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In the Shadow of 1937

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  • In the Shadow of 1937

    In the Shadow of 1937
    December 26, 2006 (John Batchelor - NY Sun)

    Not since 1937 have the richest 1% of Americans been so far above the average citizen in assets and earning power as today. More, these one percenters are not coupon-clipping, Palm Beach-squatting heirs. They are wage earners and entrepreneurs, and their prospects just get grander as globalization grows the market capitalization of all enterprises. Further, the one percenters are pulling away not only from everyone in general but also from the richest of the rest. Their income has doubled since Ronald Reagan, while in the same time frame the merely rich, the 90th to 95th percentiles, have flatlined.

    What this means today, brooding on George Santayana's drollery that you are doomed to repeat the history you don't learn from, is that it is useful to travel back to New York City in 1937 to see what severe and, truth be told, grotesque income disparity might mean in the world of affairs ahead.

    AntiSpin: We've drawn the parallel between 2007 and 1937, two periods when government intervention to manage post bubble economic pain, as an unintended consequence, produced wealth and income inequality. Here Batchelor extends the comparison and takes it to its logical conclusion.

    The October 19, 2006 iTulip piece Dow 12,000: Not a bubble, but not healthy growth, either" states, "This bounce has more in common with the US market bounce in 1937 that was fueled by the sudden surge of inflation and liquidity produced by the Fed starting in 1933, and the temporary increase in industrial production that followed, as you can see in the charts below."




    Batchelor says:
    The rich got richer in 1937 not only because of their assets but also because of a deepening worldwide deflation that, destabilizing democracies, favored strongmen on all continents. In Spain, in the proxy war between communist Russia and capitalist Europe, leftist rebels claimed that two "Reich Divisions" were en route to aid the government forces under Francisco Franco. In Moscow, the mood was drunken self-denial, the crammed Metropol Hotel charging 115 rubles for half a bottle of foul Soviet champagne. In Berlin the mood was grim ambition. Propagandist Joseph Goebbels's official newspaper, Angriff, asked, "Will War Come Automatically?" Four-Year Plan boss Hermann Goering proclaimed, "Full steam ahead to assure German honor and German rights." And Hitler admonished, "Fulfill in the new year the eternal watchword, ‘Everything for Germany'."
    Actually, the rise of strongmen has a greater correlation to hyper-inflation than deflation. Nations that suffered deflation during The Great Depression tended to maintain their democratic institutions. Quoting from the iTulip bible, galbraithmoney by John Kenneth Galbraith (Houghton Mifflin, 1975), Economic woes leading to Fascism or Communism: The Economic Policies of Hitler:
    "That the great German inflation, like the ones elsewhere in central Europe, produced a large transfer of wealth from those who possessed saving accounts, money, securities or mortgages to those who had debts or tangible property is assumed. And, despite a shortage of affirming statistics, that such transfer occurred does seem plausible. The loss so involved, the parallel lost by people of their stake in the social order and the companion anger and frustration were, in turn, thought to have much to do with the rise of Fascism or Communism. These are matters on which there is no proof, and it is unbecoming, however customary, to substitute certainty of statement for hard evidence. But the simple facts are worth a glance. All of the countries of central Europe that suffered a collapse of their currencies following the First World War were eventually to experience Fascism, Communism or in most cases - Poland, Hungary, East Germany - both. The countries that did not experience such a breakdown in their money were almost uniformly more fortunate."
    To take Batchelor's points a step further, it is likely that Japan's "lost decade" combined with the threats posed by an increasingly economically powerful and militarized China produced the social shift in Japan that resulted in the election of the hawkish Japanese Prime Minister Shinzo Abe.
    After a decade of economic slough, Japan is surging back. Amid signs that it is maintaining its economic recovery, the land of the rising sun recently took two significant steps toward shaking the bogeyman of its World War ii legacy and reasserting Japanese nationalism.

    On Friday, December 15, the Japanese Parliament passed a bill that upgraded the Japanese Defense Agency to full ministry status. This takes the new Japanese Defense Ministry into the cabinet arena along with other top government departments. Significantly, the defense bill enjoyed the support of the Diet’s main opposition Democratic Party, making it, with the exception of two minor opposition parties, a virtual bipartisan affair.

    All that now remains for Japan to finally legitimize itself as a fully fledged member of the international community empowered by parliamentary authority to act militarily, both defensively and offensively, beyond its own shores, is to change Article 9 of its postwar constitution which, in theory, presently prevents Japan from so engaging. Shinzo Abe is on track to obtain that change during his first tenure as prime minister.

