Hindsight: perhaps we really did live too well too long

Filed under: Hazlehurst |

The world crisis, which has seen the arcane financial system that underpinned a globalized economy disintegrate, is far from over. Think of the Panic of 1907, the Depression of the 1930s and the economic “dead zone” of the 1970s — events with repercussions that eventually affected all businesses, not just Wall Street.
We’ll see profound changes in the business landscape, which will go far beyond the usual strategies that characterize slowdowns. Businesses will, as you’d expect, trim payrolls, precisely target advertising, postpone capital expenditures, pay late and collect early, reduce debt and increase liquidity.
This is Management 101: coping with a recessionary environment.
When such recessions end, businesses usually emerge leaner, stronger and more competent — ready to resume growth.
But this crisis, a worldwide storm that has spared no country, no bank, no business and no regulatory structure, will leave a ruined landscape. Businesspeople might find themselves, like the residents of the Texas Gulf Coast, wandering dazed through the wreckage, wondering what comes next, forced to rethink the fundamental beliefs that drive their enterprises.
And just as Texans will rebuild their lives, businesses will rebuild and recreate — but the new world may bear little resemblance to the old.
Ours has been a time of wealth, driven by the debt-fueled “irrational exuberance” of worldwide booms in commodities, real estate and securities of all kinds. Every such era — the 1920s, the 1960s and the 1980s — has ended with a thud. And this thud is, as a stockbroker might have said after Black Tuesday on Oct. 29, 1929, a real doozy.
It’s worth remembering what happened to the stock market at the onset of the Great Depression.
During the summer of 1921, the Dow Jones Industrial Average made a yearly low of 63.9. Eight years later, on Sept. 3, 1929, it reached 381.2. It’s doubtful that any of those who participated in that heady market suspected that a quarter of a century would elapse before the Dow surpassed that mark.
At the end of the day on Black Tuesday, which was preceded by Black Monday and Black Thursday, the market stood at 260, down more than 30 percent. But instead of recovering, as investors anticipated, the market declined for three years, bottoming out during July 1932 at 39, off 89 percent from its 1929 high.
Years of hard times changed Americans.
My parents, who as 20-somethings benefited from the careless prosperity of the 1920s, became addicted to thrift. They saved, they scrimped, they did without. Both worked, but the family house on Tejon Street never got a fresh coat of paint, the old oriental rugs were threadbare and we always ate at home. Nothing was thrown away — it was kept against an unknowable future.
Their friends and neighbors were just as careful, just as cautious, just as hesitant to spend money. Even when the economy improved, they didn’t change. They knew from experience that good times end, that money’s hard to earn and easy to spend and that borrowers come to grief.
The generations that succeeded them have been profligate and spendthrift. We’ve seen ourselves as players in, and beneficiaries of, the world’s most powerful economy. Saving was just an option — but spending was a necessity.
But, thanks to the “fall,” we think differently.
A CNN poll posed this question:
“As you may know, the U.S. went through a depression in the 1930s in which roughly one out of four workers was unemployed, banks failed across the country and millions of ordinary Americans were temporarily homeless or unable to feed their families. Do you think it is very likely, somewhat likely, not very likely, or not likely at all that another depression like that could occur in the U.S.?”
Very likely — 21 percent
Somewhat likely — 38 percent
Not very likely — 29 percent
Not likely at all –13 percent
Every economic recovery since the 1930s has been driven by consumer spending — which, since the 1950s, has been the economy’s most important component. Consumers who believe we’re headed for a depression are not going to lead a recovery. They might so change their behavior that previous economic models become untenable.
Imagine a nation of savers, not spenders. Imagine businesses which are driven not by seeking growth, but by cutting costs and maintaining market share. Imagine homeowners who stay in their houses for years and pay off their mortgages.
Such a nation would reshape businesses everywhere. Major sectors of the economy would disappear. Business travel would evaporate, as would upscale retailers, boutique hotels and other service providers to the suddenly parsimonious rich.
Will it happen?
We’ll see. But we’re in uncharted waters. Ours was a spectacular boom of unrivaled longevity — and the party had to end someday.
As a friend said about the unfortunate adventurer Steve Fossett, whose crashed plane was recently found in the California wilderness, “There are old pilots and bold pilots — but there are no old, bold pilots.”
John Hazlehurst can be reached at John.Hazlehurst@csbj.com or 227-5861.