Bill Bonner: Good things come from bad times
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Bill Bonner Oct 02, 2009
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The God of Abraham may rule the Vatican. But another group of gods rules the City. They are like the Greek gods – playful and mischievous, with a keen sense of humor and a connoisseur's taste for irony and paradox. They look down from heaven not like a benevolent shepherd watching his flock, but like a cackling gawker betting on mud-wrestlers.
Here on the back page, this is not the first time we've paid homage to these lesser deities. Nor is it the first time we've mentioned their perverse method: those whom these gods would destroy are first cursed with good luck. Today, we look at the bright side: later, they're blessed by misfortune. According to a pair of researchers from the University of Michigan, a depression does more for longevity than diet or exercise. Life expectancy during the worst years of the Great Depression increased from 57.1 years in 1929 to 63.3 years in 1933, says the report by Jose A. Tapia Granados and Ana Diez Roux. It didn't matter whether you were a man or a woman, black or white, the results were the same. And it didn't matter if you were in the US during the Great Depression or in Spain, Japan or Sweden during their economic downturns.
In their study of America's depression, the team concluded that "population health did not decline and indeed generally improved during the four years of the Great Depression, 1930-1933, with mortality decreasing for almost all ages, and life expectancy increasing by several years in males, females, whites, and non-whites". By contrast, life expectancy fell during the boom years. For most age groups, "mortality tended to peak during years of strong economic expansion (such as 1923, 1926, 1929 and 1936-1937)", they wrote in the Proceedings of the National Academy of Sciences.
Conventional wisdom is that recessions are times of stress. People do not eat as well. They skip medical check-ups. They should drop dead earlier. Instead, they live longer. Perhaps it is because the economy slows down, allowing people to live at a more comfortable pace. Or perhaps, in hard times, people have less money to spend on liquor and tobacco. Maybe the unemployed get more sleep. We don't know. But if you want to live an extra six years, nothing works like a slump. When it comes to economic health, nothing works as well as a depression.
On Monday, World Bank president, Robert B. Zoellick, explained to Washington how the dollar made Americans wealthy: "The United States is incredibly fortunate that the dollar enjoys this special status." It made it possible for Americans to buy things abroad with dollars and then, rather than come back to the US as a claim against US assets, the dollars stayed in foreign central bank vaults. It was as if the US, and the US alone, could issue IOUs and never have to pay up. An "exorbitant privilege", Valery Giscard d'Estaing called it.
Since the end of World War II, the world had no real alternative. It had to use the dollar in its international transactions, just as it once used gold. This had a marvellous effect on world trade and roughly the same effect on America as a winning lottery ticket. Like a lottery winner, she was ruined by it.
With no effective limit on the number of IOUs they could issue, Americans issued far too many. From a low of around 2% of disposable income in 1945, US debt service rose to nearly 15% of disposable income in 2007. In terms of total debt/GDP, the ratio was only about 150% in 1945, but that was with public debt from the war years at 120% of GDP. By 1950, the war debt had been cut down to about 70% of GDP, with private debt still at about 35%. At the height of the bubble years – 2005 to 2007 – total US debt hit 360% of GDP, only 60% of it owed by the federal government.
Then, the bottom fell out of asset prices in 2007-2009. With so much collateral disappearing, America's leading financial institutions were in trouble. Suddenly, it looked like the whole system might fall apart. In March of this year, Americans found that their stocks had fallen back to real values not seen since 1968. Their houses were sinking fast too. By May 2009, one out of every four American homeowners was 'underwater' – with a mortgage greater than the value of his house. Incomes and profits were falling, along with the net worth of the typical American household. Everything was falling – except debt. How the gods must have roared when they saw the looks on their faces! In the biggest, longest boom of all time – even with a monopoly on the world's reserve currency – Americans had lost money.
But while Americans were once cursed by good luck, they are now blessed by misfortune. Granados and Roux merely scrape the surface. "The US would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," said Zoelick. "Looking forward, there will increasingly be other options to the dollar."
Thank the rascal gods. Americans are saving again, rebuilding their balance sheets – and, eventually, their economy. And now they can look forward to living longer than ever too.
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