On surviving a depression

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

A response to the original thread by Stan Faryna:


Brian wrote a good response, although I disagree with his economics, i.e., economic depression is caused by a contraction in the supply of money. If you buy a share of Faryna, Inc. for $10 you are exchanging $10 in money for a tangible asset. The money is not destroyed. It simply passes from the buyer to the seller.

If Faryna, Inc. jumps to $100 in value, your asset has increased by $90, but no money has been created. In fact, you cannot realize the profit unless you sell the stock for $100. Again, money is not created. It simply passes from buyer to seller.

Whatever the loss (or gain) the stock of Faryna, Inc. is not "money" as commonly defined (M1, M2, M3). Stock, bonds, land and precious metals are tangible assets. Like any asset, they increase or decrease in price due to changes in supply and/or demand.

When the stock market crashed in 1987, there was a one-day decline in the DJIA of 23%, but there was not a depression. Why? Despite the staggering decline of stock prices, the overall wealth of America was far less severely impacted. This is because most of Americas wealth is in assets other than equities. The weakness of an overvalued stock market in 1987 did not reflect the underlying economic fundamentals and thus we shrugged off the correction and entered the longest expansion in recent history.

The price of assets change over time. I am fond of noting that black pepper was once traded, ounce for ounce, for gold. Supply and demand changed. People who value gold as an absolute commodity often overlook this historical evolution.

Value is different than price. A price is a transaction value. In simple terms, how much will the market pay in currency for a given asset? The other component of value is use. Land can be used for habitation, agriculture, commerce, recreation, etc. While land can be sold, it also can be used in the creation of wealth. The same applies to human capital, machinery, information, patent rights, and other factors of production.

Having assets with use value unencumbered by debt is one key to surviving a depression. The best investment is almost always improving ones skills and abilities. A good education is portable and lasts a lifetime. Land varies widely in price, but it does become more valuable in hard times. Unrestricted land allows the owner to grow fruits and vegetables, raise stock, produce modest amounts of power, harvest fuel for heating, etc. More than gold, information has been the most consistently valuable commodity through the ages. It takes information (or skills) to capitalize on assets with use value.

Returning to Brians analysis, what is the role of debt in the creation of money? A banks ability to loan money with less than a 100% reserve requirement creates money. For example, the a farmer goes to the bank and takes out a loan to buy new equipment. The bank approves the loan and the farmer takes the a check from the bank and buys the equipment. The note is secured against the equipment. Of course, the equipment dealer receives its check money effectively created by the bank. As the farmer repays the note, the bank is compensated through the payment of interest.

In hard times, the farmer may not be able to repay the note. If the bank begins to have many farmers default on loans, it comes under intense pressure. This is not so different than large multinational banks who hold paper on struggling LDCs.

There are two basic types of hard times inflationary and deflationary. In inflationary hard times, it takes more money to buy goods and services. A common example is the savage inflation in 1920s Germany. (See Weimar Republic.) By 1922 the Mark was worth 1/100th of its 1914 value. By 1922, the value of the Mark fell from 162 to the American dollar to 7000 Marks to the dollar. By November of 1923, it had fallen all the way to 4,200,000,000,000 Marks to the dollar. A wheelbarrow of money to buy a loaf of bread.

On the other hand, deflation is the widespread decline in prices. The 1930s U.S. depression was deflationary, as was the post-Civil War period. While one might think falling prices are good (they can be), but think about wages and assets. Leveraged assets are particularly vulnerable. Who wants to pay a $100,000 mortgage on a home worth $50,000?

Modest inflation and deflation are usually manageable, however both phenomena create winners and losers. Brian describes a deflationary scenario. Contrary to his analysis, the Federal Reserve has been liberal with the money supply of late. The global recession, cheap commodity prices and the remarkable absence of wage pressure have kept inflation at bay. With the bias towards higher interest rates (and a weather eye on the speculative market bubble), the Fed is trying to let some air out of the balloon. Frankly, if we move past recession into depression, its a pick em on inflation versus deflation.

Brian strikes me as a monetarist. The supply of money is important to the economy, but I take a different perspective. In my opinion, the real issue of Y2K is productivity. If Y2K problems cause significant inefficiencies in the economy, productivity falls. So do profits. Reallocating resources to deal with crises is usually inefficient. If productivity falls significantly, we will face a terrible hangover after a decade of economic partying. On the positive side, the free market benefits from an occasional morning after. Weak firms should fail. If we have a serious recession or even a depression, there will be some excellent investment values during the darkest days. Those who are liquid and have the chutzpah to invest will become wealthy on the recovery.

Brians advice is very sound. Stay debt free. Have use value assets. In the advice of Rothschild, Buy on the cannon, sell on the trumpets. In closing, let me borrow a clichi. Tough times dont last. Tough people do. Hard times are still times of opportunity in America, Stan.

