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Response to Floyd Norris

By Howard Katz      Printer Friendly Version Bookmark and Share
Apr 30 2009 3:06PM

(Note: Floyd Norris is an economic columnist for the New York Times.  His article, “Recession, Far From Over, Already Setting Records.? appeared in the Times of Saturday, April 25, 2009.)

Dear Mr. Norris:

I approach the subject of economics from a slightly different point of view than the writers for the Times, and I wanted to take issue with your comments in Saturday’s paper about the “recession.?

First, there was an event that happened at the very beginning of the New Deal which sets the tone for the economic controversies of the past 80 years. F.D.R’s Brain Trust., freshly in office, came up with a plan to get the country out of the depression by means of killing pigs and plowing under crops. The plan, however, ran into one difficulty. (I owe this story to my good friend Warren Roberts.) The jackasses who pulled the plows had been carefully taught to walk between the rows. Now that they were being ordered to walk on the rows they rebelled. The reason for this is that the jackasses had more brains than the Brain Trust.

Supporters of the New Deal had an effective way to deal with this. They all carry a mental eraser in their heads, and when something embarrassing occurs, they simply erase it from their minds. To claim that you are going to save the country from depression by destroying wealth is akin to the math student who enters the class with the theory that 2 + 2 = 27. There is really no point in debating him. One is dealing with a nut case, and to attempt an intellectual discussion to show him the error of his ways is itself a mistake.

Further evidence of the Times’ incompetence in economics can be seen from their failed predictions over the past 30 years.

  • In 1982, with the DJI at 800, the Times kept telling the country that Henry Kaufman was the nation’s top economist. Dr. Kaufman was then known by the nickname “Dr. Doom? because he was predicting higher interest rates and lower stock prices. Millions of people took your advice and sold their stocks, just months before the greatest stock bull market in American history.

  • In 1985, with the DJI at 1350, the Times’ Op Ed page developed the theory that the chart pattern of the DJI bore an uncanny resemblance to late 1928 and early 1929.  This implication was that stocks were on the verge of a massive decline which would cause them to lose 90% of their value.  All over the country people were thrown into a panic and sold their stocks, knocking the DJI down below 1300.  From there it turned and, over the next 2 years, rose to 2700.  It never got below 1300 again.

  • In 1987, a gentleman named Ravi Batra wrote a book entitled The Great Depression of 1990. The Times, and the remainder of the nation’s media, became very excited over this prediction. Lester Thurow went ga-ga over the book. Leonard Silk, Christopher Lehmann Haupt and Thomas Hayes gave him high praise. The pessimism generated by the book may have contributed to the crash of October 1987. But when 1990 rolled around, the worst that happened was a 1.3% (2 quarter) decline in GDP.  J. Scott Armstrong called this the seer-sucker theory: for every seer there is a sucker.

  • In 1999, the Times turned bullish and published Dow 36,000 by Glassman and Hassett, predicting that the DJI would rise to that number between 2002-04.  By 2002, the DJI had declined to a low of 7,200, and its 2004 high was still below 11,000.  Carried away by its own irrational exuberance the Times invested $2.7 billion in its own stock (then trading around 40). At present, one share of Times stock sells for about the same price as a Sunday paper, and the loss on those turn-of the century investments is about $2.3 billion. This has forced the Times to mortgage its new headquarters and to take a loan from Mexican billionaire Carlos Slim.

In short, this record of prediction is pretty much what one would expect if the student who believed the 2 + 2 = 27 theory were to take over the math class and start investing the school’s money.

Second, let us consider the question, what is a recession? A recession and a depression are, respectively, mild and severe declines in wealth in which the vast majority of the people in society become poorer. There can be very little doubt about the validity of this definition. As soon as anyone hears the words, his immediate reaction is: “These are bad things, and we must put them to an end.?

Yes indeed. But there are a few problems here.  If we take what is called the Great Depression (on the argument that it is the worst depression that ever was) AND ACTUALLY LOOK AT THE FACTS, we find that they are very interesting.

  • From 1929 to 1934, meat consumption in the U.S. rose from 129 lbs per person to 144 lbs. per person, an increase of over 11%.  At that time, even more than now, meat consumption was a sign of wealth.  Indeed, the Republicans had bragged, in the election campaign of 1928, that they had put “a chicken in every pot,? meaning that they had made it possible for every American to eat meat every day.  This was not true because meat consumption had declined in the “boom? of the 1920s, but it does make clear the point that, to the people of the day, rich/middle class people ate meat daily and poor people could not afford to.

  • We find a similar situation with respect to butter.  Butter consumption per person rose from 17.6 pounds in 1930 to 18.6 pounds in 1934. Margarine was just coming into use at the time, and it was not yet colored yellow, but it was definitely the poor person’s spread. There were no health considerations at the time.  If you were poor, you used margarine.  If you were richer, you used butter. Margarine consumption went from 2.6 pounds per person in 1930 to 2.1 pounds per person in 1934.  Indeed, there are statistics on butter consumption in the U.S. back to 1869. The highest butter consumption for the nation was 22 pounds per person in 1896, the year which conventional economists call the “Silver Campaign Depression.?  During “boom? years butter consumption dropped sharply.

  • Further, during the early 1930s there was a surge in charitable giving, from 1.5% of total personal consumption to 2%. The figure fell back below 1.5 % in the late ‘30s and remained in the 1.2% to 1.5% range for the next 30 years. If the great majority of Americans were poor during the Great Depression, how come they were able to give more to charity? (All data from Historical Statistics of the U.S., 1954, 1970.)

