Special Report: 4.16.2009

Posted by TED Magazine on Thursday, April 16, 2009

Yes, it is a Depression

 

By Joe Salimando

 

Recently, a distribution industry writer and editor (a person who merits great respect) wrote that we’re not in a Depression. After all, he said, the unemployment rate in the Great Depression reached 25%—and we’re not anywhere near that.

 

It’s very possible that estimable source is wrong.

 

1. You would not, rationally, expect a Depression in 2008 and the years that follow to travel the same course as did the one almost 80 years earlier. History does not actually repeat itself (Mark Twain added “but it rhymes”).
   
   
2. We don’t count unemployment now the way we counted it back then. The Bureau of Labor Statistics has seen a lot of meddling in the way it sticks numbers on things, including employment/unemployment and inflation.
   
   
3. I went back and checked. An article on the BLS website (find it here) included the table that’s below.

 

Some of what’s in that table might be just a little too familiar for comfort. That 1923 to 1929 very low unemployment rate, for example, matches up pretty well with what we had in the early part of the 2000s.

1.   Right now, using the March 2009 unemployment report from  BLS (find it here), you can get the following numbers:

 

 

That’s a REAL unemployment rate of 14.8%, just three months into the year. We might yet “average” a number on the other side for 15% for the full year of 2009.

 

Obviously, we’re closing in on the 15%-plus unemployment rate of 1931 (you might add “right on schedule” to that sentence).

 

[TECHNICAL NOTE: I ignored the birth/death model machinations of the BLS in assembling the table above. BLS added 248,000 to employment totals in February and March (combined) based on a guess that people are starting up businesses that it can’t detect. This is a bit weird, isn’t it?]

 

Depression or Not, this Bears Watching

 

Some caveats and definitive statements:

 

1. Are we headed for 25% unemployment? Maybe not. The U.S. economy is more important to the rest of the world today than it was in the 1930s. Perhaps the ROW won’t let us go down that far.
   
   
2. Is 15% unemployment-plus-underemployment a recession or a depression? There are no rules. Plus, the fact that we’ve matched 1931 means nothing. As noted above, it’s not reasonable to expect major economic setbacks that are 80 years apart to travel the same exact road.
   
   
3. Does this make Joe S. right (in saying we’re in a Depression) and the other guy wrong? Absolutely not. But what it should tell you is that you should keep a very watchful eye on the general economy (not the stock market, for Pete’s sake!) in the coming weeks and months.
   
   
4. The housing crisis isn’t over. The credit card nightmare is just beginning. Commercial mortgage problems are only now surfacing. There appears to be a lot left in this disaster.
   
   
5. Folks will tell you the bottom is in, the worst is over, blahblahblah. Ignore them. They didn’t see this coming. They don’t (still) actually know what’s happening. There are no experts on which to rely right now, only yourself.

 

What Happens Next, Part A

 

If you have been keeping an eye out, you’ll have seen discussions of ANOTHER stimulus program. Yes, another one, in addition to the $787 billion program already signed into law.

 

If you’re like me, this might stimulate a sneaking suspicion between your ears...that our government might not actually know what it is doing.

 

Sometimes, you can hear people say “have faith.” There was a scene in a recent rerun of the TV show House, in which a father replied to a son who appealed to him to have faith: “I have faith in God. You, I trust.”

 

Is it reasonable to note here that Ben Bernanke may not be God? That Tim Geithner looks rather more scared, in his various TV appearances, than an emissary from an all-powerful entity might appear?

 

Might we recall that Bernanke has been wrong, wrong, wrong—at least since 2007? And that Geithner was the president of the New York Fed when that organization stood around playing tiddlywinks while Lehman Brothers burned?

 

Could it be the right time to bring up the fact that our government (all together, with all of its various branches) has promised $12.8 trillion in spending, backstops to financial institutions, and related anti-depression stuff?

 

See the table below, which comes from a Bloomberg.com article of March 31 (note that that the amounts are in billions, so the “Total” numbers are $12.798 trillion committed and $4.169 trillion “current”—so far):

 

 

You know, perhaps we’re really NOT yet in a Depression. But the U.S. government is doing its level best to convince careful observers that some group of folks at the top fears that whatever this is might well turn into something a lot more than a serious Recession.

 

Don’t you think?

 

Bounces and Depressions

 

People get fooled in Depressions. The U.S. stock market declined 90% in the early 1930s. Before it was done wreaking havoc, however, it had several short, sharp rallies. In fact, some of the best short-term percentage moves in the Dow Jones Industrial Average—records lasting to this day—were set back then.

 

See the first table above, with the unemployment rates in the 1930s. There was a deceiving bounce from 1935 to 1937, as the rate fell from 20% down to 14%. But the next year, we were right back up over 19% (as the year’s average).

 

Similarly, history plays games with the memories of people. President Roosevelt was hailed as a great leader (by my grandparents’ generation). Somehow, that was translated as the “fact” that Roosevelt led the nation (and the world) out of the Depression.

 

He didn’t. Hitler did. Without World War II, it’s not at all clear that the bad times would have ended so quickly.

 

Inflation as a Follow-Up

 

One reasonable fear when stimulus programs get ever-larger, and federal promises approximate the size of one year’s GDP (which is $14 trillion, more or less) is that inflation might result from the effort to fight off the worst effects of a Depression.

 

Fed head Bernanke says his organization can fight inflation on the other end of this thing. Remember (this bears repeating): Bennie’s been wrong a lot of the time, especially about the future, since 2007.

 

Your question here should be: “I wonder how my distribution company would fare when we shift from a Depression to hyperinflation?”

 

Speak Spanish? Take a trip to Argentina and ask the business execs down there how the heck THEY have done it.

 

Another question might be: Why, when the United States came out of the 1930s Depression, did we not have massive inflation? A simple answer might be “There was a war going on.”

 

A more sophisticated answer is: “The government used the war as an excuse to impose all kinds of wage and price controls.” That happens to be true.

 

What Should You Do?

 

A good question here would be: What should you do about all this? Some obvious answers:

 

1. Watch what’s going on, carefully.
2. Keep in mind that there are things happening, below the surface, where we all can’t see them.
3. The nation’s electrical contractors shed 77,200 field employees, according to the BLS, in January and February. They wouldn’t do that for fun. Something is going on, somewhere. Is this happening where YOU do business? Will YOU get paid by the contractors who normally post DSOs of 75 days with you?
4. Prepare to be nimble, with your personal investments as well as your business.
5. Sleep with one eye open.

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
IMPORTANT NOTE: THIS COLUMN REFLECTS ONLY THE OPINIONS OF ITS AUTHOR AND DOES NOT REFLECT THE OPINIONS OR POLICIES OF NAED, TED MAGAZINE, OR THE ADVERTISERS ON THE TEDMAG WEB SITE.