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To look forward, we sometimes need to look back. But one lifetime is not enough. Our lives are often unlike those of our parents. They tend to have more in common with those of our grandparents, particularly when it comes to the larger economic realities. Thus, 60 or 70 years ago is often the place to look for the lessons of today, and not in the adult memories of our own parents. Thinking of that big cycle, I believed the childhood part of my father's story, was going to be the most relevant to today's news. The years of the roaring '20s and the stock market and huge spending boom which preceded the 1929 top do seem to foreshadow the period we are living through now. After the Tech and Internet Boom of the 1990s, the market peaked and the stock market bubble burst. We now remember 2000 ushered in a two year plus stock market slide, but nothing to rival the Wall Street Crash of 1929-1932. The generosity of our modern Federal Reserve has, so far, saved us from a slide into economic crisis. People have kept spending, using cheap borrowed money, and easy credit supported by rising house prices. As I write this, the property bubble is still growing, and our American dream of never-ending abundant times are still intact. In those older days of my father's youth, people were also ambitious and optimistic. They traded up when possible, and borrowed money if needed, in order to improve the quality of their lives. My father wrote about those times:
"One afternoon in the summer of 1929, I heard a horn blowing in front of our house. I looked up and saw a brand new Model "A" Ford with my dad at the wheel. It turned out that he had traded the old Model "T" with the rumble seat in for a brand new Model "A". It was a great car and the whole family piled in and went for a ride. I was ecstatic!" (Hampton, James E., My Fabulous Journey Through Life, Family Archive, 2003, page 4.) But that magical car did not stay in our family long. Within a few months, the economic climate had changed, and my grandfather lost his job, making it impossible to keep up the payments. So the car got repossessed, along with the new cars of many other unfortunates who also lost their employment and their regular wages. And with the job losses, the stock market crash of 1929 morphed into a severe downturn in the economy.
The slowdown was aggravated by a collapse in credit. In the roaring twenties, it was easy to borrow money, for building new homes or buying new cars. Some, like my grandfather who had worked as a piano tuner, got credit beyond what that they could readily service. So when the work dried up, and money got tight, the payments became impossible. In the thirties, America became glutted with repossessed cars and houses for sale. Demand for new products faded, and the wheels of industry slowed to a crawl. With no pay coming in, my father's family lived for awhile on the property of his maternal grandfather, who was better off than they were. My father was very impressed by the apparent wealth of his grandparent: he possessed his own home and even a housekeeper. But there suddenly there were too many hopes riding on one old man. "There was not enough room in this grandfather's house for our entire family so we were forced to pitch a tent in the front yard. We had use of the house for tending to our personal needs and for some of our meals." Beyond most of his contemporaries, Grandpa Hupp was a man with intellectual curiosity. Perhaps as a sort of symbolic effort to hold onto his dreams in the fading good times, this grandfather began inventing. My father described his efforts:
"One thing I remember vividly about grandpa was his mechanical ability and aptitude. He invented, developed, and constructed an ingenious 'perpetual motion' machine. It was constructed of shiny metal and he kept it highly polished. It was about six feet tall and resembled a ferris wheel. All around the circumference of the wheel were attached frames which encased rolling weights which would flop over at the apogee and impart downward forces to the wheel. It was so efficient that it would rotate for long periods of time without the addition of any outside force. At the time I didn't know there was no such thing as perpetual motion, so I was convinced that he had a good thing. I often wonder how he felt when he found out it couldn't be done." (Ibid.,page 5) Now for some reason, perhaps it is the Rube Goldberg images (Heath-Robinson for those in the UK), this passage makes me think of Mr. Greenspan, who seems to think that he has perfected a perpetual motion machine for our time. In Greenspan's case, the motion he is seeking is that of dollars, since the economists of our time bizarrely measure growth in our economy in terms of spending, not in the number of jobs being created domestically. Greenspan's wheel was set in motion in the 1990s and early years of this new century, when the Fed made repeated cuts in interest rates. Lower rates, have worked like the accelerators on Grandpa Hupp's machine, triggering spending spurts as homeowners refinanced their mortgages. But this Greenspan mechanism may meet the same fate as did great Grandpa's non-perpetual machine. Like the aggressive home and car buyers of the 1920s, people of our time have believed it is safe to borrow aggressively to improve their lifestyles, particularly when their homes have risen in value. Higher debt levels in a falling interest rate environment often come with little or no increase in monthly mortgage payments. So why not take the extra money, by borrowing more, when it seems it will be so easy to repay through a fixed payment, backed up by the security of a fast-appreciating home.