L'audace...L'audace..Toujours L'audace


-- Mr. Decker (kcdecker@worldnet.att.net), June 23, 1999


"Having assets with use value unencumbered by debt is one key to surviving a depression. The best investment is almost always improving ones skills and abilities ... More than gold, information has been the most consistently valuable commodity through the ages. It takes information (or skills) to capitalize on assets with use value."

I agree strongly with this and am mainly in agreement with Ken's other arguments here as well. I also see inflation-deflation as "pick 'ems" though I envision possibility of a very confused "both-and" situation (assuming unpredictable breakdown and recovery time for "pieces" of the global supply chain, causing inflation-deflation recursively and in parallel in various places).

A number of the regulars have moved into "brainstorm mode" in "real life" on how to leverage our information skills together after Y2K (and not only IT skills, though that as well, natch). This forum and those activities are entirely about leveraging information to protect our families and enhance everyone's future.

I also agree that "productivity" is the key economic dimension with Y2K.

In a best case, firms that have prepared will thrive, as they *should* though I am bearish on the long-term dangers of yet another global concentration of power in fewer hands (a highly probable outcome of Y2K, no matter what happens). In a worst case, our mixed free-regulated world market may have a hideous time reallocating resources, maybe on a par with the '30s, maybe worse, IMO.

There will indeed be tremendous opportunities for individuals and larger entities with imagination, courage, flexibility and liquidity. I see no contradiction (and never have) with a "hope for the best, prepare for the worst" scenario. It can only be win-win.

-- BigDog (BigDog@duffer.com), June 23, 1999.

Well said, Mr. Decker

-- Greybear (greybear@home.com), June 23, 1999.

If you two are going to continue to talk intelligently and pass on informative, thought provoking answers to y2k related topics, you are going to have to find a new forum.

-- xyz (abc@def.gov), June 23, 1999.

xyz --- ROFLMAO. You mean me and Greybear, right? Appearances to the contrary, I always look for opportunities to agree with ANYONE and everyone as far as possible. But I'll keep your admonishment in mind! Don't want to have to multiply forums, do we?

I am more bullish than Decker about gold, but didn't mention it in first post because I believe it is being hellishly manipulated globally and I'm not smart enough to figure out which way to go personally on it. But his point here wasn't to denigrate gold, but to establish the greater importance of "information" as he defined it. And, again, I am in solid agreement with that as the premier source of "value". Which should be a great source of encouragement to all the regulars who have been working hard on "use" skills along with their preps.

-- BigDog (BigDog@duffer.com), June 23, 1999.

Interesting treatise, and well stated.

However, you completely ignored one small point. The STOCK MARKET is NOT the be-all and end-all of business. There are actually COMPANIES out there, that MAKE things and PROVIDE SERVICES. If people get scared, they QUIT BUYING THINGS. This causes the mfg. world to curtail making their products, or providing fewer services.

This causes employers to lay off workers (after a short "grace- period"). These workers no longer contribute to the economy, so buying slips further. At some point, "critical mass" is reached, and companies begin to go bankrupt, their stock prices plummet, the market drops, and we have recession/depression.

I understand that an economist would tend to look at things from just a single point of view, but that's what this whole Y2K mess is ABOUT, isn't it? The key people failed to see the "big picture" (that demon "interconnectedness" that the pollys whine about as non-existant).

Well, no matter WHAT "they" think, the interconnectedness IS there, the code IS broken, and we're in for a mighty rough ride. TEOTWAWKI? Depends on your definition, doesn't it? If "your world" includes fresh raspberries in January or overnight world-wide package delivery (as well as myriad other "modern conveniences"), the answer may well be "yes".

-- Dennis (djolson@pressenter.com), June 23, 1999.

One of you stated there would be great opportunities. I am not a person with great deal of imagination but I do have some liquidity. Having taken care of all my preparations where should I look to maximize what I have left over. MsGlory

-- Roberta Blackard (roblackard@juno.com), June 23, 1999.


You have asked, IMHO, the magic question! I truly hope that this thread will continue and provide some quality answers. Most everyone that regularly posts on this forum has already 'graded' the potential severity of Y2K. Hey people, how would you use your 'surplus' assets to show gain in this scenario? Bury it in the ground? Buy up all of the black pepper you can find? Corner the Viagra market? Waddaya think?

-- Barry (barryjaynes@usenvitech.com), June 23, 1999.

Mr Decker

Excellent post! You are on firm footing when it comes to economics. I would like to point out that I am NOT the Brian that Mr. Decker refers to but here is a link to the previous thread on the subject started by Stan.

