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In Case of Depression, Break Glass
February 11, 2002
by Kurt Cagle

The images that we carry from the 1930s have the sepia tinged characteristics of faded black and white photographs - the Dust Bowl, grimy laborers standing dejectedly in front of a shuttered plant, banks closing their doors in front of angry investors, shanty towns stretching as far as the eye can see. Perhaps it is precisely because of these images that it is difficult to conceive of a Depression in the 21st centure, more than seventy years later. We know what a Depression is, and its impossible for things ever to get that bad again.

What many don't realize, however, is that a depression is not simply a bad recession. A recession is to a depression much like a cold is to cancer. A recession occurs when production gets ahead of demand - people are let go, profits drop somewhat, inventories draw down, and eventually (usually after about 18 months or so), the inventories are down to a sufficient level, and demand begins to pick up again. Sometimes recessions are started by shocks - the oil crisis in the 1970s, for instance, coupled with moving off the gold standard, created a bizarre situation where economic growth was anemic while inflation shot up. Eventually, the money supply and oil both stabilized, laying the groundwork for an apparently robust period of growth.

Cancers typically remain undetected for quite some time, but the overall health of the person gets subtly worse, until the immune system is compromised by a cold or something similar... then it gets very much worse. Depressions share this characteristic. What's cancerous in our economy? Living wages have dropped, relative to inflation, nearly every year since the 1960s. Simultaneously, the amount of credit that's been made available has risen dramatically, meaning that rather than paying for full for items, people (and companies) have increasingly been buying on credit, stretching out the time to pay at the expense of becoming increasingly in debt. Why? Because everywhere you listened you heard the "great news" - "We are in the New Economy, and everyone will become rich, so you know that if you buy something on credit today you'll have more money available tomorrow! You can ALWAYS pay it back."

So we consumed, we consumers. Savings dropped to the lowest level in decades, since savings accounts returned lower rates than you could get from even the most anemic of stocks in the 1990s. We bought larger houses and newer cars every year, bought computers at $3000 a whack that would depreciate to nothing in the space of two years. This behavior was very common in 1927, by the way, though NOT to the degree you see today.

Corporations did the same thing, of course. An acquaintance of mine, a man worth about $20 million dollars once upon a time, told me that the money was unimportant - it was only a way of keeping score. We loosened the requirements on investing, which made it easier for small investors to get into the market, but that was only a side effect. It also meant that large investors could undertake risky ventures, especially if they could net far more money.

Derivative trading made it possible to make huge bets on the direction that the market would turn. That was fine if it was your own money, of course, but with loosened oversight that money was increasingly coming from large pools - pension funds, the working capital of cities, retirement accounts, mutual funds - money that once converted into bits and bytes became simply anonymous fuel to fan the bonfires. The ones that profited were the ones who had the least scruples; the captains of industry feted by Wall Street knew that their goals were simple - make money at any cost for the shareholders.

In the 1970s, a typical CEO of a company would make about 30 times the "income" of the lowest paid worker. By 2000, that ratio has risen to 5000 times the income, mostly on the basis of stock, and in some cases it's closer to one million times. Stocks a funny thing that way. A stock option costs a company very little - because of lax regulation, in fact, stock options are essentially free money. If you pay a software engineer a small salary and award generous options, then they may have the chance to make a lot of money, while the CEO that hired him makes only a very small investment that will ultimately net the company many hundred times the salary that the programmer makes. In effect, Wall Street ends up paying that programmer's salary, in a scheme that would have made Ponzi green with envy.

However, this only works so long as there is fuel feeding the fires; when the money begins to run out, when the demand begins to drop, the fire goes out, quickly...

One other factor comes into play here ... energy. In 1971, a gallon of gasoline cost about 28 cents. In 1977, as OPEC flexed its muscles, a gallon of gasoline cost about $1.35 a gallon. Nearly twenty five years later, gasoline costs about $1.35 a gallon. In other words, it has dropped in inflationary terms back to about where it was in the early 1970s, maybe about 50 cents a gallon or so.

That's about to change. Bush and company are involved in a very dangerous chess game to gain control of the Uzbek oil fields. It is no surprise that Iran and Iraq were both on his list of "The Axis of Evil" - they control a significant part of the oil fields in the region. Saudi Arabia, which controls most of the rest, is seething in political unrest, brought about largely because of the heavy-handed actions of George Bush. You don't hear about in the American news, of course (the media companies, in that era of free money, were essentially bought up by the petrochemical industry), but the region is simmering to boiling. If the Saudi monarchy fell in a fundamentalist coup, then the majority of the world's oil supply will be controlled by Islamic extremists who would no longer really care about enraging the United States by wiping out Isreal. Yet if any of this comes to pass, the price of oil will rise above $40 a barrel, and the US government, tied down by massive deficits, would be unable to subsidize the low gas prices that have been another significant factor in the ability of large corporations to continue their efforts of globalization.

Because corporations have been using Wall Street to subsidize their cost of labor, a no longer rising stock market means that options become worthless. This is worth emphasing. The danger here comes not from just falling stock market prices, but even stagnating prices. If you get 1000 stock options at the time of hiring, and the stock price remains unchanged at the time you vest, those stock options are worthless. If the stock market drops, this means that those options will not be worthwhile for potentially years to come. This means that corporations have to start paying their employees in "real" money, which they know longer have because it is going to the shareholders who are expecting dividends (or in the case of Enron, is being embezzled through shady off book deals). This in turn means that corporations will continue to shed employees not because demand is slack, but because they can no longer count on the stock market paying employees for them, and have to readjust dramatically.