It is not a closed system, nor is this financing done in a vacuum. Money borrowed through our modern refi's has gone only partly into property investments. Consumer spending has shot up also. An important part of that money has circulated out of the US to China and Japan to pay for the imported goods that keep flowing into our country. Fortunately, our new bankers in the Far East also want to keep the big wheel turning, since from their point of view, all those exports to America create jobs back in China and in Japan. They also realise that the competitiveness of their goods in the global market might be endangered, if their currencies were to rise sharply against the dollar. So they have been investing their growing surpluses of dollars back into the US, usually buying Treasury Bonds. And this recycling operation has seemed like a virtuous cycle for the US economy. Strong foreign buying of bonds, have allowed Greenspan to keep both long and short term rates down. Confidence in the momentum of the economy has grown, even though actual job creation has remained anemic, weaker than is normal in a recovery coming out of recession. The net result of the action of Greenspan's money machine is that Debt has grown in the US, while China and Japan have accumulated massive holdings of US debt. Meantime, other investors seeking better returns than on US government T-Bonds, have gorged themselves on mortgage-related debt, the product of the refi boom. By mid-2004, U.S. Household debt had risen to 86% of GNP, up from 64% just ten years earlier, and foreigners hold a majority of US treasury debt, up from almost insignificant amounts in 1994. (source: Comstock Partners, as quoted in Barrons, 25 Oct.2004) So the wheel turns round and round, with consumer goods flowing into our country. Because the money flowed back from exporting countries- we have paid for purchased goods, not through working and earning higher incomes, but simply by increasing our debt. So far, this vendor finance, recycling operation has seemed painless. For a long time, we hardly noticed as debt built-up rapidly in the form of increased household mortgage debt and as massively increased liabilities of the US government. But the bad news is that, slowly and quietly, the US has lost control of its own destiny. Grandfather Hupp couldn't get his wheel to turn forever. And neither will Mr. Greenspan be able to keep the foreigners money rolling into a profligate consumer economy. At some point, the Chinese and Japanese will lose their appetite for US debt, and when that happens we are likely to see a sharp collapse in the dollar. When that shock hits, interest rates may need to rise to much higher levels to bring our lenders back. And high rates will have a potentially disastrous impact on our overheated housing market and the fragile US economy which has lost so much of its manufacturing industry to workers in foreign countries. Meantime, the US debt bubble grows inexorably, and the system becomes more unstable. The inevitable friction reveals itself in higher commodity prices, as the Chinese appetite for commodities like Energy and Metals grows along with their expanding economy. They are beginning to realise that it is better to hold commodities that they need to fuel their economy, and gold which holds its value, rather than dollars which are backed by nothing more than a future promise to pay. Like my father, I wonder what will happen to Greenspan and our economy, when we wake up and discover that the wheel that keeps turning on cheap money and seemingly-perpetually growing debt cannot go on growing forever. The excess of the Twenties, were followed by the Long dark days of Depression. Our excesses will also bring a long period of repair and correction too. I can only hope it will not bring on another depression. My father's memories of the depression are chilling, like a scene from a movie about a distant country, or distressed planet. A lot of things we take for granted, like cheap food and energy, were simply not affordable: "Our family situation was very bleak. I remember on several occasions, taking a bushel basket in my wagon and going down to a store on Wyoming Street to get a bushel of coal for twenty-five cents to keep us warm for the night. When we didn't have any money to buy a bushel of coal, which occurred sometimes, we all gathered in the kitchen and lit the gas oven to keep us warm. Usually after a few days of this, we would get our welfare allotment of coal dumped into our coal bin and be good for another few weeks. For our food, we depended upon welfare coupons. We used them at our local C.F. Smith store, which in those days could be found at strategic locations all over the city of Detroit. We never seemed to have enough food! I remember we ate a lot of potatoes, pork and beans, eggs, homemade navy bean soup, biscuits and corn bread, but not much meat. When we did have meat it was cheap ground beef. I'm sure this was because my mother was trying to get as much as possible with welfare coupons." (Ibid., page 11.) When I read this, I am amazed when I recall that our modern concept of "core inflation" excludes food and energy. As if we could ever get by without these items. Instead, our current low inflation has been kept low by all those cheap things, from clothes to shoes to phones, which can be manufactured in China, which is maintaining its currency link to the US dollar, perhaps artificially, by recycling all those excess dollars from export sales to us. Here's what my father wrote about how his family coped with minimizing those other expenditures: "We seldom got any new clothes, but my mother always kept the old ones clean and well mended. I came up with a system of wearing socks with holes in the heel. I folded the good part of the sock, which was above the hole, down under my heel before I put my shoe on. Ingenious! I also became quite adept at cutting out card board inserts to place over the holes in my shoes. I could go on with this list, but you get the idea." It does sound bleak, and very miserable. But the human spirit does not get crushed so easily. When everyone is enduring hardship together, something often blossoms from hardship: co-operation, generosity, and a sense of kinship. My father felt that too: "Actually, we kids were happy at the time. I think one of the things that got us through the depression was that we didn't really know how bad off we were. Because most of our own neighbors were experiencing the same difficulties, I guess we thought that was the way things were supposed to be." If hard times do return to America, I believe that once we get over the initial shock over the changes in our living standards, things will be alright. In times of abundance, we forget our neighbors. In times of hardship, we remember them, and they remember us. Then, maybe the true spirit of America can be reborn. America the wasteful, and America the world's policeman, can both be assigned to the dustbin of history. A new America, with a bigger purpose, can then emerge: the historical America of the inventive spirit. We can help ourselves and the world to find and build new forms of energy which will be less wasteful of limited resources, and kinder to future generations and the flora and fauna with whom we share the planet.
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