Is the economy better than it has ever been? Have we never had it so good? Or is the system about to fall apart as the anti-capitalists warn us (in between the mindless violence)? Me, I suspect big problems. Could be right. Could be wrong. How do we survive it if it all ends in tears? Well, let’s see…
We’ve Never Had It So Good – Or Have We?
People who know me will know I’ve been banging on about the coming great depression for donkey’s years now – and yet, where is it? And what is a ‘Great Depression’ anyway?
Well, let’s start with a few definitions:
- GDP: Gross Domestic Product – the measured economic activity in an economy – the sum of all the money exchanged in all trades (ignores unpaid work, the black economy, and counts disasters such as the costs of cleaning up pollution as a good thing for the economy since it costs money and so adds to GDP);
- Recession: a recession is where GDP has been declining for at least two consecutive quarters (six months);
- Depression (formerly known as a ‘panic’): A period during which business activity drops significantly. High unemployment rates and deflation (falling prices and wages) often accompany a depression. Typically when GDP has been falling for at least 18 months (e.g. as in Japan over the last decade and SE Asia in general, much of Africa, the former Soviet Union and South America);
- Panic: Sudden, widespread fear of economic or market collapse, leading to massive bank deposit withdrawals and/or falling stock prices (e.g. as happened in Argentina recently) and typically includes one or more stock market crashes which act to suck investment capital out of the economy (the capital literally disappears) producing a destructive spiral of collapsing companies (suddenly short of capital to back up their bank loans, etc.) and further falling stock prices;
- Collapse: A sudden, dramatic drop in economic activity and/or market prices;
- The Great Depression: Worldwide economic collapse following the stock market crash in 1929, in which unemployment remained high for an extended period and huge numbers of businesses failed. GDP declined for several years in succession;
- Bubble: Rapidly rising share prices, usually in a particular sector, that is not supported by business fundamentals. The term is used because, like a bubble, the prices will reach a point at which they pop and collapse violently when investors come to their senses (e.g., the dot-com bubble, property prices in Britain at the moment, possibly);
- WTO: World Trade Organisation: a Western-backed trade organisation that promotes international free trade for multinational corporations at the expense of just about anything else, including human rights, welfare, small business, government regulation, state services, the environment, you name it. Related organisations with the same basic policies include the IMF (International Monetary Fund) and the World Bank. These organisations are objected to by the anti-capitalists a) because they don’t like the corporate globalisation that these organisations promote, and b) because they don’t like the promotion of business efficiency at such a high cost to other human values. Personally, I have no problem with globalisation as such, since not being efficient is after all simply a waste of the Earth’s valuable resources, but I do think that business efficiency should be effectively weighed against other values and its impact on overall economic efficiency (more later).
Got that? Good. Now let’s look at how well off or otherwise we are (in my opinion). Well, first of all, we all know that much of the world exists in extreme poverty, so they aren’t well off. Are they worse off now than in the past? Well, it would seem so: Third World debt is massive and despite talk of debt forgiveness, it is not being forgiven (although token measures and debt payment rollovers do happen, they are ineffectual and don’t address the fundamental problem but only act to protect the creditors (lenders)). So people are enduring WTO hardship measures instead, growing cash crops for export instead of feeding themselves, and not succeeding in paying off their debts anyway. Consider Zambia: in 1999 Zambia spent US$123M on healthcare. It transferred US$137M out of the country to its rich creditors in debt repayments too. One in 9 of the population are HIV positive. Life expectancy is 40 years. 13% (one in eight roughly) of its children are orphans. Zambia, as it turns out, isn’t so badly off: in Africa in general, ten times more is spent on debt repayment than on healthcare, and it represents 3 times the value of Africa’s total exports. On the other hand, 100 times the amount spent on healthcare is spent on arms. Most of the wars in Africa seem to be related to attempts to grab resources such as diamonds or other minerals, for sale to the multinationals: get-rich-quick schemes, in other words.
But OK, some countries have always been poor and in some cases, with their corrupt governments, perhaps they only have themselves to blame. But is it really that simple? Of course not. Not in a world where each of the three richest individuals control more wealth than each of the 48 poorest countries, or the 225 wealthiest people own as much wealth as the poorest half of the world’s entire population (currently that poorest half numbers in excess of 3 billion people). Just think about that for a moment… Can the world economy work efficiently if so much wealth is concentrated in so few hands?
