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Hysterical Depression

For many people, this is a time of great uncertainty – they don’t know what is going to happen next.  For those of us who study history, what happens next isn’t the question, but rather how bad it will be – and what happens after that.  This may sound like the same thing, and as far as most people are concerned it probably is.  But there is a boundary to what might possibly go down and there are known likely effects of this situation.  The more we understand what happened before, the more we can take confidence that we at least know where we are.

I’ve been slow to make predictions as to how the Depression will play out because there are a lot of people in positions of authority who understand the situation.  How much influence they have is always a question, but they are there – and may influence what goes down.  The conditions we see are indeed a Depression in the sense that it is a Kondratieff Winter, or a specific situation where the economy simply over-extended itself.  To understand the waves of history we have to start by looking at the last three Depressions and what happened.

Naturally, some people will say that the economy has changed completely in the last 150 years.  That’s true, but it’s only one reason why this is an art, not a science.  A Depression, in the sense that I use the word, starts with a bank panic or large failure of credit markets – but not all bank panics trigger a Depression.  Poorly run banks are historically pretty common, and many of you will say that what just went down is nothing more than one of those things.

I will describe the last three Depressions and let you decide what is relevant – Caveat Lector.

1857: Britain, exhausted from the Crimean War and other adventures of “The Great Game”, entered a recession in 1856 and slowed its buying US exports.  The long period of expansion after the Mexican War had created a lot of manufacturing capacity, and with the slowdown to our largest trading partner warehouses became full and manufacturers defaulted.  When massive embezzlement was discovered at the Ohio Insurance and Trust office, a run on all banks resulted.  The unemployment in the North hit as high as 15% by some estimates, but the South was relatively untouched.  The resulting emboldening of Southerners, especially given the apparent superiority of their quiescent economic system that avoided boom and bust cycles, was one of the causes of the Civil War in 1861.  Our politics was forever changed after the War.  Around the world, strange military adventures included the French invasion of Mexico in 1863 and eventually the unification of Germany in 1871.

1893: A recession struck all of Europe in 1889, and by 1893 exports to Europe were negligible.  The excess capacity lowered prices for everything and resulted in a massive default nearly simultaneously.  There was no single scandal or event that triggered this collapse.  The unemployment rate hit as high as 18%, and was above 10% for five years by most estimates.  The excess of people was absorbed by the growing West, where at least some living and cheap land were still available in places like North and South Dakota.  Progressive politics was born from the horrible working conditions that remained for those who still had jobs.  The Spanish-American War of 1898, where we knocked off a relatively weak power and assumed our position in the world stage, was an immediate response to the Depression.

1929: Recession brought Europe to its knees long before the US, exacerbating the already obvious excess capacity – especially in the automotive industry.  The Stock Market Crash of 1929 was the result of a series of bank failures and a creeping credit meltdown, and while the first big sign of trouble it is incorrectly viewed as the cause of the Depression.  The unemployment rate hit 34% as the Depression lasted as long as 12 years, the worst in our history by far.  There was significant improvement in the mid 30s, but officially it only ended as World War II flared up. Our current system of left-right politics, reflecting a response to the Cold War, was created in the aftermath.

Where are we today?  I’ll let you decide.  Nearly all Depressions started abroad, but this one may have started here first.  All were caused by excess capacity in a key sector, this time the financial sector.  There is a cast of villains in a key, symbolic event like the collapse of Lehman Brothers – except for 1893.  Unemployment was often ran above 10%, but not by much – except in 1929.  The ending comes when the entire social, political, and often geographic landscape changes, without exception.  War can proceed a Depression, but after such an event it is very likely.

This may look chaotic, and it is.  It is a bounded chaos, however, a fractal landscape of recursion or at least passing backward glances.  We can’t say what will happen, but we know where it’s going in broad terms.  Some paths through this territory are better than others, for sure.  It’s also not necessarily as bad a ride as some people think, assuming you don’t mind a sense of danger on every curve.

29 thoughts on “Hysterical Depression

  1. Erik, Touching on the uncertainty. I will add a few notes to my reading on the printing press and change/literacy and change. “In the rise of the printing press and the rise of science print may have actually have led the culture away (emphasis) from using words and towards using wood block images. In the natural sciences such as anatomy, geography, astronomy, flora and fauna images/ pictures are clear and precise, much more so than words.
    Another interesting thing to note in the change from oral culture to literate culture is that there is actually less emphasis on the memory arts. How this will play out in some
    Muslim countries will be interesting to see. Afghanistan has a 25% literacy rate. According to the Oxford history of the U.S. in the seventies the fall of the shah may have been the fruit of some of western development models.
    Youth were better fed, better read and also more capable of revolution and self government.
    We can’t just take things at face value. It is also interesting to note that the printing press may have led away from the use of Latin and made education and the populous much more open, democratic and valued.

  2. I knew the big DEPRESSION and all the recessions since and in all cases each successive wave of 4o somethings is struck down by shock and awe

  3. Whether or not this is a big Depression or not, it certainly has the key characteristics. At least this time the government is doing a lot better than Hoover did. Do these things blow 40-somethings like me away? Sure do. We are the ones with kids to raise, after all. Having a lot to lose is not a good thing in this situation.

  4. Using a definition of Depression that is different from what people are used to is difficult. I understand that historians have to say things a certain way – but it’s hard to make yourself understood.

    I get what you mean, that this is a kind of problem and its one that can get real bad. I’m not sure everyone does.

  5. I’m hedging my bets a bit because this is the first Depression to hit after modern economic theory came into being. While I don’t believe for a second that we’ve learned how to prevent Depressions, we may very well have learned how to make them a lot less bad.

    I’m only partially hopeful so far. The Fed sure is pushing money into the economy as fast as they can, but we’re not doing the things necessary to make restructuring easy. Labor markets are not very fluid at all.

    Whether people really want to call this a Depression or a Banana, I don’t really care. But it is exactly the same kind of thing that we’ve seen before – and we know what this monster can do.

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  10. This is so incredible. Why doesn’t anyone talk about the historical context? Of course, we’ve been through things like this before, before the 30’s and all. Wow.

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