The average reader could probably be forgiven for passing Vox Day’s “The Return of the Great Depression” without giving it a second thought. After all, the author is a weekly columnist for WorldNetDaily, a far-right, news website that is as biased as it is sensationalistic.
But the reader would be missing one of the potentially most-important economic reviews in recent times on how credit-card companies and other institutions helped to create a new Great Depression.
Contrary to what some might have predicted from a writer for WND, Day’s second non-fiction book — the first was his critique of the so-called “New Atheism” of Richard Dawkins, Sam Harris, and Christopher Hitchens in “The Irrational Atheist” — is not a polemic in favor of ending the Federal Reserve, returning to the gold standard, or other such issues that dominate among fringe conservatives and libertarians. Rather, it is largely a cold, rational, even-handed assessment of the economic history of the past twenty years from the rise of Japan in the late 1980s to the financial turmoil of today.
(Disclosure: I am a frequent reader of and occasional commenter on Day’s blog, Vox Popoli. I also received a review copy of “The Return of the Great Depression.”)
Day, a Bucknell University graduate with degrees in economics and East Asian studies, begins by taking the reader to the year 1988 in Japan, where he was a student at the time. The scene he sets sounds eerily like 1920s and 1990s America. Unknown models could earn $225,000 per year for only “occasional catalog shoots.” Real-estate in the island nation sold for $140,000 per square foot. A year later, the Tokyo stock market comprised “forty-four percent of the total value of every equity listed on every stock exchange around the world.” Seventeen of the forty largest banks in the world were Japanese. Tokyo, as Day recalls with a few comedic anecdotes included, was awash with money, celebrities, and business deals. As readers might recall, the fear of Japanese dominance in this climate was indeed one of the themes of Michael Crichton’s 1992 book and film, “The Rising Sun.”
And then, as we all know, Japan crashed. For more than the next ten years, the economy was stagnant, deflation was dominant, and the stock and real-estate markets had lost all of their gains that occurred during the bull market. Today, as Day notes, the country’s debt-to-GDP level is four times higher than it was just after the crash, Japan’s government owes double the amount of yen as the economy makes in a year. Twenty years later, Japan has yet to recover fully.
Day cites research prepared in 2002 by Mitsuhiro Fukao for a symposium by the Japan Foundation at the University of Michigan to argue that Japan’s crash had three main causes: loose monetary policy [low interest-rates], tax distortions, and financial deregulation. As Day implies, this scenario should sound hauntingly familiar.
From just before the early-1990s recession to the aftermath of September 11, 2001, the Federal Reserve cut interest rates from ten percent to 0.75 percent. (Currently, the rate is just above zero percent.) The low cost of borrowing — combined with government initiatives under both Democratic and Republican administrations to increase homeownership, government deregulation of the financial sector, and financial institutions who stretched, if not outright broke, the law — led to the housing boom that eventually burst in a scenario not unlike that of Japan.
But this is old news. What Day sheds light upon over the next two chapters is the fact that U.S. banks — through fractional-reserve banking — have been living on a tightrope that is thinner than people realize and that economic statistics are massaged enough so that no one truly knows the current state of the economy.
For example, Day notes that the often-reported 10.3 percent cash-reserve ratio applies only to “institutions with more than $43.9 million in net transaction accounts and does not apply to corporate, foreign, or government deposits.” As the author writes: “if even one percent of the average U.S. bank’s customers closed their accounts and demanded their cash, the bank would be wiped out.” In sum, banks loaned and invested so much of their deposits that any crisis would cause many of them collapse. It is no wonder, then, that financial institutions are now hoarding money, resulting in the often-described “credit crunch.”
But Day goes on to observe, correctly, that the modern, U.S. economy — based on Keynesian theory — has needed debt to keep growing even though, as I observed in a prior post as well, such an paradigm was doomed to collapse. At an increasing rate over the past twenty-five years, consumers kept borrowing money — and banks were glad to loan the money — to live beyond their means and keep the economy afloat through consumer spending, which comprises roughly two-thirds of the Gross Domestic Product (GDP). Day accurately notes that such a “debt-based economy is little more than an economy-sized Ponzi scheme.”
Moreover, as Day writes in Chapter 4, the statistics on which policy makers and financial journalists rely hide the precarious state of the U.S. economy. Day presents records showing that the GDP figures from the Bureau of Economic Analysis between 2007 and 2009 vary at an average of $245 billion between the advance and revised numbers — and that the difference is great enough to change whether the economy is growing or contracting in many of those specific quarters. Day shows that government revisions — sometimes going as far back as 1929 — tend to overestimate GDP while understating unemployment and inflation. In the author’s view, the economy tends to be worse than what the government reports (usually out of a political desire to keep bad news hidden).
After spending the next two chapters discussing the Ricardian Vice (oversimplification in economic analysis), the Keynesian theory of economics, the Chicago school of monetarism, and whether the system of central banking has lived up to its purported benefits, Day launches into a chapter defending the theory to which he subscribes: Austrian economics. Without going into economic history and philosophy here, the author makes a point that is worth remembering: Austrian economists including Peter Schiff, Marc Faber, and Mike Shedlock were generally the only ones who predicted the current crisis. Day summarizes the Austrian view of the business cycle as such: credit expansion, economic boom, malinvestment, economic bust, liquidation and credit contraction.
Near the end of Day’s book, the author offers ten reasons why a second Great Depression will occur — and why it will be worse than the first — even though many analysts are currently predicting a recovery to be underway:
- The pre-2008 investment boom was larger than the one before 1929, meaning the downturn will match the upturn;
- Governments will enact fiscal policies that will ultimately prove harmful on greater scale than was enacted during the 1930s;
- Governments have less room for action because they are already constrained by debt;
- Loan defaults will extend from housing to other sectors including credit cards;
- Allowing so-called “zombie banks” to survive — as Japan did — will be more harmful in the long run than letting them fail;
- The full effect of the crash of the derivatives market is still unknown;
- Policies that encourage underemployment to combat unemployment even though it makes economies less efficient;
- The lack of a war — like World War II — to boost the national economy;
- The economic cost of any anti-climate change regulations; and
- The idea — controversial, to say the least — that the United States has entered a “Grand Supercycle bear market” in terms of long-term historical events that will balance the bull market that began with the Revolutionary War.
Day — who, it must be noted, is a writer who can make a persuasive argument without a finance degree — closes his book by offering six scenarios of what may occur in the U.S. economy. The most likely, as the title proclaims, is another Great Depression that will be worse than the first. (The least likely, he predicts, is a so-called “V-shaped recession” in which everything will revert to normal soon.) At the end, the author recommends several policies that he believes will salvage the U.S. economy as much as possible.
Now, it goes without saying that making economic predictions can be a fool’s errand at best. Economists can look at the past astutely, but if you ask five for their opinions on the future, you will get six answers. As Day himself notes, the U.S. economy is such a large, complex beast that no one — not a government agency, nor any economist, nor anyone — can accurately observe the present, let alone predict the future. But the author provides enough data and analysis to raise important questions on the stability of the foundation of the U.S. economy.
As Day notes in an early chapter, “the mainstream media from which we receive most of our information has an institutional memory that is measure in days, if not hours.” What he does best in his latest book is take a step back and show the reader the economic forest rather than the trees. And the forest, quite possibly, might be on fire.