The Coming Economic Depression.

Published on “The Brasilians” newspaper in December 2002

“The Coming Economic Depression.”

By: Ricardo C. Amaral

We are in the beginning of a deflationary cycle; that means that prices will decline. The economies of Japan and Germany are already suffering because of this deflationary spiral. Few years ago many economists claimed that they had tamed the economic cycle, and that deep recessions and depressions were things of the past. When I read articles about that, I thought they were completely wrong.

The truth is the world is overdue for a new economic depression. Historically we had a depression in the world once every 55 to 60 years. The last world depression was over 60 years ago. A Russian economist, Nikolai Kondratieff, published a study in 1926 showing that a very long-term economic cycle existed. His major premise was that capitalist economies had a pattern of long wave cycles of boom and bust. The bust cycle repeated itself approximately every 60 years. If you had read Kondratieff's paper in 1926, you would have known that an economic depression was around the corner.

Kondratieff identified four distinct phases the economy goes through during each cycle: 1) Inflationary growth, 2) Stagflation, 3) Deflationary growth, and finally 4) Depression—falling prices, falling stock prices, falling profits, debt collapse.

As the stock market is collapsing, a number of corporate scandals emerge such as Enron, WorldCom, Global Crossing, Adelphia Communications, Arthur Anderson and many others. As the debt load reaches new highs in the economy, the result is a record-breaking number of personal and corporate bankruptcies, as is the case in the US today.

There are many countries around the world whose economies are in a state of deep economic depression such as Argentina, Brazil, Bolivia, Colombia, Paraguay, Venezuela, Uruguay, and also most African countries. This is just a small list of countries in deep economic distress.

We can add to this list of economies in distress, not only the US economy with its $ 8 trillion dollars of cumulative government debt (and continuing to grow), but also the local economies of most states in the United States. The most important states in the US economy are California and New York, and their economies are in shambles. If California was an independent country, its economy would be collapsing today in the same manner as the Argentinean economy.

To put the states' mess in perspective, I quote from an article published by The New York Times on December 9, 2002, "Loss of Boom's Billions Sink California – State With a France-Size Economy Now Has a Pacific-Size Deficit." The article said: "State officials are proposing deep reductions in education, health services and other programs to deal with a budget shortfall that could total $ 25 billion in the next 18 months. "That's a hole so deep and so vast that even if we fired every single person on the state payroll—every park ranger, every college professor and every Highway Patrol officer—we would still be more than $ 6 billion short," said the Assembly speaker, Herb J. Wesson Jr., a Democrat."

In the past, a major war was the way out of a economic depression. Maybe that solution will be used by the US one more time to restart its economy—a major war contributes to ending the depression phase, and leads the economy to the first phase of the cycle once again. The big war has to be started somewhere—even in Iraq.

Economic War

It is very hard for any country to create good paying jobs for everyone, to build a solid middle class and in turn generate economic growth and prosperity. Each year that goes by, it becomes even harder to create new jobs in the economy.

In 1995, a book was published , "The End of Work" by Jeremy Rifkin, which described in detail the current and future trends in the job market. I recommend reading that book to anyone who wants to understand the current catastrophic job market.

I will quote the following from Jeremy Rifkin's mind-opening book. He wrote in the introduction:

"Global unemployment has now reached its highest level since the great depression of the 1930's. More than 800 million human beings are now unemployed or underemployed in the world. That figure is likely to rise sharply between now and the turn of the century as millions of new entrants into the workforce find themselves without jobs, many victims of a technology revolution that is fast replacing human beings with machines in virtually every sector and industry of the global economy.

...In the past, when new technologies have replaced workers in a given sector, new sectors have always emerged to absorb the displaced laborers. Today, all three of the traditional sectors of the economy—agriculture, manufacturing, and services—are experiencing technological displacement, forcing millions onto the unemployment rolls. The only new sector emerging is the knowledge sector, made up of a small elite of entrepreneurs, scientists, technicians, computer programmers, professional educators and consultants. While this sector is growing, it is not expected to absorb more than a fraction of the hundreds of millions who will be eliminated in the next several decades in the wake of revolutionary advances in the information and communications sciences.

...Now, for the first time, human labor is being systematically eliminated from the production process.

...Substituting software for employees...To begin with, more than 75 percent of the labor force in most industrial nations engage in work that is little more than simple repetitive tasks. Automated machinery, robots, and increasingly sophisticated computers can perform many if not most of these jobs. In the United States alone, that means that in the years ahead more than 90 million jobs in the labor force of 124 million are potentially vulnerable to replacement by machines. With current surveys showing that less than 5 percent of companies around the world have even begun to make the transition to the new machine culture, massive unemployment of the kind never before experienced seems all but inevitable in the coming decades.

