(This is Part 9 of a series. Go back to Part 8.)
Proponents of the idea that the United States is headed for a depression without inflation point to the example of the U.S. in the 1930s. They remind us that the U.S., in the years prior to 1929, built up giant credit and speculative bubbles, just like now.
When the bubbles burst, America suffered a deflationary depression. Won't this be the same, only more so because the bubbles are much larger?
I do believe that we'll get the depression part all right— that is, a severely declining economy and increasing unemployment—but at the same time, I think consumer prices may very well be rising relentlessly. How so?
Well, there seem to be four main differences between the U.S. then and the U.S. now. Like so:
First, in the 1930s the United States was the world's largest creditor nation. The U.S. was self-sufficient in capital. Contrast that with now, when the U.S. is the world's largest debtor nation and is running gargantuan (and rising) budget and trade deficits.
In fact, we must import billions of dollars every day just to keep functioning. In doing so, last year we consumed
80% of the world's savings. What happens when, to feed our ravenous bubbles, our capital needs exceed 100%?
Second, in the 1930s the United States was the world's manufacturing powerhouse. We were self-sufficient in manufacturing. Contrast that with the present time, when our manufacturing base is steadily eroding to lower-wage workers and lower-cost factories in China, India, eastern Europe, South America, Mexico and so on.
Consider the statistics: The United States has lost over
3 million manufacturing jobs in the last few years. The U.S. must now import 38% of its durable goods, 56% of its computers and office equipment, 71% of consumer electronics, 78% of apparel and so on.
What this means is that even if the dollar falls a great deal further—which it must because of our burgeoning trade deficits—we will still need to keep importing many of our manufactured goods. And as the dollar falls, the price of those imported goods will go up.
Third, in the 1930s the United States was self-sufficient in energy. Our major oil fields were just being discovered and we supplied virtually all of our energy needs. Today,
we must import 60% of our energy needs, without which our economy cannot function.
Thus, when the dollar falls further the price of oil will go
up in dollar terms, and we will have to keep importing it nevertheless. Furthermore, there is rising competition for the world's increasingly scarce fossil fuels, which will keep putting upward pressure on oil and related prices for the foreseeable future.
Fourth, in the 1930s the U.S. dollar was backed by gold. Today it is backed by nothing at all; it's a fiat currency, meaning that the government can create as much of it as it wants. The law of supply and demand still holds: As more and more dollars are created, both in terms of money and credit, the value of each dollar must go down.
The great analysts Jim Puplava and Frank Barbera feel that the correct analogy for our current situation is not the U.S. in the 1930s but Argentina in the 1990s. I agree with them.
As the incisive analysts Jim Puplava and Frank Barbera have noted, the correct analogy for our current situation is not the U.S. in the 1930s, but Argentina in the 1990s.
(This is the end of Part 9. Go to Part 10.)
—jim sloman, 5.25.05
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