But… you ask, what is wrong with people being rich? Nothing, I answer, in itself. We all want to be well off, but taking it to extremes results in problems. The nature of economics is such that there is no shortage of wealth: me getting rich does not, in itself, make you poor, as long as wealth as a whole is reasonably widely distributed and money can circulate around the economy – into your wages, into the supermarket, into the factory, back into wages and taxes, and so on: it is the circulation of money that makes economies work. But, consider the extreme case: suppose all the world’s wealth was owned by one person. What would happen to the economy? It would collapse because nobody else would be able to buy anything. OK, so that’s the extreme case. Now, look at the less extreme case that we have today: with a high concentration of the world’s wealth, a lot of people are deprived of the money to spend in the rich people’s factories – so the rich suffer too, and sell up to the richer still, making the problem worse. A lot of rich people don’t like welfare, but the fact is, welfare subsidises them because without social security, there would be a lot less money being spent on the food/services/goods that the wealthy sell.
At the end of World War Two, the difference in wealth between the top 20% and the bottom 20% of the world’s population was around 30 to one. This was a healthy situation, and the world’s economy grew for many decades. In the 1970’s it stood at about 60 to one. In the early 2000’s it is 82 to one and still increasing. Economic activity around the world is stuttering: growth rates in the early part of this period were around twice what they were in the latter part. Check out the writings of Economics professor Robin Hahnel at the subscription service http://www.zmag.org/. There is a free article here.
The point is, that by acting to concentrate wealth into fewer and fewer hands, the economic system automatically leads to greater and greater instability as the years go by. That is why, historically, there has been a Great Depression every 55 years or so. In a Great Depression, businesses go bankrupt, debts therefore get liquidated and money which was wasted servicing debts to rich people becomes available to spend on fresh capital goods (machines that can be used to make new products, for example). As debts get liquidated, although a lot of financial capital goes to money heaven as stock markets crash, companies close, and so on, the ratio of debt to available cash improves as so much of the bad debt is simply destroyed. The effect is that money is redistributed around the economy, and things begin to recover. Then the capitalist system can begin funnelling the money from the poor to the rich again and we have another 50-odd years to go before things have gone too far and another slump is on the cards. You might suggest that today’s politicians are smarter than those in the past, and having the lessons of history behind them, they won’t make the same mistakes again. Right? Wrong. They are in fact making the same mistakes all over again, only bigger. Since the economy began to struggle in the 1970’s, they have been heavily promoting corporate globalisation, the privatisation of state services (in effect selling countries’ capital assets to rich individuals whose goals do not begin and end with social justice) and so on in an attempt to improve the efficiency of the world’s economy by improving the efficiency of their biggest corporations: by being globalised, a corporation can make sure that the country best able to manufacture something is the country that does in fact do so. A worthy goal, perhaps? Well, yes, indeed. But because of the way it is being done, I think it amounts to nothing more than a holding measure: it disguises the oncoming slump, and maybe delays its onset in the rich countries, by funnelling cash in from poor countries to prop them up for a while. Meanwhile, the differentials, the instabilities, are increasing all the more, indeed to historically unprecedented levels. Because the corporate globalisation is being done with almost no regard for the welfare of the people most affected by it, wealth is not being distributed effectively throughout the world economy, and slump is therefore inevitable.
If you are in the West like me, perhaps you don’t feel that people are worse off than they used to be. But, I would argue, you only have to look around you to see whether most people are better off or not. Sure, there are gadzillions of consumer goods and useless doodads to spend our money on, and we feel poor if we can’t afford to buy the latest Madonna CD. But look a little more broadly. Fifty years ago, our society could afford libraries in every village, local post offices, decent schools, world-class hospitals available to everyone, pensions, and so on. If we are so rich now, how come these things are having to be sold off, privatised or funded by private insurance in the case of hospitals, or simply closed down? It appears to me that we can’t afford them any more. On top of that, the multinational corporations want a hand in running them for profit (rather than to provide social welfare) and governments around the world are increasingly in their pockets, because power follows wealth, and 51 of the 100 largest economic entities in the world are not countries, they are multinational corporations who spend big money supporting your supposedly democratically chosen political parties, or can lobby effectively through the press and the media companies which they own and which only broadcast messages that are compatible with their owners’ agendas. You can also look around you and see shops and small businesses closing all over the place. How many computer shops have come and gone on your high street over the last 5 years or so? Once upon a time, such a business would last ten or twenty years if it was viable at all. Now, they seem to come and go almost seasonally. Small business is nowhere near as good an investment as it used to be. The big corporations hold all the aces – or they do until the coming depression redistributes wealth again, of course. Scandals at corporate level are one of the major first signs of impending slump as corporate chiefs scramble to hide the financial mess their companies are getting into: Enron, Worldcom and the like are only the beginning, I am sure.
