• Dr. Timothy X. Merritt

How Would the Second Great Depression Affect Society?

Abstract: A global depression is a nebulous term. It is much worse than a recession, with GDP falling significantly and usually lasting for several years. It is understood as a very severe event with significant socio-cultural impacts. In this first step of a STEEPLE analysis, the impacts of previous economic depressions are used as a guide to question what a Second Great Depression might look like for the modern world.




Background (STEEPLE Analysis)

This article is the first of a seven-part Horizon Scanning process designed to examine the future impacts of a fictional Second Great Depression. The specific Framing question for this exercise is:


How might Global Multimodal Logistics (GML’s) decision to purchase six hybrid airships be affected by a global-scale Second Great Depression occurring in the decade of the 2020s?


From this perspective, it becomes possible to examine trends from the seven categories defined by the STEEPLE analysis. The first of which is the Socio-Cultural, which includes items such as population, attitudes, age structure, or lifestyle. This article seeks to offer a plausible answer to the following two questions:


How would the Second Great Depression affect Socio-Cultural background of the future? How would this impact GML’s global operations?


Unlike any other field of endeavor, the role of fiction is to imagine the unimaginable. The purpose of the STEEPLE analysis is not so much to predict the future as it is to illustrate different plausible futures. But this is not simply an exercise in fear-mongering. It is equally important to look to solutions that have worked in the past and opportunities for transformation and hope.


One thing to remember is that whatever the future may hold for us, we are receiving "signals" now that will seem apparent with hindsight. Directed Fiction seeks out possible signals that can be measured now and uses them to anchor the landmarks and end states of the story.


What is a Global Depression?

A global depression is a nebulous term. It is much worse than a recession, with GDP falling significantly, and usually lasts for several years. It is understood as a very severe event with significant socio-cultural impacts.


The first step in assessing the impact of a Second Great Depression is to develop an understanding of what a Great Depression actually is. When the term Great Depression is used, it refers to the Great Depression that ravaged the United States (and the rest of the world, to varying degrees) between 1929 – 1939. Of course, there have been many economic depressions throughout history; the US Great Depression is just the most commonly referenced example.


Unlike an economic recession, which is typically defined as a decline in the gross domestic product (GDP) for two or more consecutive quarters, an economic depression is a more nebulous term. "An economic depression is an occurrence wherein an economy is in a state of financial turmoil, often the result of a period of negative activity based on the country's Gross Domestic Product (GDP) rate. It is much worse than a recession, with GDP falling significantly, and usually lasts for many years” (CFI, 2022). While the definition is less precise, people generally understand an economic depression as a severe event with significant socio-cultural impacts.


The Great Depression lasted for a decade in the US, with the unemployment rate reaching 25% and wages falling by 42%. In my Global Depression scenario, I want to look beyond the borders of the United States. I will describe a future global economy that has experienced a more than 5% reduction in GDP for six consecutive quarters, with a median unemployment rate in all developed countries that remains in double digits. Dr. Ranell, the Chief Logistics Officer for GML, is facing a situation where global trade has already plummeted 37%.


John Maynard Keynes (1935) defined an economic depression this way; “A chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” This definition, however, makes the subject more difficult to understand, not less. Rickards (2021) elaborates, “This brings us back to the real meaning of ‘depression.’ It does not mean continuous declining output. It means depressed growth relative to trend growth. If an economy is capable of 3 percent growth yet grows for an extended period at 2 percent, it’s experiencing depressed growth… the key lies not in quarterly performance, but in the long-term trend relative to potential.” What both definitions share is the description of economic depressions lasting for a very long period of time.


Despite the common use of the term Great Depression to describe the economic depression in the US during the 1930s, this type of financial event has been regularly occurring since the advent of money. In his book "The Changing World Order: Why Nations Succeed and Fail," Ray Dalio describes economic depressions as part of a cyclical trend that impacts all national economies and has determined the relative standing between great empires, including (but not limited to) the Dutch empire and the guilder, the British Empire and the pound, the US empire and the dollar, the Chinese empire and the renminbi.


