I have been enjoying the recent discussions about the core values of homesteading and Current Reality As Seen Here. Although I am a psychologist, not an economist, I have been following recent economic and social events. Here is my take on the subject:

Americans generally seem to have very little sense of history, and worse, seem to get much of their working knowledge of the world from the media, particularly television. Some of us believe that the overall picture presented by the media-that everything is wonderful and continually improving-is terribly wrong. Homesteaders seem to be one of the only groups taking preparatory or corrective action for a declining civil situation.

Throughout history people have developed a share of common wisdom, much of which is stored in popular proverbs and virtues, about the right way to live. One of the old virtues is "prudence," in the sense of having a careful or cautious stance toward the future.

The virtue of prudence is woven into the homesteading movement. One way of thinking prudently about the events of our time is contained in the term "sustainability". Other ways are included in the terms "organic," "recycling" and "permaculture." The core ideas of prudence-caution, planning for adverse events in the future, etc.-are partially shared in these terms. It may be that things have gotten so imbalanced that we need to go through a generation of re-education (voluntary or involuntary) regarding the classical virtues.

Voluntary re-education in diverse things including prudence involves the modern American homesteading movement and is, I believe, epitomized by this magazine and its audience. Here we have people engaged in and sharing the learning necessary to move toward self-sustainable lives. This is not a money thing.

An example: I appreciated COUNTRYSIDE'S printing the article I wrote on the basics of sharpening and tool maintenance several years ago (79/4:67-80). I was surprised to be severely criticized about this by two authorities, one a relative who had worked in newspapers and the other a well-known "country"-type author. Both of them complained that I had given the article to a magazine that did not pay me anything and thus had been "working for free". They totally missed the point. The payment for me was in writing the article (formalizing my thinking, doing a little research, etc.) and in being able to share something practical. It is vastly more important to me that necessary information be distributed efficiently than my making sub-minimal wage writing for a highly specialized magazine.

Notably, neither of these critical "authorities" had a glimmer of understanding of the contents of the article. This is despite the fact that the "well known author" had operated a nationally advertised homesteading school for some time in the past. I guess they just purchased new knives when theirs went dull. Or maybe they didn't get dull knives because they didn't use them? If COUNTRYSIDE had to pay for content then it would be much thinner on the content, limited in what was said so as to not offend advertisers, and much fuller on the slick advertisements. This would be a much less efficient way of distributing the content. The magazine's content is what we are interested in, after all.

Forced re-education usually happens to people who have planned poorly and who end up on the wrong side of a big event such as an economic depression or a war. Under these circumstances they can either learn to adapt, or perish. High-risk gamblers frequently end up having these remedial education experiences. I know individuals in their fifties and sixties who have all of their retirement funds tied up in highly speculative stock market ventures. They talk about their upcoming retirements. Many of these folks are going to learn that they will not be able to retire on that money they gambled away on risky ventures. Hopefully their discomfort over their losses and their newly found need to work into their nineties will be tempered by their heightened appreciation of the classical virtues.

One of the amazing aspects of our time is the almost total lack of perspective which the opinion leaders in the media and responsible positions have for our long-term situation. A good book on recent (the last 80 years or so) economic history is A Journey Through Economic Time by John Kenneth Galbraith. In this book Galbraith describes the economic history of this century with a little twist. Most of the lightweight stuff we see in the popular media describes capitalism as a sort of godlike force moving humanity toward ever greater "standards of living" (by which they mean doing less work and at the same time increasing consumption). In fact Galbraith points out that, to the contrary, capitalism has two general states or "equilibrium states," conditions which, when they are reached, tend to hold on for long periods.

The economic condition everyone seems to worship, and in fact equate with capitalism, Galbraith terms "high equilibrium." This has been the general economic situation of the USA since 1945. When we have high equilibrium we have low unemployment, inflation problems, high resource utilization, high levels of waste and increasing demand for most things. Everyone else in the world would like to have this general economic state. These periods are called "economic booms".

The root cause of such long booms is a mass psychological attitude that things are going to get better and more secure (but also more expensive). Jobs will be more plentiful, credit will be more available, etc. The psychology is "Buy now, pay later." This is an adaptive attitude as the "later" involves cheaper (inflated) money.

In actuality what we have seen in the end phases of this "long boom" is that the value of money decreases faster than the typical person's ability to make it and we have real declining incomes and declining wealth (as people use credit to make up for income shortages), more bankruptcies, and frantic attempts by government and the financial institutions to keep things going.

