The Dow Jones Industrial Average managed to shed almost a decade’s worth of economic growth in a single day today. The DJIA closed today at a level that hasn’t been seen since 1999.
The 7% decline today doesn’t compare with the double digit declines that marked the beginning of the Great Depression in 1929. Over a quarter of the American labor force was unemployed in 1933, with none of the safety nets we have today: no unemployment checks, no public housing, no government welfare of any kind. Back then, though, we had food, we had oil in the ground domestically, we had plenty of home grown resources and we had very little national debt, many of us outside of the High Plains had family farms we could return to and wait things out.
Today, we have monetary inflation of basic foodstuffs in spite of lower real wages for the majority of Americans. We have crippling debt at the national and personal level. It should be an interesting week, and by “interesting” I use it in terms of the Chinese curse, “May you live in interesting times.” Massive layoffs from all sectors of American business will be announced around Thanksgiving this year.
Some of you might be interested in this article that likens the Borg of Star Trek with our modern financial system.
What we are seeing reflects a general insolvency of the global financial system. Part of the problem is that investors, business people and governments didn’t foresee that crude oil production would flatten in 2005 and prices would go from $10 per barrel in 1998 to $100 per barrel in 2008. Or that China and India would consume so much so fast that nearly all forms of commodities would rise in parallel with oil prices.
When credit is extended over a long time horizon, as in a home mortgage, the underlying assumption is that the future will be akin to the past. Inflation will be relatively modest and incomes will keep up so that a steady flow of cash can go back to banks and keep up their reserve balances. Obviously this hasn’t occurred: prices rose faster than incomes and the ability to repay debts faltered.
The United States (and other nations with negative trade balances and large foreign held debts) is in a Catch 22 situation. Flows of credit are so crucial for the daily functioning of our economy that it looks as though these will be preserved at all cost.
It is difficult in a panicky time to step back and ask questions about the greater purpose of what we are doing. One of the problems I have is balancing my current anxiety over the unraveling of systems that I depend on, with the knowledge that these systems are highly misguided and need radical change. As a people, we have become very poor at distinguishing between productive and unproductive debts.