By Doug Casey
Editor's note: This weekend, we're featuring a must-read essay from Casey Research founder Doug Casey. Doug says “The Greater Depression” has started…but most people don't know it because they can neither confront the thought nor understand the differences between this one and the last.
Over the next two days, Doug explains what these differences may look like by comparing the situation today to that of the 1930s. The results don't look promising…
By Doug Casey, founder, Casey Research
You've heard the axiom “History repeats itself.” It does, but never in exactly the same way. To apply the lessons of the past, we must understand the differences of the present.
During the American Revolution, the British came prepared to fight a successful war—but against a European army. Their formations, which gave them devastating firepower, and their red coats, which emphasized their numbers, proved the exact opposite of the tactics needed to fight a guerrilla war.
Before World War I, generals still saw the cavalry as the flower of their armies. Of course, the horse soldiers proved worse than useless in the trenches.
Before World War II, in anticipation of a German attack, the French built the “impenetrable” Maginot Line. History repeated itself and the attack came, but not in the way they expected. Their preparations were useless because the Germans didn't attempt to penetrate it; they simply went around it, and France was defeated.
The generals don't prepare for the last war out of perversity or stupidity, but rather because past experience is all they have to go by. Most of them simply don't know how to interpret that experience. They are correct in preparing for another war but wrong in relying upon what worked in the last one.
Investors, unfortunately, seem to make the same mistakes in marshaling their resources as do the generals. If the last 30 years have been prosperous, they base their actions on more prosperity. Talk of a depression isn't real to them because things are, in fact, so different from the 1930s. To most people, a depression means '30s-style conditions, and since they don't see that, they can't imagine a depression. That's because they know what the last depression was like, but they don't know what one is. It's hard to visualize something you don't understand.
Some of them who are a bit more clever might see an end to prosperity and the start of a depression but—although they're going to be a lot better off than most—they're probably looking for this depression to be like the last one.
Although nobody can predict with absolute certainty what this depression will be like, you can be fairly well-assured it won't be an instant replay of the last one. But just because things will be different doesn't mean you have to be taken by surprise.
To define the likely differences between this depression and the last one, it's helpful to compare the situation today to that in the early 1930s. The results aren't very reassuring.
Banks, insurance companies, and big corporations went under on a major scale. Institutions suffered the consequences of past mistakes, and there was no financial safety net to catch them as they fell. Mistakes were liquidated and only the prepared and efficient survived.
The world’s financial institutions are in even worse shape than the last time, but now business ethics have changed and everyone expects the government to “step in.” Laws are already in place that not only allow but require government intervention in many instances. This time, mistakes will be compounded, and the strong, productive, and efficient will be forced to subsidize the weak, unproductive, and inefficient. It's ironic that businesses were bankrupted in the last depression because the prices of their products fell too low; this time, it'll be because they went too high.
If a man lost his job, he had to find another one as quickly as possible simply to keep from going hungry. A lot of other men in the same position competed desperately for what work was available, and an employer could hire those same men for much lower wages and expect them to work harder than what was the case before the depression. As a result, the men could get jobs and the employer could stay in business.
The average man first has months of unemployment insurance; after that, he can go on welfare if he can't find “suitable work.” Instead of taking whatever work is available, especially if it means that a white collar worker has to get his hands dirty, many will go on welfare. This will decrease the production of new wealth and delay the recovery. The worker no longer has to worry about some entrepreneur exploiting (i.e., employing) him at what he considers an unfair wage because the minimum wage laws, among others, precludes that possibility today. As a result, men stay unemployed and employers will go out of business.
If hard times really put a man down and out, he had little recourse but to rely on his family, friends, or local social and church group. There was quite a bit of opprobrium attached to that, and it was only a last resort. The breadlines set up by various government bodies were largely cosmetic measures to soothe the more terror-prone among the voting populace. People made do because they had to, and that meant radically reducing their standards of living and taking any job available at any wage. There were very, very few people on welfare during the last depression.
It's hard to say how those who are still working are going to support those who aren't in this depression. Even in the U.S., 50% of the country is already on some form of welfare. But food stamps, aid to families with dependent children, Social Security, and local programs are already collapsing in prosperous times. And when the tidal wave hits, they'll be totally overwhelmed. There aren't going to be any breadlines because people who would be standing in them are going to be shopping in local supermarkets just like people who earned their money. Perhaps the most dangerous aspect of it is that people in general have come to think that these programs can just magically make wealth appear, and they expect them to be there, while a whole class of people have grown up never learning to survive without them. It's ironic, yet predictable, that the programs that were supposed to help those who “need” them will serve to devastate those very people.
Most economies have been fairly heavily regulated since the early 1900s, and those regulations caused distortions that added to the severity of the last depression. Rather than allow the economy to liquidate, in the case of the U.S., the Roosevelt regime added many, many more regulations—fixing prices, wages, and the manner of doing business in a static form. It was largely because of these regulations that the depression lingered on until the end of World War II, which “saved” the economy only through its massive reinflation of the currency. Had the government abolished most controls then in existence, instead of creating new ones, the depression would have been less severe and much shorter.
The scores of new agencies set up since the last depression have created far more severe distortions in the ways people relate than those of 80 years ago; the potential adjustment needed is proportionately greater. Unless government restrictions and controls on wages, working conditions, energy consumption, safety, and such are removed, a dramatic economic turnaround during the Greater Depression will be impossible.
The income tax was new to the U.S. in 1913, and by 1929, although it took a maximum 23.1% bite, that was only at the $1 million level. The average family’s income then was $2,335, and that put average families in the 1/10th of 1 percent bracket. And there was still no Social Security tax, no state income tax, no sales tax, and no estate tax. Furthermore, most people in the country didn't even pay the income tax because they earned less than the legal minimum or they didn't bother filing. The government, therefore, had immense untapped sources of revenue to draw upon to fund its schemes to “cure” the depression. Roosevelt was able to raise the average income tax from 1.35% to 16.56% during his tenure—an increase of 1,100%.
Everyone now pays an income tax in addition to all the other taxes. In most Western countries, the total of direct and indirect taxes is over 50%. For that reason, it seems unlikely that direct taxes will go much higher. But inflation is constantly driving everyone into higher brackets and will have the same effect. A person has had to increase his or her income faster than inflation to compensate for taxes. Whatever taxes a man does pay will reduce his standard of living by just that much, and it's reasonable to expect tax evasion and the underground economy to boom in response. That will cushion the severity of the depression somewhat while it serves to help change the philosophical orientation of society.