Questions for Mr. Decker: how to prepare for another great depression

Depression or whatever, fishing or farming and one can't go wrong. Unfortunately time is running a bit slim for folks to pick up on these skills.

-- Brian (imager@home.com), June 23, 1999.

Dennis, now I know you are an idiot. I was suspect for some time and the initial response on the "Variance" thread added another log to the fire but now with "Well, no matter WHAT "they" think, the interconnectedness IS there, the code IS broken, and we're in for a mighty rough ride. TEOTWAWKI? Depends on your definition, doesn't it? If "your world" includes fresh raspberries in January or overnight world-wide package delivery (as well as myriad other "modern conveniences"), the answer may well be "yes"., I know for sure you're an idiot.

We have discussed the code is broken for a long time. You need to look up some definitions and statistics on Y2K remediation. And if you think TEOTWAWKI means not getting fresh raspberries in January, then you need to do some thinking on your part. Even though this term means different things to different people, I think we would all agree it doesn't mean doing without fresh fruit.

-- Maria (anon@ymous.com), June 23, 1999.

To All

The one thing that puzzels me is the fact that if everyone was debt free then the economy would tank just on Mr. Deckers advice. Credit is what could bring down the system. Credit built it. As I am a person that has never been in debt, this seems to me to be a bit of a contradiction. And it worries me.

-- Brian (imager@home.com), June 23, 1999.

Weimar hyperinflation was a result of onerous debt loads under forced restitution payments for wartime loses to the Allied European powers. Weimar started the money printing presses and induced its own defacto devaluation of its currency. In addition, there was little to no capacity for manufacturing of peacetime goods and little capital to initiate the economy from wartime to peacetime manufacturing. Today the world is flush with overcapacity. There is an abundance of goods and many nations are already producing goods at or below production costs just to keep their workfoce employed. They know that they are lossing money but it is better than to have the masses hungry with no work. China is a perfect example of this today. The financial markets may indeed fall precipitously but the need for nations to continue manufacturing goods to mitigate internal destabilization, even at below production costs, will become even greater should there be an economic slowdown in the U.S. induced by or subsequent to a market fall.Therefor I would think that deflation holds a higher probabiliy of occurance that inflation. Having little or no debt and holding little in tangible assets(land gold goods) would be prefered.

-- PJ (iop4@hotmail.com), June 23, 1999.


In point of fact, one of my points is the stock market is only one element of a complex economy. What happens in market is far less important the underlying fundamentals of the economy.

Let me suggest another minor correction. When people are frightened they may simply buy different goods and services. Y2K has created a boomlet for a number of small industries. This can lead to the "creative destruction" of capitalism as observed by Schumpeter. Change displaces firms (and workers) even while new firms emerge. When the car emerged, saddle makers had a tough time with the transition. [Remind me to find my copy of the candlemaker's union protesting the sun.]

Economic activity can slump, but it inevitably returns. Remember, economics is the study of how humans deal with unlimited demand and scarce resoures. Rarely does "demand" take an extended holiday.

Economists (like most social scientists) have inevitable blind spots. This admitted, what some describe as interconnectedness, I see as redundancy. If you have read Lucifer's Hammer, you might recall an exchange between the Americans and Soviets in space. A Soviet cosmonaut looks longingly at a hand-held calculator. She does not believe that calculators are inexpensive and widely available in the U.S. She also questions the "efficiency" of more than one firm making calculators. (Forgive my imperfect recall.) The American economy generally has enough redundancy to put NASA to shame (except where government has abetted monopolies or oligopolies.) Sometimes I feel exactly like the American astronaut explaining this concept to the Y2K pessimists.

The breakdown in a supply chain is a problem. The free market fixes problems every day. It does not work perfectly, but the profit motive keeps the economy rolling. This is why an organic metaphor is better for our economy than a machine metaphor. The economy can be wounded... and it can heal.

Even during the darkest days of the depression, someone was eating steak and smoking good cigars. They may have had fresh raspberries for dessert. I have no inherent desire to become wealthy. I'd hate to be forced into it by Y2K. (laughter)


-- Mr. Decker (kcdecker@worldnet.att.net), June 23, 1999.

The "Mr Decker for President" Campaign is underway.

Volunteers for appointments as canvassers and phone-pollsters should reply to my mail addy.

Help make "KCD the key for 2000AD !!!"

Doomer flame shields UP. Full power. Warp speed Mr Scott. Whooooooops

-- W0lv3r1n3 (W0lv3r1n3@yahoo.com), June 23, 1999.


You make an excellent point. This is debt-fueled growth. Massive consumer debt reduction might cause slumps in some sectors. On the upside, a signficant decrease in debt, including our national debt, would create a larger pool of investment capital. The Federal Government alone could reduce the "crowding out" effect and lower the cost of borrowing. Lower debt costs increase firms' ability to borrow and invest in infrastructure, increasing productivity and wealth.