...A study was published in 1989 by the International Metalworkers Federation in Geneva forecasting that within thirty years (by the year 2019), as little as 2 percent of the world's current labor force will be needed to produce all the goods necessary for total demand." I want to remind you that it is 2 percent of today's world labor force and not 2 percent of the world labor force in 2019, which could have many more millions of people.

The Current Job Market

As we can see, it will become even harder for countries to create jobs in the future for their population. A job, any type of job, it is worth saving to keep most of the members of the population employed. Keeping jobs in your country has become more important than ever before.

The Star-Ledger, the largest newspaper in New Jersey, had a front page article a few months ago saying that: when people in New Jersey who were on welfare needed information about their welfare benefits, they called a number, and the people answering their questions were located in Bombay, India. To pay lower wages and save some money, New Jersey State exported many New Jersey government jobs to Bombay, India.

In November 2002, George Bush said that in the next two years he would privatize over 850,000 federal government jobs. That means that most of these jobs will be transferred to companies that pay lower wages with no benefits. I will not be surprised if most of these federal government jobs also are exported to India or Mainland China as well.

I see first hand on a daily basis, when I go to the labor department, what is happening to unemployed workers in New Jersey. Two people were evicted from their homes recently. Another person was in the process of his car being repossessed. Three other people have filed for bankruptcy protection under chapter-7. And most of the other people, who have used up their unemployment extensions, are now depleting any savings that they have left for their retirement. These people have no idea how they will be able to manage financially, when they get to retirement age, and all their savings are gone.

The situation is getting more and more scary by the day, since I see a drastic increase of people who are losing their jobs and coming to the labor department to ask for help. The quality of the people unemployed is mind boggling, since 50 % of today's unemployed have at least a college degree. One of the people that I see at the labor department is a young man who graduated from Harvard University, and he also has an MBA from Wharton School of the University of Pennsylvania. Even with these outstanding credentials, he has been looking for a suitable job for over a year.

For the first time in US history, 50 percent of the people who are unemployed are well- educated people. Does it make any difference if the unemployed people are well educated or if they are blue color workers? You bet it does.

The well-educated people can see that the people in Washington do not have a clue about economic policy. The economy is going to hell, and the only thing that the Bush administration can come up with is tax cuts. Tax cuts will not help the growing number of unemployed people in the US, because if your income is $ 0 for the year, your taxes also will be automatically $ 0. The Bush administration has a terrible record on job creation—since George Bush was selected as president of the United States by the US Supreme Court two years ago, the private sector of the US economy has lost over 2.5 million jobs.

I believe that the Dow Jones will sink to the 5,000 to 6,000 levels when the US corporations start expensing their real pension costs, plus the costs of stock options, and when they stop fudging their numbers. When many US corporations start reporting more realistic numbers to the public, their earnings will go down—and the stock prices will follow. It is well understood that when corporations such as General Motors, and Ford are in trouble at the same time—that means that the entire US economy is in trouble.

The Federal Reserve is running out of room. They can lower interest rates to 0 % as in Japan, but they will not be able to restart the US economy. With so much over capacity in the US economy and around the world, which industry will be able to take advantage of low interest rates? Maybe the Bush administration might be expecting a new economic boom in the telecom industry or the airline industry. The housing bubble is ready to burst.

So much hype for the American dream, but according to the Bureau of Labor Statistics out of 100 people that start working at age 25, by age 65—1% are wealthy, 4% have enough money to retire, 3% are still working (can't afford to quit), 63% depend on Social Security, friends or charity, 29% are dead. The reality is most Americans retire in poverty after working for 45 years.

For the people who are unemployed, the economic depression is already here. For the people who still have jobs, they know that if they lose their jobs it will be almost impossible to find a new job. The difference between past recessions and the current job slump, is that the people laid-off in the past, would be rehired when the economy recovered. This time around most people's jobs have gone forever.

We are in the beginning stages of a worldwide depression. The Bush administration recognizes the reality—the best days of the American economy are long gone, and today the system is running on borrowed money. The federal government, the states, the companies and the public are all surviving on credit. How far can this situation keep going on before the house of cards collapses?

Copyright © 2002 All rights reserved.

By Ricardo C. Amaral

Author and Economist

brazilamaral@yahoo.com

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