The "low equilibrium" phase of capitalism is characterized by slow activity. This is a phase in which people do not expect tomorrow to be better than today and thus they hoard their money and act very prudently, perhaps too prudently. This causes a long period of economic contraction characterized by high unemployment, scarce credit, low resource demand, low consumer demand and great bitterness and pain. Obviously these "low" conditions also reinforce each other.

The transition between "high" and "low" equilibrium states seems to me to be a "Great Depression" or a war or cataclysm of some type.

The USA has not had a Great Depression since 1929. To see one of these low phases come to life please observe the economic history of Russia since 1989. That country may have had more than a 50% drop in average living standards in five or six years. The Russian economy seems to have clearly gone through a Great Depression since 1989 and now seems to be stuck in a low equilibrium phase.

Depressions are frightful to the general public. The media and political types react hysterically to the very words involved. In fact the term "depression" was so scary after 1940 that the term "recession" (meaning a less serious pause in business activity with two quarters net negative economic or GNP growth) was coined to replace it. Then during the Carter administration the term "recession" was banned as also being too scary, leaving one administration economist testifying before Congress saying that since he could no longer use the word "recession" he would use the word "banana" to refer to two consecutive quarters of net GNP contraction.

The real driving engine behind a Great Depression is a period of extended deflation of the currency. People become frightened and this tends to make the depression worse. The mass psychology switches to negative expectations: "Tomorrow will be worse."

During inflation a manufacturer can make a product, place it on a shelf, and then raise prices as inflation progresses. The investment is secure if the price can be raised at least as quickly as inflation cheapens the value of money.

During deflation a manufacturer is punished for making a product if it is not sold immediately. This is because the price it can be sold for declines with time while the costs for manufacturing have already been paid. Under deflation it is frequently wiser for manufacturers to keep their money in financial instruments which will beat deflation, such as government bonds, than to lose money running a plant. People quickly realize that it is best to hold their now difficult-to-acquire money, because it will tend to buy more tomorrow. This cycles through the economy and things slow down.

At some point in these contractions the economy reaches a low equilibrium phase where people are very cautious and business activity is minimal. This reflects a systematic contraction of "aggregate demand." There is no reason for this to change unless the mass psychology switches and the actual necessary economic demand can be generated.

While inflation can be fought with increases in interest rates, as those of us who lived through the "Volker era" in the mid-1980's can remember, the reverse may not work with deflation. While we can raise interest rates as high as we need to strangle demand, we cannot lower them below zero to stimulate demand. If people's expectations are negative enough, even interest rates below 1% may not be attractive.

It's not just consumers who develop negative expectations. Galbraith recounts that when he was involved in mobilization of production during WW II, the government ran into resistance from the steel companies. The companies were certain that once the war was over the economy would go right back into the depression and they didn't want to be stuck with new steel mills or "excess capacity" at that point.

It seems clear to me that we are headed into a deflation/depression phase. There is much anxious talk now about deflationary pressures resulting from the Asian financial catastrophe. Interestingly enough, the media I see always seem to mention this and then try to make light of it. We used to call this "whistling past the graveyard." They know that if a real bad one hit, all these "Live Stock Markets Today"-type shows will be replaced with Soup Kitchen and riot footage.

People in this country are less and less able to pay for necessities. After the late 1970s American living standards were partially maintained only by all of the available women entering the workforce. Now they are all out working, and in fact are being downsized and squeezed from many directions, and still our "living standards" are falling.

In the 1980s and '90s people took out second mortgages which were not spent on their houses. The percentage of home ownership equity has fallen. Ditto for credit cards. The bankruptcy rate is rising rapidly. This by itself will probably cause a financial panic in a few more years.

Under these likely near-future conditions, what is a prudent person to do? Do you head for Las Vegas and take the long shot or to the homestead and take the sure shot?

If we study the last Great Depression we see that American social organization was very different then. Some of these differences probably lessened the impact of the Depression and the resulting "low" period substantially. These saving features are no longer present in the USA.

During the 1930s a much higher percentage of people lived on farms or had close relatives living on farms. A much higher percentage of all jobs involved agricultural activities including things like railroad freight and other shipping jobs. These activities never fall below a certain level.

There was a migration to farms, farm labor migrations, and labor camps and concentration-type camps for the homeless poor. (Read John Steinbeck's books on this era. He wrote about what he saw going on around him.) People learned to make do with anything and to recycle everything.

