“In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the . . . anyone, anyone? The Great Depression, passed the . . . anyone, anyone? The tariff bill? The Smoot-Hawley Tariff Act?” – Ferris Bueller’s Day Off
Did George R.R. Martin study economics? It certainly looks like he’s studied bratwurst.
Not that there’s anything to see here (yet) and I don’t want to go around spreading panic, but I just thought I’d dust off some information about recessions. And depressions. No particular reason. Nope. Just stretching my legs.
What is a recession?
A recession is a period of time when the economy gets a little smaller for at least six months or so. Generally, the recessions of the past have seen the economy drop by no more than 5% in any three month period. When you look at the numbers, even most years when there is a recession, the economy still grows overall.
Looks like this would be a good comb for Dwayne Johnson (The Rock®), or a really complicated game of Tetris®.
The blue areas are the economic growth. The red? Contraction. The average recession length since 1945 has been about 10 months, and the average economic expansion has lasted about five and a half years. The general idea is that the economy is based on constant growth.
How much of the economy is geared to growth?
I’m not sure, but I estimated it using publicly available figures. I guessed that 2/3 of construction work was geared towards growth, 20% of manufacturing, 10% of retail (Home Despot® and such), 20% of finance (can’t build if you don’t have cash), and 20% of hotel/restaurant jobs. I did the math, and that comes out to 12,000,000 jobs. How close was that? It’s roughly 10% of the workforce, and unemployment can hit 10% after a recession. So, as a first guess it’s probably not too bad. 12,000,000 jobs, at minimum are required for growth. And those same jobs disappear when growth disappears.
But even with the economic hardship and dislocation, recessions are good. Think of a small, quick fire in a forest. After the dead brush piles up, clearing out the underbrush makes the forest stronger. The strong trees survive, but the weak and rotten trees get burned down. In this part of the Midwest, a regular feature of forest management is a burn off – some places do it every three years or so. The fires are always small, and the danger of a larger fire goes away because all of the dead wood is consumed, but we do keep a supply of elephants on hand to stamp out the burning ducks. Just in case.
Bad businesses fail during a recession. Those on life support go away – they clear the way for growth and good, strong businesses to take their place – the end of a recession is a time of renewal, much like in Hollywood® when the Plastic Surgery Fairy drops by the homes of all good actors and actresses on George Clooney’s birthday.
A depression, however, is a wildfire in a forest that’s built up dead wood and standing dead trees for decades after a gasoline rainstorm. Wildfires burn out of control. Whatever is in the path gets burned. Healthy trees? Doesn’t matter – the inferno takes them along with the dead wood and no amount of well-trained ducks can stamp the flames out.
Healthy business? Doesn’t matter. Business failures start, and then cascade. People panic, and hold onto money. Companies panic and hold onto money. One sign of a depression (besides a sudden drop in male underwear sales – this really happens) is that debt levels actually go down. People don’t buy anything during a depression – they never know when they’ll be able to replace the money that they have. Debt levels also drop because the debts are written off – bankruptcy is another way to lower debt levels.
What causes a depression? A Soviet by the name of Nikolai Kondratiev had an economic theory – namely that the business cycle we stupid capitalists kept running into was based on debt and that the capitalists were stupid and over the course of decades would forget that debt was, you know, bad. Lenin loved him, but Stalin? Not so much, especially after a communist-sympathizing professor at the University of Minnesota ratted him out to Soviet authorities for a visit with an anti-communist when Kondratiev visited the University of Minnesota.
Minnesota has been a leftist state for a long time. Wondering if we could trade it to China for a box of magic beans? Or regular beans? Or an I.O.U.?
It’s debatable whether or not Kondratiev’s economic theory is correct, but it certainly fits the technologically-driven cycles of debt and discovery that lead to boom and bust that we’ve seen in the United States over the last three centuries.
I told The Mrs. I would use these graph-ruled index cards. See, I told you I would. Bonus: thinking about girls wearing bikinis.
Let’s talk about the economic cycle. (That was one of my best pick-up lines in college, but I would add “baby” at the end to make it totally sexy. Because, really, who isn’t put in the mood by discussion of aggregate economic activity?)
So, let’s talk about the economic cycle, baby.