Of course, this is like encouraging people to eat more green beans and less ice cream. Good idea in concept, but unlikely to happen.


-- Mr. Decker (kcdecker@worldnet.att.net), June 23, 1999.

[Remind me to find my copy of the candlemaker's union protesting the sun.]

Mr. Decker,

I think you are making reference to Bastiat's excellently written modest proposal against trade restrictions.

I agree that there are redundancies, and people and companies will make do with what they have in the interim. The critical question is the duration of the interim.

Not to be Keynesian about it, but "In the long run, we're all dead."

-- nothere nothere (notherethere@hotmail.com), June 23, 1999.

Mr. Decker:

Points well taken, thank you. For me then, the issue becomes "HOW MANY 'saddlemakers' do we have, WHAT other industries can they train into, and HOW LONG will it be before the 'adjustment' is complete enough to suggest a recovery?"

That "recovery is inevitable" is a GIVEN; *HOW LONG* until it arrives, and how much stockpiling must I do to help my family over the rough spots...? (NONE of these questions can be answered a priori).

FWIW: I have not been privvy to past discussions of "the code is broken", and use that term as shorthand to describe the fact that "repairs" (however one wishes to define them) MUST be made on a large scale. My TEOTWAWKI statement was an OVERLY SIMPLSTIC example of what *SOME* people would call their "normal lives". No additional connotation should be derived from those comments.

-- Dennis (djolson@pressenter.com), June 23, 1999.

Redundancy and interconnectedness are not mutually exclusive concepts or realities. Relative to our ability to grasp as a "system" (ie, we can't), the world infrastructure "seems" as much organic as mechanical. The real-time experiment on the robustness of our entire modern project of "technique" (which we term "Y2K") will shortly reveal whether we have "enough" redundancy (are loosely coupled enough) or are "overly interconnected" (too tightly coupled).

My own expectations are that we will have amazing instances of both with a net impact of tremendous confusion and noise (registered by entities as loss of productivity and individuals as an inability to get certain things they need to survive [short term] or be comfortable [mid-term]).

Out of the confusion will come, if we're lucky, entirely new thinking about BOTH redundancy and inter-connectedness and, probably, an entirely new concept to define where we would wish to be in the future.

-- BigDog (BigDog@duffer.com), June 23, 1999.

**. If we have a serious recession or even a depression, there will be some excellent investment values during the darkest days. Those who are liquid and have the chutzpah to invest will become wealthy on the recovery.**

Profiteering on Y2K, eh Mr. Decker? ;)

What percentage of GDP is made up of life-sustaining essentials? I dare say the lion's share is frivolity like new automobiles, computers, and various other high-tech whiz bang gadgetry that is hardly essential. When TSHTF, the economy will be decimated by a paradigm shift in people's perspective, and hence, their buying habits. Comparing our current situation with that of the prior Depression era has been beaten to death, and I'll not dredge it up again, except to say there is NO comparison. It took 10 years to return to prior levels, and that mainly was due to the lack of confidence on the part of the public. Human nature remains consistent. Once public trust is lost, it doesn't come back overnight. Y2K will haunt us for many years to come, in more ways than one.

-- Don (dwegner@cheyenneweb.com), June 23, 1999.

If, Don, if....


-- Mr. Decker (kcdecker@worldnet.att.net), June 23, 1999.

RE: Redundancy and supply chain disruptions:

IF, the corporations have raw materials stockpiled, then supply chain disruptions, and switches in the chain (thanks to putative redundancy, but caused by failures to survive) would be seamless, and merely a light touch of inefficiency.

HOWEVER, MOST of the LARGER manufacturers are in the process of, or have just finished installing "JIT" / "Supply Side Rationalization" Projects. This is going to be a problem. Redundancy would be NICE if it were true. Witness the new platform GM was going to introduce in 2000. They recently pushed this platform back to 2004, costing the SUPPLIERS several hundred million dolars due to participation in the design and materials planning project.

Also, remember the GM supplier strike last summer that closed GM down, nationally. If redundancy were a viable option for immediacy, we would CERTAINLY have seen it there, rather than seeing GM take a, how many billion dollar hit?

While redundancy may be a nice long term factor, the situation is such that the stocks are not there to get the manufacturers out to the longer term.

The next target for some of my clients for this "rationalization" of supply chain is a manufacturer of surgical equipment, with raw material inventory turns of 3-5 per year. They want to "save money" by making this much closer to 25 - 35. OUCH!

Chuck, a Night Driver

-- Chuck, a night driver (rienzoo@en.com), June 24, 1999.

Moderation questions? read the FAQ