Third, the traditional rebuttal to any critique of the Great Depression is, “Just ask one of the unemployed.?  That might be a good idea because there is more to the story than is being told. The story starts before WWI when J.P. Morgan snuck the Federal Reserve Act through a sleepy Congress, created money and lent it to the allies.  When the U.S. entered the war (largely due to Morgan’s behind-the-scenes manipulation), the banks lent money to the U.S. Government. In total the U.S. money supply doubled from 1914-1919.  The price level doubled as well (and the amount of butter the average American could afford to eat per year dropped sharply).

The point is that, in those days almost all Americans were savers. They saved their pennies and put them in the local savings bank or bought corporate bonds. This gave them a return of about 5% per year.  And if you compute the compound interest at 5% per year for a normal working lifetime (16-65), the money saved gets multiplied by 4.25 times.  In other words, if you could save $200,000 (to use modern numbers), you would wind up with $850,000. And this meant that even the average guy had enough wealth at age 65 upon which to retire.

But the Democrats had cut the value of the average American’s savings in half. In 1919, the Republicans correctly recognized this as a crisis. The Democrats had robbed the common man and gave the wealth to J.P. Morgan and his friends. This is why the average American cut his eating of butter during the “boom? of WWI. The Republicans saw that the number one priority for the country was to return the stolen wealth back to the savers of the nation. The way to do this was to reduce the money supply and cut the average price level back to that of 1914. Since cigars in 1914 had cost 5¢ and had gone to 10¢ in 1919, the Republican program was summed up in the phrase, “What this nation needs is a good 5¢ cigar.?  This was achieved in 1932 when the Wholesale Price Index returned to its level of 1914 (which was, by the way, the same price level it had been at in 1793). The value of the currency had been restored.

This was the same problem which the nation had faced after the Civil War. At that time, the Republicans restored the pre-war price level. The nation had appreciated it and made them the majority party for ¾ of a century. So the Republicans of 1919 knew what they were doing. Unlike modern politicians, they actually had studied American history. They knew that a declining price level was in the interest of the average guy because the average guy was a saver. They also knew that this program would cause unemployment. However, they knew that the unemployment was temporary. They also knew that the vast majority of the unemployed were also savers and were benefiting from restoring the value of the currency.

So what would happen if we address the question asked by the defender of the New Deal, “Ask one of the unemployed??  Well, prices fell by about 30% from 1929-32.  Wages also fell but not quite so rapidly. The result was that real wages rose. Eddie Cantor was a better economist than any of the Brain Trust when he sang, “Potatoes are cheaper. Tomatoes are cheaper [in terms of real buying power]. Now’s the time to fall in love.?  Rating the people of the time in terms of economic knowledge, we have:

  1. Eddie Cantor
  2. the nation’s jackasses
  3. the Brain Trust.

Therefore, if you talked to an unemployed worker of the early 1930s, he might have said, “Actually I’m voluntarily unemployed. I am holding out for the wage I was getting in 1929 (even though it buys a lot more today). But my pride won’t let me work for less. Besides, I can afford to hold out. Each year the value of my savings goes up, and I get richer without working.. Here, have a sandwich.  It’s made with butter, and there is an extra thick piece of meat.?

Now will I admit that there has been a real depression in American history?  Yes, I will, but it’s not what you think. The only depression in American history was the period 1942-45.  Remember that the definition of a recession/depression is a period when the vast majority of the people become poorer. What happened in 1942-46? First, you couldn’t buy a new house. None were being built. Second, you couldn’t buy a new car (for the same reason). Butter, eggs and many other items were rationed.  Gasoline was limited to 3 gallons per week.

Now I would call this poor. I would call it significantly poor. America was the richest country in the world during this period, but it was much poorer in 1946 than it had been in 1942. This is what qualifies as a depression.

But you know?  All of the idiot economists call the period 1942-46 a boom! Unbelievable! Let me reconstitute my rating:

  • Eddie Cantor
  • the nation’s jackasses
  • the nation’s economists
  • the Brain Trust.

Of course, I know that you define a recession as two consecutive quarters decline in real GDP. For this definition to work, however, GDP actually has to measure the wealth of the country. Do you know anything about GDP? It was invented by a Russian with an unpronounceable name who weaseled his way into the New Deal. He never proved that GDP measures the economy. He just said it.

Actually, Ludwig von Mises pointed out that two things are necessary for the creation of wealth. 1) You must actually produce the goods/services. And 2), you must produce those goods which satisfy the public’s most pressing needs. When Stalin produced a lot of industrial goods by sacrificing agriculture in the 1930s, 8 million kulaks starved to death. Stalin missed point 2. He produced a lot of goods, but they were not the right goods.  That is what the U.S. Fed does when it eases credit.  It shifts production from the goods Americans want most to those they want less.  It makes America poorer, but it makes GDP go up. The rise in real GDP during WWII is a good example.

My newsletter, the One-handed Economist, is a much better publication than the New York Times.  Its goal is to tell it like it is, not to apologize for the J.P. Morgans and Goldman Sachses of the world.  I try to protect my subscribers from the stealing of their wealth by the Federal Reserve, and I am doing a pretty good job.  If you started with $100,000 on Jan. 1, 2000 and followed all of my recommendations, by April 1, 2009 you would be up to $149,000.  If you put the same $100,000 into the average U.S. equity mutual fund, by April 1, 2009 you would be down to $71,000.  That is, I beat them by better than 2:1.

Howard S. Katz



Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965.  His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31).  Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.).  Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002.  His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures.  This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100.  Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  (Include both electronic and mailing address.)