 Okay, we're back we're live for the one o'clock show here on a given Tuesday With John David and history professor at HPU today We're going to talk about business cycles and the history of business cycles in this country and beyond this country You know and so we're probably good. We are having a significant business cycle It could get much worse. We should study these business cycles Recessions depressions in order to get a handle on where we are and what we need to have to get out of it again John welcome to the show. Hey, thanks. Jay good to be on. So yeah, you know, it's uh, well, we live in interesting times, huh? Yes, we do that unemployment of almost 40 percent in Hawaii almost 20 percent nationally Wow, this is it's unheard of unthought of I mean, this is great to spread great depression stuff You know, you know, you know what though John the people have it. It's all about people It's all about confidence and you know in the economy and the government and all that People have this strange notion that that that they can go right back. We can just go right back We can return to the way it was and the the machine will tick along just the way it was ticking along before Right, and since we've only we're only out of it by a couple of months now, right? If that, you know There's a certain credibility to that thought well You look at I don't feel it's necessarily something to rely on Well, you look at the stock market and the stock market of course went down pretty dramatically But then it had you know in April it had the best month. I think since the Great Depression actually and so it recovered at least partially and I think this is crazy making honestly. I mean, you know, you look at these unemployment numbers we're gonna look at you know a GDP that has a drop of me. I don't know 15 20 percent Maybe even more it could be as high as 37 percent So so the stock market by right should not be going up at this time But I think this is some of the same kind of thinking that this is gonna be short term We'll just go back to normal Everything will be fine and and you know the stock market is the worst place to get long-term wisdom Okay, it's it's the place for short-term thinking and for the herd what I would call what many call the herd mentality And so yeah, it's definitely a problem. But Jay before we go further I just wanted to talk to the to the audience about a few of the books, you know been talking about Epidemics I wanted to talk about a few of the books that are really good that you should look at if you want to study the history of epidemics Just interject this and so the first book is a book by William McNeill which was published in the 1970s And he's kind of the grandfather of the history of epidemics. It's a great book by a great world historian And then you have a slew of books published after that around the turn of the century You have you have The Great Influenza by John Berry, which is an award-winning book on on the Spanish flu and then you have Justinian's Flea which is a great book about the plague and you know in in the In the Byzantine Empire and then you have another book about the Spanish flu by Alfred Crosby who is a highly recognized World historian as well And then so you get this you have a you have actually a full bookshelf of books About this especially about the Spanish flu you have another book by Laura Spenny recently that is Internationalized the Spanish flu so it study, you know the Spanish flu and other parts of the world So so you have these these great books and then you also have this book That I was we were just talking about this is a book called this time It's differed by Carmen Reinhardt and Kenneth Rogoff and this is to bring us back to the subject today This is this is not about pandemics, but this is about economic crises specifically about debt and inflation and This book can help us to kind of sort through the historical implications of what it means Today to be in the situation that we're in Yeah, we just can you hold up for a minute. I just got a call my broker Well Jay Okay, if you're in the stock market Push pause You know Everybody's I mean there's a lot of people who are still in the stock market Everybody's saying you know cost average and don't worry about it stay in and I read a very good article by you know A wizened old stockbroker and he said look this time is different And we really need to look at this and we really need to reassess if you have money in stocks right now well, I would reassess because There's a lot of magical thinking about what's going to happen with this recovery The the Federal Reserve says, you know 2021 maybe midway through 2021 will start to see a recovery You can't put, you know Hundreds of millions of people back to work in a month or a couple of weeks. It's just not gonna happen like that Businesses have been destroyed in this crisis. So It's just not you know, anyway, I hope you're okay, Jay Hope so too, but you know, there's a mechanical issue there I mean, even if the business is just take it in a sequence even if the businesses had not been destroyed There's a tremendous like logistical problem about putting people back again Which ones they all come back and stand in the same place and what do you do about you know Since we really haven't solved the COVID problem What do you do about the risk of COVID? I mean, you know If they tell me I have to go back and just really interesting stuff going on they tell me I have to go back and work in the you know, the food processing plant one of those various plants that are Collapsing because of COVID right and I say wait a minute. That's dangerous over there This one of the high, you know The highest incident of COVID in the country you want me to go back and work