Also, think about where your money is going. Is it going to secure your future, or is it being spent on unnecessary doodads? Are you saving, or servicing unnecessary debts? Do you have six month’s worth of living expenses saved, or will you be struggling to pay your bills if you are out of work for more than a couple of months? People elsewhere in the world think we Westerners are well off, and in some ways, we certainly are. But in strictly financial terms, most of us are in hock to the credit card and mortgage companies and we have to crawl to appease our bosses because we can’t afford to be sacked: financially speaking, most of us are wage slaves and little more. We are better off than slaves in the past and many workers in the Third World, since we can to some extent choose our form of servitude. Also, the forms of abuse available to companies in the West have been severely restricted. But unlike 50 years ago, at least two family members now have to work to support the typical family. We’ve been given the illusion of improvement by being sold all sorts of gimmicks and gadgets to decorate our homes with and distract our minds, while at the same time we are having to work harder and send other family members out to work just to keep paying the bills. These days we are even being told in some quarters that we might have to try and get several part-time jobs at once just to get by! We are also prevented from spending our spare time thinking about our situation by being suckled, at our own cost, with 60 channels of one-dimensional, shallow and one-sided pap on the TV and endless porn or whatever on the Internet – many of whose portals are just corporate shop windows aimed at funnelling yet more cash away from us. We are not better off, really, are we?
Of course, free trade, as advocated by the WTO and other similar organisations, is in itself a good thing, but not when taken to the extremes that they advocate. Thus, of course, it is right that countries concentrate on producing the goods and services that they are best at, but I don’t think that should be at the expense of local self-sufficiency, for example. Also, why does all government ‘interference’ seem to be regarded as a bad thing by the WTO and similar organisations? Why, for example, shouldn’t we protect the environment? Can we just leave it up to consumers not to buy dolphin-unfriendly tuna or whatever? Well, how many consumers have the time or inclination to research all these things? Problems with the environment only impact most when it is already too late and most of the damage is done. This is a job that requires forethought and a social conscience, not a short-term profit motive. Multinational corporations have shown themselves unwilling to think about the greater good, not just on rare occasions, but time and time again: the food industry is a typical example, still selling additive-enhanced crap and resisting hygiene laws and other forms of ‘interference’ long after they know what people think of them. The tobacco industry is another, of course. Then there are all those clothing and toy-making sweatshops around the world. Remember those people killed in that Thai factory that burned down because there were no safety regulations and all the exits were locked? They were supplying toys to multinational corporations (Disney, Mattel) that obviously couldn’t care less where its goods came from, as long as they were cheap. Remember those children standing barefoot in cyanide vats extracting gold from ore by hand to make jewellery for Western shops? (I can’t find a link to this story… if you know of one, please let me know! Here is a general link relating to child labour.)
It is not even as if such behaviour is in those companies’ best interests in the long run anyway: as wealth becomes more and more concentrated, the corporations are cutting off their own feet – those of us who can afford to buy their goods – and they will will suffer too, when the slump reaches us.
Great depressions in the past have happened on average every 55 years or so, for the last several centuries, at least. We know about the one from 1929-1934. We don’t hear so much about the one from 1874-1894, or the one from 1819-1843, or the 1770s-1780s… and so on. If the sequence was still being followed by the modern economy, we should have seen a panic or stock market crash around 1984. Well, we did in 1987. Close enough. We should also have seen some significant economic turmoil in the decade or so preceding this, and again, we did: the so-called oil or energy crisis, rampant inflation and high unemployment (‘stagflation’) of parts of the 1970’s fit the picture exactly, with the current wave apparently peaking around 1973. We should also have seen an end to the era of high growth in this time, and again we did. As I pointed out above, typical growth rates prior to the 70s were roughly double the typical growth rates following this phase.