In Spring, new businesses are formed. As economic activity expands, existing businesses expand. Optimism is the atmosphere. And, since debt is low (and people don’t want debt), there is money to buy stuff. And stuff is relatively cheaply as the currency gained a lot of power during the deflationary winter. Social cohesion and trust in newly-rebuilt institutions is high. And it’s nearly bikini weather! Think 1945 to 1965 in the United States.
I’m sorry.
Summer=bikinis! Who needs anything else? Oh, and also relaxation, and growth, and profits, and expansion. The greatest degree of questing for personal growth and whatever hippy course you want to take to validate yourself occurs in summer. The focus on strong institutions passes – but the quest for self-gratification takes over, and it really doesn’t matter because inertia in the economy keeps things going. 1965-1985 is representative of Summer.
I’m really sorry.
Harvest happens in Fall. You could call it Autumn if you have to be all East Coast, but if you do, I’ll call it Efterår, which is Danish for Fall and sounds like what a Viking could yell it at you before you got totally pillaged. But Fall is a great analogy since at this stage the economy is harvested. All the work that went on in Spring to prepare for economic success, all the growth that took place in the Summer, well, it’s time to harvest it in Fall. And greed is good, right? And debt hasn’t hurt us for the last fifty years, so, please, have as much debt as you can eat. Yup, you got it. 1985-2005.
Okay, does this make it better? And, Oktoberfest is in fall. Or efterår.
And now? If Kondratiev was right, Winter. The last Winter in the United States was the Great Depression, which lasted 253 years if you listened to my Grandma. But the Winter was difficult – debt collapse, financial panic, bank failures, tariffs, plant closings, unemployment, greater government control of the economy, breadlines, and no bikinis at all. Oh, and war brought about by the crisis. If Kondratiev is right, this would last from (roughly) 2005 to 2025.
Oh, sure, she has to top every story. But she also dated Andrew Jackson when he was just a kid.
This graph shows the velocity of money – how it moves in the economy. It’s clear that we’re in a place where money isn’t moving as fast as it used to throughout our economy – it’s at a record low since we’ve been measuring it. The low velocity is not because everyone is wealthy, it’s because tons of dead dollars sit on the books of various banking institutions. We’ve also pumped massive amounts of money into the system:
Now, if that money starts moving around like it used to, and there’s bunches of it . . . nah, that wouldn’t lead to inflation, would it?
Kondratiev’s cycle is roughly as long as a human life – which makes sense. Like a bad Arkansas carnival ride, you have to forget what you learned in the cycle in order to want to repeat it. Kondratiev’s work was also picked up by Strauss and Howe in their bestselling book The Fourth Turning. It’s a good book, and in some cases it almost reads like prophecy (it came out in 1997). I’d toss a link to the book up here, but you can figure this one out, or at least your Mom told me you could. She also said you could dress yourself, but she was pretty worried about your diet.
Depressions bring down banking systems, currencies, and governments – from Weimar Germany to the Russian Revolution. The chaos from just a financial mess can last for decades. But during the 17th Century in Europe, things got even worse:
The massive quantity of silver and gold that the Spanish brought back from the New World distorted the economy of all of Europe, leading to inflation. But then, the Maunder Minimum (LINK) hit. The Maunder Minimum, a decrease in the overall output of the Sun, added poor harvests and exceptionally cold winters to inflation. The regular resources that Europe depended on became scarce. When accompanied by resource constraints like Europe during the Maunder Minimum in the 17th Century, the chaos can last for a century. I wonder what it would look like if oil were much more expensive? (But that’s a future post.)
I think that we were pretty close to a financial system collapse back in 2008-2009. The solution was to pump astonishing amounts of money into the financial system leading to distortions that have caused commodity prices like oil and grain to lead to the Egyptian revolution and the Syrian revolution, all while we wage wars in two countries. I don’t think our financial system is remotely fixed at this point – debt continues to rise. It’s up to $70 trillion dollars – thankfully that’s only about a million dollars of debt for each family of four. We can work that down in a year or two, right, if we cut back on going out for dinner?
The kink in the curve? That was what caused a worldwide recession and panic in 2008 and 2009. Hope nothing changes. Debt’s good, right?
Is there a draft in here? Seems chilly. Winter’s coming, I think.