and you haven't done anything to make it Safer. I'm not gonna do it now. There was one there was one governor And maybe there's more than that who said you got to go back to work or we aren't gonna pay your unemployment insurance anymore Oh, yeah, and arguably, you know, Trump may his name be erased You know, he's he's also on that team. He wants people to go back and work in dangerous situations Just a bit as economy Right Yeah, so I mean, it's it's a struggle because of the tremendous volume of the unemployed You know just in it if you look at it in the general picture in Hawaii here I mean, we have so many unemployed that this the state unemployment system can't deal with it we're talking maybe a third of all more than a third of all workers are unemployed and and Maybe half of those workers haven't gotten access to unemployment benefits yet. So this is two trillion dollar Bill that the Congress passed and the president sign has been a bit of a kind of an empty promise in some ways because because of the quite frankly the antiquated unemployment software that this state uses and the lack of Resourcing, you know, we're used to unemployment about two to three percent, you know We've never in this in this state in Hawaii We've we've had lots of under-employment, but we've had very little unemployment and So and we've never really dealt with the under-employment and now we're having a deal with both that and the unemployment and this huge backlog and I was just I was talking with my wife this morning who Read an article and you know, there are people who are They're spending down their savings and they still haven't gotten their unemployment checks from the state And they're very scared about the future. So it's it's you know It's it's a lot worse than it looks if you're watching the stock market. I'll tell you that Yeah, so, you know, that's and the big question, which is really important for us to understand historically is you reach a certain point and There's no they're there the government has no money to help you. You have no money yourself There's no jobs. There's no immediate future. Maybe a long-term future, but no immediate future What happens to society and we don't know we don't know how the unravel takes place But it will be instructive to look at earlier business cycles other economic failure periods and learn from them So what what do we learn? Right? So if we look at the the Spanish flu, for instance, there were two recessions There was one recession in late 1918 that was short-lived. We think it was pretty deep Although there's not a lot of there's not a lot of economic data from that time period but but seven months and and then there was a recovery but then then in 1919 a year later than there was another much deeper recession which coincided with the end of World War two and it and it coincided with the demobilization of troops and the demobilization of them of American manufacturing and so This is kind of it's been confusing because of the timing of these recessions It's always looked like look these are primarily because of the end of the war not because of the Spanish flu. We just don't know in that situation There was however significant unrest in the summer of 1919 which did coincide with another outbreak of the Spanish flu and It coincided with this second more serious recession. It was just coming on right at the end of that summer of Unrest so you had the race riots in all of the major cities Detroit, Chicago, Wilmington, Atlanta. You had you had You know bomb threats at the Capitol. You had an actual bomb that was what at the door of the Attorney General Attorney General Palmer You had a general strike taking place in late late 1918 in Seattle In other all kinds of labor. I mean the labor unrest was unbelievable. What were they saying with people who were protesting? Striking putting bombs on doorsteps. What what were they saying? What was their Concern, what were they expressing? Well, partly they were nervous about the fact that there was a lot of unemployment and They were scared about the economy and then they were they were you know One of the things that was happening because it was the end of the war is that the government was setting wages and setting wage increases and Workers didn't have control over this They were very concerned that they were the ones you know that the Capitol would keep the money And they were the ones who would get screwed in this so So there was a there was a great deal of unrest and of course, you know Woodrow Wilson is sick in the White House He's had a stroke so he can't provide the leadership that you need To calm things down and that might be similar to the present day and in a sort of way So you have a situation where that that's very serious in 1919 and we just have never historians have never connected it that strongly to the Spanish flu But that had to be a factor. I mean Fear about getting the flu fear about you know the flu coming back again because of course the Spanish flu came back The three times two times, you know, it came back in in fall 1918 and then it came back again in 1919 and Came back in a more virulent form and that's one of the fears about Coronavirus is that it will come back next fall in a more virulent form and then we will wish for spring 2020 because it Let's hope that doesn't happen. That's that's well if we go into, you know, trying to open all open the economy too early It could come back soon in the next fall Come back in a matter of weeks. Yeah, I mean, I'm not against opening up the economy I think that you know, the protocols are very important wearing a mask if everybody wears masks In Kylo where I live everybody's wearing a mask now and this was like this started You know in in early April was