Add on to this a few other elements that make things even scarier. Jobs are moving out of the country, chasing cheaper labor. The economy is no longer involved in the manufacture of things, but the production of services, things that have no real tangible values. Japanese investors are now running to the shelter of gold because the Japanese government is no longer guaranteeing more than $75,000 in accounts even as banks look like they may start to collapse, which in turn means even more money being withdrawn from that economy - that's money that won't be spent on US goods, by the way, and other nations' economies, from Korea to Brazil to Switzerland, are facing something unprecedented since the 1930s - deflating currencies.

That's a Depression - when currencies deflate. A Depression is pernicious, because it destroys value - slowly. It brings down governments and high flying individuals. Corporations that have bloated themselves are instead forced to sell off foreign subsidiaries and then their less profitable local divisions, but no one has the money to buy, so the value of those subsidiaries drop. High energy costs may go down some, but if the primary oil producers are unstable then they are going to push the costs up as much as possible in order to get money for their own local wars.

The Depression of the 2000s will not be the Depression of the 1930s. The shuttered factories are a relic of the past, primarily because the factories have all been exported overseas. The ghost towns will be (are) in the office parks and high rise office buildings, the empty K-Marts and deserted malls.

We have a bizarre state now where unemployment is very low. This is an illusion. The measures of employment assume the way jobs looked in the 1970s. Forty hours a week, punching the clock. Instead, we have, through three decades of assault by corporations, become a nature of contingency workers (a lifestyle that was even eulogized by the business media of the time). A company doesn't hire full time workers, because it then needs to pay benefits to those workers. Instead, many hire contingency workers from contingency companies to fill most of their primary requirements.

These workers may get only minimal benefits, but because they are under contract they are considered employed, even if they only have work for a week a month. These workers don't get unemployment benefits, aren't counted in the layoff announcements (and most likely don't hear them, because they're assignments have already been terminated) yet don't dare leave because of the difficulty of moving between health insurance plans.

The programmers and artists who used to work in those places are busy in their own little mind-realities, selling consulting work when they can get it or hawking bad art on EBay. They'll survive - they produce things, even if those things are ephemeral bits of light. The others, the managers, the marketing people, the sales people, will migrate downward to become managers at Burger King, pushing those already there even further down the chain. The ones that are displaced will find solace in drink, or drugs; ending up on the streets.

There is a movement that has been growing in the United States and throughout the rest of the world that is increasingly in opposition to the people who are driving much of push into depression. It is a movement of people that recognize that governments do serve a purpose. A governor in system theory is a mechanism that throttles down the excesses in the system, that regulates not out of evil desire but because economic systems where too much control resides in the hands of too few develop feedback loops, positive reinforcements that, left unchecked, result in the system itself undergoing a catastrophic collapse. A governor bleeds off the excess power (money, energy) of one part of the system and transfers it to another, not out of some cosmic sense of fairness, but because too much concentration of power in one area is ultimately bad for the system as a whole.

Such a governor is not typically popular among those who have power, and they will do everything in their power to subvert that governor (or better, as in current circumstances, taking it over entirely, then destroying it). Unfortunately, without the governor in place, the very engine that generates their wealth in the first place - the energy, drive, and commitment of people working collectively - will be unable to do so, and the system collapses.

Environmentalists see this, of course, because most environmentalists work with and understand systems quite well. The movement is also now benefitting from the influx of programmers who are now unemployed and getting pissed; these are people that make their living solving problems that work across systems, and they too tend to see how things are interconected. Teachers, librarians, writers, scientists, artists, the whole group of those people who are often mistakenly clumped into being considered, simplistically, as the "left", with all of the negative connations that implies (left behind, the sinister left, those who aren't "right" and hence wrong, etc), this group of people are rapidly reaching a point where they realize that rational discussion won't solve the problems, because those in power have no interest in being rational - they confuse enlightened self-interest with greed.

Currently, Bush is boosting spending, but only in boondoggle defense projects that enrich a very small number of shareholders but return nothing back into the economy, while simultaneously cutting spending in those areas that could help people start their own businesses (or keep those businesses going), educate people up to the standards necessary for the increasingly high tech nature of businesses today, or strengthen a crumbling transportation infrastructure. He's pushing to give more money back to corporations that have through incompetence and malfeasance already squandered what they did have without any oversight to insure that they change for the better.

Depressions come about in great part because government has lost the resolve to govern - subourned by money and power, they neglect or even abet the destruction of the structures that regulate the flow of power. The Japanese Depression is a good example of this, or Argentina. The Republican Party at one time were noted for fiscal discipline and restraint, but because their power base started out more closely aligned to monetary interests they were the first bought. The Democratic Party is marginally less in the thrall of big business, but as the money signs next to members Republican and Democrat in the latest inquiries into Enron reveal, the party is hardly untainted itself.

Change can only come from the bottom up, can only come from people mobilized and angry. We can now longer afford to "ask nicely", as much as it is in our natures to do so. In the face of avarice, venality and greed, this attempt at seeking the moral high ground is viewed as a weakness. Instead, we have to accept the fact that corporations exist only on the sufferance of the people, and that the role of government must serve not only to protect its people from the predations of other states but perhaps more importantly to protect the people from those within the nation, individual AND corporate, who abuse the system.

More, we have to work, hard, to affect this change, to protest, to boycott, to get elected people who will have the political will to affect change, to take back from the relentlessly anti-market forces of "The Free Market" our schools, our homes, our common places, our airwaves, our Internet, our dignity and our lives. The alternative, personally and economically, is Depression. I know which choice I'd choose.

Kurt Cagle is a writer of computer books and science fiction living in Olympia, Washington.

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