The Kondratieff cycle, as this long-term boom-bust cycle is known, can never be used to make exact predictions. But, if that cycle is real, we should normally expect the size of the economic slump to be proportional to the size of the preceeding boom. Now, as we have just come through the longest boom in modern (post-industrial revolution) history, that is, from 1934 through to around the turn of the millennium, give or take the odd crisis and recession, we can now expect the worst slump in modern history too (give or take the odd mini-boom). The boom should, according to the cycle, have visibly ended around the time of the 1987 crash, but it didn’t (in the West, unless you noticed the closing of numerous industries, structural unemployment in parts of many Western countries and the re-emergence of the so-called ‘underclass’), so perhaps things are a bit different this time around. For one thing, the governments at the time of the 1987 crash for once did the right thing and slashed interest rates after the crash, and probably succeeded in putting off the slump – although the consensus of investment professionals is that they did the wrong thing, or at least overdid it. Either way, it was followed by more, but gradually declining, years of inflation rather than major collapse and years of deflation. But… starting in 2001, the world’s stock markets have been declining. Instead of a bang, we are seeing a whimper. Far Eastern stock markets have been suffering for longer, of course, and previous Great Depressions have tended to start in some areas and then spread gradually and uncontrollably around the world, so it seems that this time is no exception. Our governments have just been more adept at hiding it, so far. And as for deflation, it depends on which markets you are looking at. Technology prices have been in constant decline for a decade and companies have been stuck in a desperate cutthroat struggle to bring out the next innovation to keep their profit margins positive. Wages have been losing ground to inflation for a decade. Finance companies have been struggling for a decade (and hiding it until their scandals are discovered, such as the pensions and endowment mortgage scandals in the UK). Unemployment figures are higher than the official figures state, as they use tricks such as not counting people who don’t claim benefit, or who don’t qualify for benefits, or who are unemployed for more than say 6 months, and so on. Such figures are useless, really.
Some commentators see the current economic situation (2003) as indicating that the world is ready to pull out of depression (since much of the world has been depressed for years, i.e., Japan and SE Asia, Latin America, E Europe, the former Soviet Union, much of Africa), but it seems to me that the depression hasn’t finished spreading yet: normally a great depression engulfs the whole world and economies all over the place quite obviously slump. Unsustainable debts get liquidated, wealth gets redistributed (creditors lose their shirts to bad debts and debtors get let off or pay off debts and don’t take out any more for a while) and new technology of some sort comes along to save the day and provide a basis for new industries and new productive growth. In the cycle that peaked in the mid-’70s, that industry was mainly the electronics industry: most big changes in the world’s economy up until that period can be seen to be related to electronics in one way or another (consumer goods, labour-saving devices, industrial machinery, and so on). The current cycle seems to be related to the information technology sector, which certainly qualifies as it started getting off the ground in the early ’80s and with falling prices (driven by the depression that is still somewhat hidden here in the West) encouraging competition, innovation, and above all the spreading of the technology far and wide (hardly a company exists without at least one computer), it may be able to drive the next upwave, depending on how it all works out, of course. (For what it’s worth, I suspect the wave after that will be related to genetic engineering, or maybe even nanotechnology or space exploration if we’re up to it by then).
Just in case you think it is just me, although the publication no longer seems to be available to read online in the original, consider this quote from the United Nations Development Programme, Transition 1999: Human Development Report for Central and Eastern Europe and the CIS:
“The ‘transition’ in most of the countries in the former Soviet bloc in central and Eastern Europe and the CIS is a euphemistic term for what in reality has been a Great Depression. The extent of the collapse in output and the skyrocketing nature of inflation have been historically unprecedented. The consequences for human security have been calamitous. By conservative estimates, over 100 million people have been thrown into poverty and considerably more hover precariously just above subsistence.”
So, it isn’t just me saying this.
What to do? Here are some tips, in no particular order:
- Get out of debt. There are bad debts and good debts, though. Bad debts are expensive credit-card debts taken out for pointless consumer goods, cars, luxuries and the like. Good debts are investment loans for business purposes. A mortgage could be either, depending on whether you are using your property to make an income; if you get into difficulty with your mortgage payments, at least try and rent out a room or something;
- Control your spending at least until the economy is clearly on the upswing: you might just need that cash! Cash is king in a slump because as prices fall, your cash can buy you more tomorrow than it can today;
- Enhance your luck: make friends, meet your neighbours if you can stand to, talk to people, look on the bright side;
- Try and find more than one source of income, or income that doesn’t require you to work for it (see my Money page for tips);
- Cultivate skills that will be in demand when times are hard: repairing goods will work out cheaper for most people than buying new if they are strapped for cash; market trading might work; e-mail me with ideas if you like!
- Keep your eyes open: are we about to slump, or are things about to take off again? Time will tell.
- The Downwave, a book by Robert C Beckman. The book is quite old, but is probably the best book to start with if you want to research this subject for your own interest and survival. Note that governments these days seem to prefer inflation to deflation and are more likely to risk the hyperinflationary route to controlling a slump (or making it worse).