People who lived in the cities, it seems to me, had much greater anxiety than people living in the country. This is because city life requires economic activity, particularly constant purchases, for basic survival. This is less true on a homestead which affords shelter and produces some food and fuel. Political and social instability are features of Great Depressions and these seem to have mostly been a city phenomenon during the last Great Depression. There are a few exceptions such as Bulgaria's "Green Socialists" under Boris III and Stambolinsky, but largely the rioting and political activity occurred in cities among people who felt they had little to lose.

While a Great Depression seems to be in our immediate future, what of the "beyond the beyond"? What happens after a Great Depression? Do we drop painfully back into a low equilibrium or bounce happily back to a high equilibrium economy? This depends upon the mass psychology and the ability of the leadership to stimulate demand.

A recent article by Lester Thurow regarding the Asian crisis points to Japan as an example of an economy with unparalleled financial resources, social cohesion and great industrial and commercial capacity, but inept leadership. This has resulted in the Japanese economy not turning around following the bursting of the "bubble" mania. Despite their advantages they could slip into a prolonged low equilibrium condition.

What happens if a substantial part of the world (the USA, Japan, Europe etc.) goes into low equilibrium at the same time? How long would it take to get back to the "good old days"? I think it could take generations.

Life is a series of risks under the best of conditions. We must do our best with imperfect knowledge and limited insight. How deep a hole could we fall into? I doubt that anyone expected the severity of the drop in Russian living standards following the disintegration of the Soviet Union. Do we have liabilities that could take us to this depth? Possibly so.

To take an easy one we can look at our money. Our current dollar is probably worth between eight and twelve cents compared to the 1931 dollar. If a full deflationary cycle were to run its course, all the inflation has to be squeezed out of the dollar. Thus, the purchasing power of a dollar should expand eight to twelve times. Of course our incomes will also drop to one eighth to one twelfth of current levels to reflect this.

Unfortunately the contracts we have made to pay off house notes, credit cards, etc, will not drop because they are denominated in dollar amounts. These will become unpayable.

This process of general contraction takes something like a year to achieve. In the recent Russian example it took two or so years to achieve a 30%+ decline in living standards.

A personal example: My mother began working in Chicago in 1931. That year the deflationary wave associated with the Great Depression hit the local business sector. As the newest salesperson in a retail department store, she took six pay cuts in nine months. She would have been cut further but the government passed a law guaranteeing a minimum wage and stopped nationwide pay cuts once they reached that level.

Unfortunately, there is another problem. The 1931 dollar was backed by gold. This provided a sort of floor for devaluation because there is a market for gold which is somewhat independent of the dollar. The dollar of today is backed not by gold but by the promises of politicians. Should a prudent person bet their survival chances on the promises of politicians?

What is a prudent person to do?

It seems likely that there will be a huge wave of deflation leading to foreclosures and bankruptcies. Credit card debt is essentially not collateralized so there is nothing to seize when the banks panic. The usual strong-arm collection tactics they are masters of will force people into bankruptcy when they cannot pay. Very much of this activity and the entire banking system goes into decline.

History will describe this as a "Great Depression" although the government will probably try to put some "spin" on it. Maybe the government will call it a "Great Banana" until their denial collapses. The Feds will eventually save the banking system but this will take time. All of the resulting hysteria and theatrics will aggravate a crash and it sure looks like we are headed for a long period of "low equilibrium capitalism" following the crash.

So what is a prudent person to do?

Bear with me while I attempt to sketch the larger picture. Fernand Braudel describes economies as having up to three layers, sort of like a layer cake.

The simplest (lowest), and most universal layer is at the level of the topsoil. This is the extraction layer. The layer of the farmstead, fishery, mine and forest. Relationships are face to face and face to dirt, timber and water. This level is not something that can be seen as actually distinct from the topsoil. This is where most humans have always lived. Throughout virtually all of human history over ninety percent of all humans have lived as hunters, herdspeople and peasants.

The middle layer is built on the first and is the level of commerce. Buying and selling and organization of markets occurs here. Relationships are more remote and abstract. This second layer is less extensive than the first, and not all societies have it.

The third (top) layer, built directly upon the others, is the layer of finance. Few societies have this layer. This layer is largely remote from the reality of the topsoil or face to face relationships.

Financial panics and crashes primarily start in the financial layer. Recessions and depressions occur in all layers with the deeper events (Great Depressions) beginning in the financial layer and driving progressively down into the primary layer. A very good description of this process (and the reasons to be on a homestead during one) is described in J. D. Belanger's A Place Called Attar (available through this magazine).