    Barely an hour following this historic change in the Japanese government, another bill was approved along party lines requiring schools to teach patriotism. Consistent with Prime Minister Abe’s efforts to have Japan shed remaining taboos associated with the nation’s inglorious defeat in World War ii, the Japanese leader had made this legislation a key plank in his political platform. He understands clearly that the old generation that still remembers that huge national loss of face is dying out. The new generation needs a fresh focus on the nation’s future. To this end, schools will now be charged with the responsibility to generate and instill a new sense of national pride in their students. Japan—on the Rise Again
    A distinct rise in militarism and idealism, paralleling a decline in diplomatic engagement and pragmatism, is spanning the globe, from East to West. A more nationalist Japan is but one of the wild-card geopolitical antecedents for political turmoil in the next few years as the liquidity driven economic boom of the past four years winds down and a major global recession begins, much as during the period following 1937.
    Last edited by EJ; 12-26-06, 01:42 PM.

  • #2
    Re: In the Shadow of 1937

    Conclusions? The 1937-2007 parallel is a compelling one in some very fundamental ways. I can also think of some with circa 1975. If we could count on history to repeat, investing for 2007 would be a slam dunk. But assuming that rather than repeat, history rhymes, what can we conclude? Stocks, bonds, commodities, real estate, cash ... which to overweight, which to underweight?
    Finster
    ...

    Comment


    • #3
      Re: In the Shadow of 1937

      Yes;

      In 1975 the American people perceived inflation as a threat. Now, through the last 15 yrs, inflation has been masked. Finster is right, in that every time we have a " new " crises it might be similar but isnt exactly the same. What is the same is that the government must step in and redistribute wealth. This goes againist my Libertarian beliefs but it is the only way semi equality can be achieved ; that is without a complete meltdown of the government and economic systems as we know them.
      I one day will run with the big dogs in the world currency markets, and stick it to the man

      Comment


      • #4
        Re: In the Shadow of 1937

        Originally posted by EJ
        [B]

        Not since 1937 have the richest 1% of Americans been so far above the average citizen in assets and earning power as today.
        In one of those interesting serendipitous moments, I ran into hard some data last week on the "wealth gap"... and here's the result.

        http://www.NowAndTheFuture.com

        Comment


        • #5
          Re: In the Shadow of 1937

          Bart, what about the other 29%? Why aren't they accounted?
          Jim 69 y/o

          "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

          Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

          Good judgement comes from experience; experience comes from bad judgement. Unknown.

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          • #6
            Re: In the Shadow of 1937

            Originally posted by bart
            In one of those interesting serendipitous moments, I ran into hard some data last week on the "wealth gap"... and here's the result.

            Kinda needs a log scale doesn't it Bart? .001% to 100% ????

            Comment


            • #7
              Re: In the Shadow of 1937

              Originally posted by spunky
              Yes;

              In 1975 the American people perceived inflation as a threat. Now, through the last 15 yrs, inflation has been masked. Finster is right, in that every time we have a " new " crises it might be similar but isnt exactly the same. What is the same is that the government must step in and redistribute wealth. This goes againist my Libertarian beliefs but it is the only way semi equality can be achieved ; that is without a complete meltdown of the government and economic systems as we know them.
              FWIW, I think what has happened is the government already has redistributed wealth - in favor of the wealthy. Just the latest example is the Fed's serial bubble blowing. In the past few years, the Fed drove interest rates down to multi-generational lows, prompting millions of homeowners to "equity extraction". Folks, they "extracted equity" - real, long term wealth - in order to spend on stuff that wears out or burns up - consumer goods and energy. Sending that wealth overseas in the process, the financial establishment turned record profits as it took a cut of the wealth as it passed through its hands. The whole process was greased by cutting taxes on international commerce to the bone even as those on American labor and production were left in place.

              If the government would simply stop redistributing wealth, a lot of wealth inequality would go away.
              Finster
              ...

              Comment


              • #8
                Re: In the Shadow of 1937

                Originally posted by Finster
                But assuming that rather than repeat, history rhymes, what can we conclude? Stocks, bonds, commodities, real estate, cash ... which to overweight, which to underweight?
                Indeed, the $60,000 question =)

                I think history can be instructive, but we shouldn't try to impress the mould of the past fully on the present. I prefer to focus mostly on today's fundamentals. Given those, I see massive inflationary pressures soon on the horizon (perhaps surfacing only some time into the major upcoming recession), widespread financial system crisis (greater than the S&L scandal), and the bursting of the remaining financial economy bubbles (including the stock market). However, the market declines may not happen in nominal terms, so I think real asset plays are the most attractive.

                Look at the S&P 500, for instance: while up supposedly near 14% on the year, it is actually only up a little over 5% when adjusted for the dollar's devaluation over the same time period.

                You wouldn't want to have shorted that market, but on the other hand, your money would have been better allocated to gold and other natural resources/commodities (gold itself was up about 10% on the year with the same dollar devaluation adjustment).