like maybe 10% of people wearing men wearing masks and then 50% and then it became the law and then people got on board and Everybody's wearing masks and there's there's hand sanitizer at the in front of all the stores and so If if if we can take those kind of precautions I honestly I'm not too worried because we can knock this down the thing is in the Spanish flu The health care providers wore masks, but the average American did not wear a mask and It should have I mean that should have been the recommendation that that's probably one of the differences is the the health The the polyhealth protocols are better now than they were during the Spanish flu think I think the The magic the magic step would be to have testing we've heard this before but we still don't have Testing at will testing really quick testing 15 minutes Patrick Sullivan of Ocean it was just on the show last hour Yeah, talking about trying to develop a test where you you spit in a coffee cup And it immediately tells you if you have COVID and that would be very helpful in Managing managing the illness even if we were back at work and we'll give us a way a way to protect ourselves back at work And I think also the antibody test. I mean I think I'm gonna go get the antibody test Because I think I might have had COVID and just was a mild case, but I don't know and I'd like to know Would you step back from the camera just a few inches? Yeah, sure Jay Oh, you're worried Don't worry, I don't think this is transmitted via you know via the internet, so I think So we had we had you this book you were talking about the one that's hard to read the last one you referred to That talks about what happened in Germany, right? It's after the war and in the 20s And that is something we should know about yeah, okay, so so when we look forward to what what could happen with the American economy I mean we could have a you know as a standard recovery in in 12 to 18 months You know it could we could come out of this no problem There's some problems though and and so and let me talk about the problems first And then we can go back into the history and look at some examples and essentially It's either Japan or Germany in different time periods in the 20th century And so one of the things one of the problems we have right now is we have tremendous debt Worldwide the global debt situation is unprecedented and I have a slide here about derivative debt and derivative debt is about Credit default swaps and and the collateralized debt obligated It's about it's about taking debt and selling that debt off and you can see there we have 516 trillion dollars worth of derivative debt right now and the world GDP is only about It's a little more than 50 might be 60 trillion or 70 trillion dollars now and and we have this enormous amount of derivative debt and So and it's it's more than the stock market. So I think You know, it's it's this is unprecedented time So so we have the debt overload the United States has a national debt of over twenty twenty trillion dollars now Well, more than half of all of our GDP goes to pay the debt It's over a hundred percent of our of our GDP so More than a hundred percent of our income or national income goes to to pay, you know, the national budget pardon me goes to pay the debt so So our debt has really increased and in that situation There there are two outcomes that could take place That one of the outcomes is we could have the beginnings of inflation Ratcheting up. This is what happened to Germany in World War one Yeah, Germany had to increase the amount of its money supplied by 400 percent That means that's similar to what we're doing right now at the Fed Well, we are increasing the money supply supply. I don't think it's by that much Right now, but yeah, the Fed is actually creating electronic money every day different kinds of ways sending credit out to to businesses sending credit out to other nations buying Treasury bonds so that the Fed is actually doing this But not at the same level as Germany now and there's some other differences. So so that's never without Consequences down the road, right? Right, right. No, that's right. It's it's definitely got consequences But but here's the interesting thing So when you when you increase the money supply that much at least in that time period and you're these are this is a period of Basically national economies. There's not a lot of investment International investment and other people's currencies this kind of thing Then what you can expect is you're going to reduce the value of your currency dramatically and This is what happens in Germany when they printed money printed money for the war and then they reduce the value of their Own currency and then and then it becomes this untenable cycle where you you continue to print more money to pay for the things that become more and more expensive because you have Less value in your currency the currency was the rights mark. And so by 1923 Billions of rights marks, okay, we're spent for a week's wages Rights marks were basically worthless people were throwing rights mark. Yeah, there's there's a picture of children playing with rights marks Building blocks with rights marks another picture of a woman burning rights marks to keep warm You know, you have you have kites made out of rights marks and you have You know, you have big stacks of rights marks that are used to to pay people to make purchases So, you know, you had to use a wheelbarrow to go get a loaf of bread well at the end of the day you couldn't buy a loaf of bread for you know, any reasonable price and So you couldn't have a loaf of bread and people would go hungry and that affects the social fabric and Let me let me ask a question to you on that point that came in while you