There are rises and falls during a great depression. There are interest rate fluctuations, stock market rallies, periods of inflation, and periods of deflation. People often do not realize they have already entered an economic depression. That definition is only assigned after a long period of misery. Two facts stand out. First, great depressions last a very long time. The Great Depression lasted about ten years. The so-called "Long Depression" of 1873-1897 lasted twenty-four years. “If twenty-four years seems like a long depression, give a thought to Japan, which experienced an ongoing thirty-year depression beginning in 1990” (Rickards, 2021).

The second fact is that economic depressions are severe, with profound socio-cultural impacts. "Depressions are as much psychological as numeric. Output and employment figures matter, but behavioral changes matter more” (Rickards, 2021). The effects of the Second Great Depression will be global in nature with the profound power to alter the current World Order.


Will Banks Fail?

Collapsing banks are a hallmark of economic depressions. No remedy is perfect despite laws and policies designed to prevent bank collapse.


One of the hallmarks of the US Great Depression was the collapse of the banking system. "The Great Depression of 1929 devastated the US economy. A third of all banks failed" (Amadeo & Kelley, 2022). Economic depressions do not all have the same characteristics, but it is reasonable to speculate about the future of the global banking industry.


Frank Partnoy (2020), a law professor at UC Berkeley, sees tremendous danger lurking in the current use of the leveraged collateralized loan obligations (CLO) financial instruments, “At some point, rumors will circulate that one major bank is near collapse. Overnight lending, which keeps the American economy running, will seize up. Government officials will hold frantic meetings but to no avail. The faltering bank will fail, with others lined up behind it.” In the aftermath of the US Great Depression of the 1930s, many laws, regulations, and institutions were developed to protect the financial system. However, no remedy is perfect, and there are still many plausible ways the global banking system might collapse. By then, humanity will be staring into the financial abyss.


Will people lose their jobs?

Persistently high unemployment is another indicator of an economic depression. Today, the United States is enjoying a very low unemployment rate. Nevertheless, this is a key indicator to pay attention to. Any sudden, rapid rise in the unemployment rate may signal impending economic calamity.


Another prominent feature of the US Great Depression was a persistently high unemployment rate. “Unemployment rose to 25%” (Amadeo & Kelley, 2022). Unemployment is such an important indicator of an economic depression that I initially considered the global unemployment rate for the vertical axis of my Axes of Uncertainty model. However, my point-of-view character, Dr. Josef Ranell, working as the CFO for a global logistics firm, would be less influenced by the unemployment rate.


Nevertheless, global unemployment would profoundly impact all aspects of society. Corbett et al. (2022) provide this gripping description of the impact of unemployment during the US Great Depression.Families would first run through any savings if they were lucky enough to have any. Then, the few who had insurance would cash out their policies. Cash surrender payments of individual insurance policies tripled in the first three years of the Great Depression, with insurance companies issuing total payments in excess of $1.2 billion in 1932 alone. When those funds were depleted, people would borrow from family and friends, and when they could get no more, they would simply stop paying rent or mortgage payments. When evicted, they would move in with relatives, whose own situation was likely only a step or two behind.”


Global unemployment will rise sharply during the Second Great Depression. To cope, people will cut back drastically on their spending and hoard what money they can. When magnified across millions (or even billions) of households, the aggregate effect will be to further deflate the global economy.


The Great Depression and Famine

Today in the United States, you can go to the store and buy all the groceries you want. The COVID pandemic proved we are not immune from supply shocks as we woke up to empty store shelves. There are already reports about possible food shortages caused by droughts and the War in Ukraine.


Food insecurity can already be found in every corner of the earth. In some places, the percentage of people facing real hunger is so low as to be nearly imperceptible. In other locations, famine is a significant and persistent threat. During a global depression, the scale of starvation is shifted towards the extreme end of this spectrum with devastating consequences.