                Comment


                • #9
                  Re: In the Shadow of 1937

                  I was a sucker for the 1974 analogy and now after reading this I'm a sucker for the 1937 analogy.

                  God, I'm easy!

                  Comment


                  • #10
                    Re: In the Shadow of 1937

                    Originally posted by Charles Mackay
                    I was a sucker for the 1974 analogy and now after reading this I'm a sucker for the 1937 analogy.

                    God, I'm easy!
                    Probably elements of both at work, Charles. In fact, the experiences of the 1930's and the 1970's were quite similar at a fundamental level. Remember the 1930's started out with the price of gold fixed in dollars - and as the value of the gold rose, so did the dollars. In the 1970's that link was severed, and the value of the gold rose just the same, while the dollar was free to fall in relation to it.

                    In both cases, we had deflation in gold terms. More generally, the value of claims on assets fell in relation to that of assets themselves - the hallmark of a deflation of inflated claims.
                    Finster
                    ...

                    Comment


                    • #11
                      Re: In the Shadow of 1937

                      Originally posted by Charles Mackay
                      Kinda needs a log scale doesn't it Bart? .001% to 100% ????
                      Believe it or not, that actually is a log scale and chart.

                      Excel does a pretty poor job with many log based charts, which is the main reason I seldom use them. But I had no choice with that extreme range of data - $900 to $16 million.
                      http://www.NowAndTheFuture.com

                      Comment


                      • #12
                        Re: In the Shadow of 1937

                        Originally posted by bart
                        Believe it or not, that actually is a log scale and chart.

                        Excel does a pretty poor job with many log based charts, which is the main reason I seldom use them. But I had no choice with that extreme range of data - $900 to $16 million.
                        Must be okay...

                        Hey, even Mr. Log F. Chart didn't complain ... ;)
                        Last edited by Finster; 12-26-06, 07:26 PM.
                        Finster
                        ...

                        Comment


                        • #13
                          Re: In the Shadow of 1937

                          Originally posted by Finster
                          Must be okay...

                          Hey, even Mr. Log F. Chart didn't complain ... ;)

                          My first cut actually was a linear chart with left and right scales. But the data and points are tougher to really understand and see:




                          So I had to lower myself to log style... ;)
                          http://www.NowAndTheFuture.com

                          Comment


                          • #14
                            Re: In the Shadow of 1937

                            Yes, I agree Finn...both times were a revaluation of real vs. paper wealth. My relatives used to be farmers in Northern Ohio and they always said that the "fabulous 40's" were the best farming profits they ever experienced (in real terms). Maybe that is the overriding consensus and most important distillate we can come to. The tangible boom in relation to paper is the big similarity between the two periods.

                            Comment


                            • #15
                              Re: In the Shadow of 1937

                              Originally posted by Charles Mackay
                              Yes, I agree Finn...both times were a revaluation of real vs. paper wealth. My relatives used to be farmers in Northern Ohio and they always said that the "fabulous 40's" were the best farming profits they ever experienced (in real terms). Maybe that is the overriding consensus and most important distillate we can come to. The tangible boom in relation to paper is the big similarity between the two periods.
                              It's a kind of asset musical chairs ... the number of chairs stays the same, but more and more people get tickets entitling them to one. It creates the illusion of an increasing number of chairs ... more and more wealth. That is, until the music stops and people start to stake their claims. Then the market value of the claims falls back into line with the number of chairs there really are.

                              The whole process is staged by the moneyed powers through the agency of the central bank. In the US before 1913, the normal feedback mechanism brought the value of claims back into line with the value of the assets themselves before it got too far out of whack. Then the Fed was deliberately chartered with the objective of expanding credit, almost as if the value of claims could be forcibly kept rising without any regard to the underlying assets. It succeed for a while, but by the end of the 1920's reality began to reassert itself - calamitously.

                              Pretty much the same thing happened all over again in the sixties and seventies, but this time, the currency unit was untethered from anything tangible ... so that rather than the value of claims on assets plunging in nominal terms, the dollar itself plunged right along with them, giving rise to an illusion that the claims were more or less holding their value. Of course, this illusion was laid bare as well, as people eventually found that their power to buy something tangible with claims fell regardless.

                              It cannot be otherwise. Each cycle seems to bring progressively more clever means to perpetuate the illusion as long as possible, but the result is always the same. We're seeing a repeat of the same phenomenon on the heels of a mega-bull-market in claims during the eighties and nineties. Over and over the cycle repeats - the value of claims is inflated beyond the value of the assets upon which they are claims - and then they fall back again.

                              The effect is an almost extraordinary popular delusion and apparent madness of the crowd...

                              (BTW ... loved your book ... ;))
                              Last edited by Finster; 12-27-06, 04:09 PM.
                              Finster
                              ...

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