were speaking just The questioner says good point about protest and violence What challenges do you think our local union shops will be dealing with on the show last week with Eric Gill from local five? That's the hotel workers right you said the trust fund is paying for benefits for their members and the employers are not making their Contribution. Yeah, okay. This is very serious and this is the kind of thing that You know can can be very dangerous in the long term or maybe even in the short term But so so you have Germany in that situation Let me come back to that question in a second because I think that's a great depression question So Germany has this terrible situation the cycle of of in hyperinflation. They can't get out of and What happens is first of all the United States puts money into Germany We put about a billion dollars into Germany by the end of the 1920s to try to to try to make sure that they can actually pay their war debts But the other thing that Germany does which is very interesting is they change currencies in 1925 And they go from the rights mark to the rent and mark and they peg the rights mark as I think it's a million rights marks to one rent and mark the new currency Therefore you if you have debt in rights marks, you can pay it off very easily Now those who had savings in rights marks. They were they were in very bad shape But overnight the German economy recovers from this little trick of creating a new currency the currency by the way was based upon real estate Commercial and private real estate in the country not based upon gold or anything else because Germany simply didn't have enough gold at this time To to actually, you know, provide a solid basis for the currency So so that's Germany in the 1920s now There is some social unrest but surprisingly that The most of the unrest doesn't happen until the late 1920s when Germany slides into the great depression And then of course you have the rise of Nazism in the early 1930s But also in the in the United States when the United States slides into the great depression In the night in the early 1930s, you know stock market crash in 1929 and then depression in 1930 and up until almost World War II And then so in the United States you have you have I mean you have tremendous Problems you have starvation quite frankly in the summer. Uh, pardon me the winter of 1932 1933 And uh, you have businesses that are simply not I mean, they're not, you know to the question of the viewer They're not paying in contributions They're not they're the factories are not open in Detroit. For instance, Detroit had 70 percent unemployment And people starving in the streets In 1932 1933 And so the union benefits will last a while, but they won't last very long and by the mid 1930s you had pitched battles in Detroit between, uh, the hired thugs of for instance ford motor company and Union workers who were who simply wanted to get back and and start working their jobs again So and a lot of times what happened then is they would hire strike breakers So, you know, it's it's impossible to know right now exactly what's going to happen in Hawaii at a local level But at a national level we'll probably see higher levels of social banditry and could be higher levels of Of, you know violence domestic violence and you know violence and workplaces I just don't know but this is one of this is one of the things that happens when Economies to become destabilized as societies, you know, the social fabric begins to be torn. So yeah Well, I think people are feeling a little of that already. There was an article in the paper about a fellow in Kalihi over the weekend who was doing target target practice out of his window and his condo And the neighbor the neighbors complained about that and the police came and took him away But but imagine, you know, he was liberated from The norms that would normally apply and I think that's that's a you know, it's an indicator of some kind of people Loosing it a little bit. Yeah when when people have to begin to choose To not eat enough food To put food in their kid's stomachs before they can have food And we're not quite there yet, but we're we might be close six months three four five months from now We could be close to that then then it becomes a serious social crisis in addition to an economic crisis Uh and so I mean, yeah, I mean, it's it's very serious Well, based on based on the history of it coming out of it Do we just wait this thing through john or is there affirmative action the government can take? I mean, I know that f dr was not perfect, but he certainly he took in the new deal He took a lot of action and for the most part it helped, didn't it? So shouldn't we look at that now? Yeah, well, I think so. I think uh, I think the new deal is is the model I mean, we're using some of that model already and offering temporary relief to to people who don't have jobs and and offering businesses some relief and And uh, you know, we'll see how far the government goes, but you can do other things you can, uh, you know You can drive down supply To induce more demand Um, that was done in the in the new deal with some success in the agricultural sector. So so there's things that you can do Um, the the thing is we don't know exactly where this is going to go One of my concerns is not that we're going to have hyperinflation like germany Okay, I don't think that's going to happen. I mean when you look at the price of of Treasury bonds right now they are they're incredibly low Even compared to a year ago. I mean, they're just rock bottom. It's because uh, there's so pardon me There there's so much instability in the world and And the united states even though it's falling into a recession. Maybe a depression looks relatively