Corbett et al. (2022) offer this harrowing description: “Children, in particular, felt the brunt of poverty. Many in coastal cities would roam the docks in search of spoiled vegetables to bring home. Elsewhere, children begged at the doors of more well-off neighbors, hoping for stale bread, table scraps, or raw potato peelings. Said one childhood survivor of the Great Depression, ‘You get used to hunger. After the first few days it doesn’t even hurt; you just get weak.’ In 1931 alone, there were at least twenty documented cases of starvation; in 1934, that number grew to 110. In rural areas where such documentation was lacking, the number was likely far higher. And while the middle class did not suffer from starvation, they experienced hunger as well.”


Famine is the wolf at the door that changes the consciousness of a nation. People forget passing ideological fads. They remember soup lines. My own grandparents, who endured the US Great Depression, would save every scrap of food and were adamant that nothing went to waste. During the Second Great Depression, consumers who are already staring at rows and rows of empty shelves in the local grocery store will have to re-learn the terrifying lessons of famine.


The Great Depression and Homelessness

What happens to your employees when you have to lay them off during a Great Depression? Tracking the number of Internally Displaced Persons (IDPs) is a powerful indicator of global economic health.


International economic policy is complicated, and myriad theories abound about cause and effect. However, all of these considerations disappear when the person contemplating them loses their home. During the US Great Depression, international trade plummeted, and deflation soared. The great length of the economic collapse meant that many could not hold out. “As farmers (and many others) left in search of work, they became homeless. Thousands of people with no money gathered in cardboard shacks called Hoovervilles” (Amadeo & Kelley, 2022). Consider the psychological impact of knowing, as you shut the door to your former residence for the last time, that tonight you will be sleeping outside. In desperation, you think about who you might call. Can you stay with a family member, with a friend? What will happen to your kids if no one takes you in?


From Dr. Ranell’s relatively secure position as GML’s Chief Logistic Officer, the issue of homelessness impacts him most directly when he is involved in decisions to lay off employees. During the Second Great Depression he will watch endless news feeds about the growing worldwide homeless crisis. Internally Displaced Persons (IDPs) and Refugees crossing international borders will be standard headline fare. And Ranell will know that with each hard corporate decision he makes, he will add real people to these homeless populations. Employees facing layoffs will doubtless confront him with the enormity of the personal disaster they are facing. "Please don't do this…"


Will there be more protests?

We already have instances of political violence occurring at locations throughout the world. Protestors stormed the Sri Lankan presidential palace, and Dutch farmers are blocking roads in the Netherlands. When will bricks and bottles transform into guns and bombs?


Who will throw the first stone? In the US, it has become a truism that the nation is politically divided. And in light of the countless riots, fires, vandalism, and injuries that are already occurring, it seems that the first stone was thrown long ago. No one remembers who threw it or the reason it was thrown.


The real questions seem to involve the degree to which violent political protests will continue. “The polarization of politics could worsen, leaving people even further apart ideologically and with less room for compromise. In the worst-case scenario, the political debate could be replaced by the use of force. Those in opposition could then take up arms, a situation particularly worrisome in areas with ready access to weapons or a history of political violence" (Gray 2018). We are already accustomed to a low level of endemic violence. What is the likelihood that the bricks and bottles currently being employed will transform into guns and bombs?


The negative aspects of the Second Great Depression will drive an initial enthusiasm for revolution. The rule of law will give way to the law of the jungle as competing groups escalate the level of violence to achieve their political objectives. Many will be sucked into the pitiless vortex of ideologically driven quests for power. Others, like Dr. Ranell, will see the escalation of violence for what it is, a foolish participation in a zero-sum game where everyone is the loser.

Seemingly helpless in the face of the mounting violence and depravity, many will become bitter critics of ideologies they formerly supported (Romer & Pells, 2021). They will understand that they have been betrayed by the values and ideas of influential intellectuals who will never face the real-world consequences of their own philosophical worldviews.


