ARE WE HEADING TO THE
DIRTY THIRTIES WRIT BIG?

William Krehm

The Governor of the Bank of Canada
It is the ultimate irony of the New Economy, the obsolescence of accountancy, and all the other jazz that made up the unsinkable endless boom, that the world bit by bit is coming to resemble the Dirty Thirties writ big. Four years ago, a Governor of the Bank of Canada ate humble pie for having let slip his concern about deflation.¹ And under pressure from whom, it has never been made clear. Instead he promised that he would regret having done so all his life. Yet there is nothing on our law books that forbids the mighty Governor of our central Bank from being worried about deflation as much as by inflation. Why doesn’t an enterprising reporter look up Mr. Thiessen and interview him on that quaint statement in the light of what is taking place in the world It would break the monotony of all those dreary reports of transnational corporations letting go tens of thousand of workers across the globe. It might also shed some light on just who led us into this mess.

The Finance Minister
And it was only a matter of months, since our Finance Minister and Prime Minister-in- Waiting Paul Martin, assured the Canadian public that our fundamentals were so ultra-sound, that we hadn’t a care about a recession the US affecting us. Mr. Martin is one of great statesmen who brought us Globalization and Deregulation, to say nothing of NAFTA. The Made-In-the USA Depression was bound to catch up with us because Mr. Paul Martin had surrendered all our defences. Our key employers are American-based transnationals who have bought up promising Canadian firms at bargain low-looney prices. And NAFTA has given us the US the Soft-lumber super-tax that makes a bad joke of its free-trade professions.

Reportage
When the high-tech companies cratered, the remaining golden hope was automobiles and real estate. And as though to rub in the irony of all this, it is a Canadian reporter, Greg Ip, not so long ago of the Globe and Mail and now at the Wall St. Journal who reports the death of these self-deceptions in two front-page articles of that paper (20/8). In one ( “A Year Into Slowdown, Economy’s Last Pillars Show Signs of Stress) he deals with cars and real estate: “ It is as though he were spelling out the impossibility of Canada with D&G being immune to any bad news that happens in any part of the world let alone in the US And as though he were putting it in the simplest terms for our Finance Minister, Ip chooses a small town in High-Tech territory for his illustrations.

That recalls one of the landmarks of downtown Toronto of the eighties, abandoned at the underground garage stageon which work was resumed - with Martinesque timing - just a few months ago.

Memory Lane
And to wander still further back along memory lane, it recalls the Toronto of the thirties whereat two downtown sites abandoned steel skeletons set the mood until after the war. One of these even developed a list, as though to drive home a point about the crazy economic system that led to such results. And following the example of many distinguished stock brokers, one of its developers jumped or fell from it to his death.

In the other piece “Companies Cash in On Corporate Bonds” Greg Ip whistle another tune out of the Thirties. “The Federal Reserve’s interest-rate cuts haven’t done much to lift stock investors’ spirits. But it’s a different story in the corporate-bond market, where borrowing costs have tumbled , unleashing a torrent of issues that have smashed full-year records.

The Dirty Thirties Revisited
That reproduces to the very cowlick the portrait of the Thirties, once the Depression had settled in as a way of life: businessmen were too frightened to spend, and people hoarded what money they had. That was what prompted the Argentinian-German economist, Silvio Gesell, to propose a special money that would require a stamp affixed to it each month to keep it valid and out of the mattress. A sort of negative interest payment.

The Fed
“This illustrates a conundrum facing the Fed.. It can do a lot to lower the cost of borrowing, but it can’t make borrowers, especially businessmen, spend. Capital investment fueled the late-1990s boom, and a lot of it was financed with debt. The financing gap - the shortfall between corporate investment needs and internally generated cash - soared to $265 billion last year from $65 billion a decade earlier, and as a share of non-financial corporate output, it hit 4.9%, the highest since 1974. That gap had to be financed by borrowing or issuing stock, leaving investment plans vulnerable to the mood of the market.

Into The 90's
“For most of the 1990s, that wasn’t a problem. Investors cared more about growth than strong balance sheets, and companies obliged by borrowing to expand, to acquire other companies, and to buy back their own stock, at the expense of creditworthiness. Beginning in the third quarter of 1998, Standard and Poor’s began downgrading more corporate issuers than it upgraded, a trend that continued for 12 straight quarters, surpassing the 11-quarter streak of 1989-1992.

“Several major commercial paper issuers defaulted, shaking up a market that rarely experiences default. Some of the credit ratings on Lucent Technology and Xerox, once corporate highfliers, were downgraded to junk-bonds, and the companies were forced to sell off pieces of themselves to get their debt burdens down.

“As business investment has plunged, so have interest rates on investment-grade corporate bonds relative to those on safer Treasurys, handing investors in corporate bonds one of their best years of relative performance, so far, ever, though it weakened in the past week. Companies have benefitted from lower borrowing costs, and reduced reliance on short-term borrowing that can be yanked in a crisis. Getting companies to actually spend requires a belief that their markets and cash flow will improve. Until then cash preservation comes first.” In fact more than a hint of the current Japanese situation.

Japan
So let us leave Greg Ip for a glance of what is perking in Japan. A preliminary word on Japan’s brilliant record during the Thirties, in applying Keynesianism before Keynes had discovered it, and once again in the postwar reconstruction. It made a point of conserving its skimpy foreign currency and directing it to the development of necessary infrastructures to build might export industries minimally dependent on imports, keeping interest rates and the yen low and credit abundant to strategic industries - regardless of what Washington might be advising. It got into first-class trouble only when against considerable resistance it weakened in resisting the Washington Consensus model forced upon it by the US and it loaded up with US real estate in the 1980s. More recently it has reduced its bank rate to practically zero, but strapped corporations have the same fortal fear of making investments as can be seen in the US. Hence the Associated Press report out of Tokyo carried by The Globe and Mail (20/8) is significant. “The Bank of Japan is under intense pressure from the government to fight deflation and encourage lending even though interest rates are already near zero. Japan’s benchmark stock index jumped almost 4% on Tuesday after the BOJ said it was increasing its purchase of long- term government bonds, but the market retreated at the end of the week, finishing near a 17-year low.

Conclusion
When the central bank buys long-term government bonds, the government in effect creates money on an interest-free basis: any interest paid on such debt reverts to the government. That puts the government in a position to undertake infrastructural investment with a freshly created supply of money that is not hobbled by a hump of interest costs. The trouble in the West is that the central banks have vacated that resource to private banks to bail them out of their 1980s insolvency. For the purpose, the Bank for International Settlements Risk-Based Capital Requirements declared the debt of OECD Governments to be “risk free” not requiring banks to put up any money to hoard it. With the present blue funk that has overtaken the private sector, private banks will not undertake the capital investment needed to revive the economy - exactly what happened in the thirties. Only the government can do that. But to make that possible it must reclaim the money-creation powers it surrendered to the banks in the early nineties. In the thirties the world had to wait for a World War to achieve the necessary government spending for this. Hopefully, we will not be dependent upon President Bush’s Missile Defense project to do likewise. Once againwe are back in the thirties biting our finger- nails to see whether we are smart enough make it possible for society “to buy cabbages without first having to build more machine guns.”

1. Name of Gordon Thiessen. Meltdown, Comer Publications, 1999, p. 312, Get Thee to a Monastery, Mr. Thiessen.