stable and so People from other countries are socking their money into american bonds So so it's not hyperinflation just because of the shape of the world economy I don't think we're going to go there at least not yet Even though the the federal reserve is actually creating a lot of money right now I think it could be more like japan Japan from about 1990 to the present Has suffered from very low or no economic growth And and they've been caught in what we call a liquidity trap in which People are you know, your your average person is is hesitant to consume Is hesitant to make investments and therefore takes money Takes money out of the stock market takes money out of the bank or leaves it in the bank But but it holds it in cash now Japan has had One of the best saving countries in in the world in the post-war period They have a huge amount of personal saving The problem with the japanese has always been to get them to spend And it's it's slightly better now But the truth is the japanese economy is still in a situation where people are Are concerned so they're holding back cash and that creates a lack of investment And you know opportunities for businesses to create new products and And then the government is the fallback in this case and the japanese government Has done what the united states government is beginning to do now, which is take a lot of money And invest it over time and so the japanese have had excess budget since the 90s and they're They're spending their national debt is now at about 220 Of their of their GDP And so it's even it's twice as much as the united states now The united states of course has a lot bigger budget than japan but So my concern is that we could end up flatlining and get ourselves into a liquidity trap And i'll be honest with you i've already kind of contributed that because i'm no longer in the stock market When all of this happened i i began to pull out of the stock market and if enough people do that Then what you'll have is a kind of situation where It will be very difficult to generate Inflation and you're gonna have to keep interest rates very low, which means that people Well, there will be very little incentive for people to take their money out of cash and invest it in anything because interest rates are so low So that's my concern is we could end up like japan Well, let me let me ask you that you know at the end of the day um, this is about About the public it's about how people feel and think and how they conduct themselves financially and uh, you know Yes, they could wish to go back to normal or as Trump says normality. I don't think that's a real word But um Or they could do something else and I guess a big question. It's a hard one. I don't know if you have a ready answer But what if people what do people wish what should they think now? How should they see all of this? How should they see the future knowing the risk of recession depression? Coming soon, you know, I suppose if everybody got back out there on the street mask or no mask Um, and and live their lives the lives to the fullest extent as they could that would be good for us May not be good for them individually Right. So this is you know after after 9 11 then george w bush went on tv It said everybody needs to spend they need to consume so we can get the economy going again And that actually kind of worked But in this situation The problem is even if you have money people are afraid to go out and spend because They can't go out or they can go out only if they have masks on So it's a little different. So it's not like a typical recession in that way because Because people are constrained from actually Going out and spending money in ways that they might even in another kind of recession Simply because of covet So this is a complicating factor It could mean that once people can go out and spend that they will have enough money And they'll start to spend and the economy will kick back in here pretty quickly That's possible But the problem with that scenario is the unemployment quite frankly The unemployment in this you know in this situation is something We should have avoided this at all costs because we saw what happened in the 2008 great recession When with 10 unemployment, it took us you know, it took us until 2016 to fully recover from that Yeah, so if there was if there was another president I mean, I I think we agree that this president isn't isn't likely to be able to fix things It's just makes the wrong moves all the time. He has the wrong advisors and he doesn't even listen to them But if there was another president by Biden say for example Would that change the The scenario that you described could it change the scenario you described? Yeah, I mean, you know part of it is confidence right do people feel confident and and You know and and do you know do leader? Do they feel confident in their leaders that they'll do the right thing that they'll protect them? and so You know part of it is j People feel confident Yeah, well, you know in in case you thought this election coming in November was important for in the rule of law for corruption For bringing the branches of government back to proper operation. It's far more important than even that Uh, it will really determine the future of the country The world in our in our individual lives. No, thank you so much for helping us understand this We have to keep on doing it Because you know why change is the only thing that is for sure And uh, I hope to catch you again next next couple weeks And we'll we'll continue this important conversation. Okay j John david and history professor and what what did george santiana said? If you ignore history, you're gonna repeat it. That's what he said, right? Thank you so much. He was wrong about that