Would a Second Great Depression Pull us together?

Could a global economic depression bring people together? If the unipolar model of US global hegemony gives way, will an unplanned and uncontrolled multi-polar world emerge in which all nations must compete or face obliteration? Are there any universal human principles around which people from different corners of the earth can rally?


Would a Second Great Depression inevitably tear apart the World Order? Or is there a possibility that a severe economic crisis could bring people together? “The Depression was so severe and lasted so long that many people thought it was the end of the American Dream (the idea of guaranteed rights to pursue one's own vision of happiness). Instead, it changed that dream to include a right to material benefits” (Amadeo & Kelley, 2022). People began to expect that government intervention (instead of individual self-reliance) was required to save them from the economic calamity they were enduring.


Desperate people naturally turn to ever bigger governments for solutions. However, big government comes with its own set of problems, which end up making things worse. Through painful trial and error, more profound truths and better solutions can emerge:

“Aside from the Civil War, the Great Depression was the gravest crisis in American history. Just as in the Civil War, the United States appeared—at least at the start of the 1930s—to be falling apart. But for all the turbulence and the panic, the ultimate effects of the Great Depression were less revolutionary than reassuring… The Great Depression taught people of all social classes the value of economic security and the need to endure and survive hard times rather than to take risks with one’s life or money. Moreover, faced with the specter of totalitarian ideologies in Europe and Japan, Americans rediscovered the virtues of democracy and the essential decency of the ordinary citizen” (Romer & Pells, 2021).

In the future that Dr. Ranell inhabits, the Second Great Depression is sweeping away the unipolar model of US global hegemony and replacing it with an unplanned and uncontrolled multi-polar world in which all nations must compete or face obliteration. Under these conditions, is it possible to break out of the bleak box of zero-sum thinking and explore trade deals, treaties, and business arraignments that are mutually beneficial to all parties involved? Are there any universal human principles around which people from different corners of the earth can rally? What can bring us together as human beings?


References

Amadeo, K. & Kelley, R. (2022). 9 Principal effects of the Great Depression. The Balance, https://www.thebalance.com/effects-of-the-great-depression-4049299


Corbett, P. S., Volker, J., Lund J. M., Pfannestiel, T. Vickery, P. & Waskiewicz, S. (Retrieved 2022)US History. Provided by: OpenStax College. Located at: http://openstaxcollege.org/textbooks/us-history


Corporate Finance Institute (2022). Economic Depression Retrieved online: https://corporatefinanceinstitute.com/resources/knowledge/economics/economic-depression/


Dalio, R. (2021). The changing world order: Why nations succeed and fail. Avid Reader Press. New York, NY.


Gray, A. (2018). Future shocks: 10 emerging trends that threaten our world. World Economic forum. Retrieved from Future shocks: 10 emerging risks that threaten our world | World Economic Forum (weforum.org)


Keynes, J.M. (1935). The general theory of employment, interest, and money. Harcourt, Brace and Company, Macmillan Cambridge University Press.


Lowrey, A. (2020). The Second Great Depression. The Atlantic. Retrieved online: https://www.theatlantic.com/ideas/archive/2020/06/second-great-depression/613360/


Partnoy, F. (2020). The Looming Bank Collapse. The Atlantic. Retrieved online: https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/


PESTLE Analysis. (2015). Difference between STEEP and STEEPLE Analysis. Retrieved from https://pestleanalysis.com/steep-and-steeple-analysis/


Rickards, J. (2021). The New great depression: Winners and Losers in a post-pandemic world. Portfolio. An imprint of Penguin Random House.


Romer, C. D. & Pells, R. H. (2021, October 11). Great Depression. Encyclopedia Britannica. https://www.britannica.com/event/Great-Depression


Tibbs, H. (2000). Making the future visible. Psychology, scenarios, and strategy. Global Business Network. Retrieved from http://www.psicopolis.com/futurdrome/archivio/futures.pdf










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