05 for a medium container. A gallon of peanut oil ran to just under $22.00 10 pounds of King Arthur flour?
Over seven and a half dollars.
Now get this: a regular can of Folgers was eleven dollars and sixty nine cents.
We didn’t buy any of these, since we stocked a solid pantry a while ago, but did a major run on sale meat. By some chance the store manager checked us out and mentioned that “people have no idea how much meat prices are going to skyrocket next month.” He meant April.
Next we went to King Soopers for the items they sell cheapest. Or not, because Yuma coffee ran at $12.69 a can. Cooking oil there was less overall, but still in the $6.00 range, except for the 1.5 gallon size of peanut oil for over $35.00. Did all the peanuts die this year and no one told me?
Butter cost $2.89. Cans of beans ran 25% higher. King Arthur flour was the same price as across the street, and even my usual generic unbleached flour was up to $3.76 for a 5 pound bag.
The sad part, though, happened when my daughter was investigating the price of dog biscuits, which we ended up not buying at almost $5.00 a box. She overheard a mom telling her kids that they weren’t going to get everything on the list, just the things they absolutely had to have. For the first time, Sharon’s point about preparing to help those who will be in need but don’t yet know it really struck home. I’d never had the hair on the back of my neck stand up before.
Out last trip was to Vitamin Cottage to order bulk food. I’ve been reading FerFal, and he suggested that WTSHTF you want food that’s quick to cook to save fuel. So I ordered 25 pounds of couscous since my family has the metabolism of hummingbirds and all it requires is boiling water.
Vitamin Cottage used to quote a price and it was good for ages. They now have a 48 hour policy from the time the price quote email leaves the warehouse. Nothing says price volatility like that. I mean what are they expecting? A horde of people craving North African cuisine is going to start a bidding war on my couscous? Or is their inventory so low that every 48 hours they pay a new price? That thought scares me.
Sorry to run on, but at every store I went to today there were absurd, Argentinian kinds of prices. It’s everywhere.
(For those curious, of course I didn’t buy anything that expensive. I’ve been filling up my pantry for months and can afford to be choosy.)
Jade
Sharon, my great-grandparents owned a bank in Mason City that went belly-up during the Depression, on mortgaged farm land when the farmers couldn’t sell their crop.
The difference then from now is farmers who couldn’t afford tractor fuel could lay hands on horses and still had horse machinery in the barn.
The business news today was full of of farmers switching from corn to wheat and beans for this season, thinking it’s all based on price - it’s not. The price of producing corn is *high*, and if you don’t rotate it’s higher in the second year. Chemical fertilizer is made from oil. So people who went all out on corn last year are really gambling if they don’t cut back their corn acreage this year, because their input price will definitely go up and it’s only speculation that corn prices will continue to rise.
Hi all. I have been reading this blog for some time now, and have learned so much from Sharon and all of her wonderful readers, thanks so much to you all. Right now I am working on getting a handle on my finances, and reading this post made me think this might be a good place to look for information and advice. I have some money that was given to me by family, and it is currently invested in an index fund. I have many issues with this arrangement, both ethically and practically. I have a dream of using this money as a down payment on a piece of land, but I won’t be able to do that for a few years. I wonder if anyone reading this has any advice on sources of information that are savvy to the current ecological/economic situation and could give me some sound advice on how to keep this money for the future in a way that is socially and ecologically responsible.
Thanks so much for any information you may have!
Sharon — I love your website! I cannot remember how I stubbled on it but have marked is as a “daily read”. Thank you for all you are doing.
I am been in the banking world (not the investment banking world) for 34 years. What we are going through is unlike anything I have ever seen before — anything.
Thank you -
To anonymous: I don’t know if this will help with your decision, but there’s a lot of financial news over at http://theautomaticearth.blogspot.com. Sharon has written about their blog quite a bit. I’ve learned a lot from both them and Sharon. Check it out.
I work at a natural foods co-op here in Central Minnesota, USA. We have seen some price increases over the last several months-i.e. wheat has doubled and almost tripled in price. Other things like body care products (I am the Buyer for these items) have gone up due to fuel costs, etc. but not to the percentage that wheat has. Cod Liver and Fish oils have gone up 25% due to the dollar’s value dropping and the Norwegian Kroner’s value going up respectively.
Still, we have not felt the panic and not seen food prices go up as far as they have in the conventional groceries. Maybe because organic foods have always been higher priced (and more realisitically priced based on the true costs of raising food). I am watching carefully, but so far am not getting the shock at the co-op that I would be at the grocery store. Also, because we tend to buy “ingredients” rather than prepared, processed foods, our food budget remains so much lower than most people’s, even buying about 90% organic.
I do some shopping at the regular grocery as well though and am tending to stock up on things that are on sale or “manager special” there. Last week, I got 9-2 lb. boxes of spaghetti there for $1.50 each on a “manager special”, regular 2.29. I figured with the rising price of wheat, this was quite a deal so I stocked up. My family can eat the conventionally grown wheat pasta with our grassfed beef and home-canned, farmer’s market chemical-free tomato sauce! I think it’s still possible to find “bargains” like this if you shop carefully. Of course, I’m used to doing that and have been for years. A lot of people are having to totally change their habits, though, I’m sure. I hope they will be able to do that successfully.
Jade, wow, that’s a big list of out of this world prices. I had a look at our weekly ads here after reading your post, and things look to be pretty much where they were last week. Our coffee by the can, just for comparison, is running around 6 bucks per. Don’t know if that’s the same size can you were looking at, but if it is that’s a bit more than half what it is there! That is a significant regional difference. So, something odd is likely going on in your area - if it were me, I’d probably be curious enough to try to discover what it is. Did anyone have any idea why things had gone so high?
good luck!
Idaho Locavore,
Thanks for the local data. I’m seeing price schizophrenia on almost every item. On older stock the prices remain the same as the last few weeks but as items are replaced they come in at much higher levels. I can get a pound of spaghetti for 61 cents, but the popular next size up bag of the same brand runs 3-4 times as high. The $12.69 coffee sits next to the $6 cans, with a number of others in the $7-$9 dollar range.
It feels like being in a tilt-a whirl where you’re not sure whether you’ll see the sky or ground when you open your eyes.
I still want to know who killed the peanuts!
And why a haddock? why not a flounder? or Hallibutt?
I’m read the same stuff, and yeah, they’re not getting it.
One thing: “that is, while unemployment remains comparatively low ” -
Keep in mind that the unemployment statistics have been being “cooked” ever since Bush took office. It’s MUCH MUCH higher than the official figures. They only COUNT you if you are “looking for work”. For 8 years, now; MILLIONS of people have been “dropping out” of the labor pool- as they have just given up completely looking for work.
Good thing we don’t have to count them too, huh?
Jade, thanks so much for reporting the food prices - that’s really interesting and useful to know.
Sharon
Lisa Z, which coop?
We were North Country members (Mpls) until it closed, and I’m kind of looking around (though we’ll probably end up at Seward since it’s closest).
I started tracking my grocery spending, to figure out how much of things to start trying to stock, and discovered that I had to totally change my spreadsheet - the prices weren’t holding still for a week in some cases.