Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

Economic Depression Within the Great Depression

Economics / Great Depression II Oct 22, 2010 - 01:52 PM GMT

By: James_Quinn

Economics

Diamond Rated - Best Financial Markets Analysis ArticleBy James Quinn, Contributor, The Casey Report : Regular Casey Report contributor James Quinn is the head of strategic planning for one of the world's most prestigious business schools and the host of TheBurningPlatform.com blog. In this article, he is presenting historical indicators that may tell us what’s in store for the U.S. economy. 


In recent months, worshippers at the altar of Keynes have been hyperventilating over the possibility Congress will run a deficit of “only” $1.5 trillion in 2010. They have issued dire proclamations about a replay of the 1937-1938 Depression within the Great Depression. White House favorite and #1 Keynesian on the planet, Paul Krugman, declared that not borrowing an additional $100 billion to hand out to the unemployed for another 99 weeks would surely plunge the country into recession again:

“Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.” - Paul Krugman in NYT

So did Roosevelt’s attempt to balance the budget in 1937 cause the second major downturn in 1938? I’m a trusting soul, but I prefer to verify what is being peddled to me by any economist, especially Paul Krugman. 

Ghost of Keynes Past

Today’s Keynesian economists have convinced boobus Americanus that the Great Depression was caused by the Federal Reserve being too tight with monetary policy and the Hoover administration not providing enough fiscal stimulus. Ben Bernanke and Barack Obama used this line of reasoning to ram through an $850 billion pork-laden stimulus package, as well as the purchase of $1.2 trillion of toxic mortgages by the Federal Reserve. 

The only trouble is that this storyline is a complete sham. 

The fact that colossal stimulus spending, zero interest rates, the purchase of over a trillion in toxic assets by the Fed, and the loosest monetary policy in history have done absolutely nothing to revitalize the economy, has proven that Keynesian policies have been a wretched failure. This is not a surprise to Austrian school economists. 

Keynesian policies failed during the Great Depression, and they are failing today. An economic catastrophe caused by loose monetary policies, crushing levels of debt, and appalling lending practices cannot be solved by looser monetary policies, issuance of twice as much debt, and government commanding banks (or, in the case of Fannie and Freddie, “commandeering”)  to make more bad loans. 

Ludwig von Mises described what happened in the 1920s and 1930s. His explanation accurately illustrates the situation in America today. 

"There is no means of avoiding the final collapse of a boom brought on by credit and fiat monetary expansion. The only question is whether the crisis should come sooner in the form of a recession or later as a final and total catastrophe of depression as the currency systems crumble.”

The Roaring Twenties

They don’t call the 1920s roaring because money wasn’t flowing freely and consumers were practicing frugality. The newly created Federal Reserve expanded credit by setting below-market interest rates and low reserve requirements that favored the big Wall Street banks. The Federal Reserve increased the money supply by 60% during the period following the recession of 1921. By the latter part of the decade, "buying on margin" entered the American vocabulary as more and more Americans overextended themselves to speculate on the soaring stock market. 

The 1920s marked the beginning of mass production and the emergence of consumerism in America, with automobiles a prominent symbol of the latter. In 1919, there were just 6.7 million cars on American roads. By 1929, the number had grown to more than 27 million cars, or nearly one car for every household. During this period banks offered the country's first home mortgages and manufacturers of everything – from cars to irons – allowed consumers to pay "on time." Installment credit soared during the 1920s. About 60% of all furniture and 75% of all radios were purchased on installment plans. Thrift and saving were replaced in the new consumer society by spending and borrowing. 

Encouraging the spending, the three Republican administrations of the 1920s practiced laissez-faire economics, starting by cutting top tax rates from 77% to 25% by 1925. Non-intervention into business and banking became government policy. These policies led to overconfidence on the part of investors and a classic credit-induced speculative boom. Gambling in the markets by the wealthy increased. While the rich got richer, millions of Americans lived below the household poverty line of $2,000 per year. The days of wine and roses came to an abrupt end in October 1929, with the Great Stock Market Crash.

Between 1929 and 1932, the market fell 89% from its high. The Keynesian storyline is that Herbert Hoover’s administration did nothing to try and revive the economy. It took Franklin Delano Roosevelt and his New Deal Keynesian policies to save the country. It’s a nice story, but completely false. Between 1929 and 1933, when Roosevelt came to power, the Hoover administration increased real per-capita federal expenditures by 88%, not exactly austere. 

Excessive Consumer Spending 

When examining the BEA chart of GDP from 1929 to 1939, some fascinating similarities with today’s economy leap out. In 1929, consumer expenditures accounted for 72.3% of GDP, confirming that the much-commented-upon American consumerism is not a modern development. In fact, consumer spending peaked at 81% of GDP in 1932 and remained above 70% during the entire depression. 

By 1950 consumer expenditures had subsided to 64% of GDP. In 1960, they had fallen to 63% and edged up to 64% by 1970, where they remained until 1980. By 1990 they had ticked up to 66% and by 2000 had reached 68%. The modern-day climax appeared to many to have been reached in 2007 at 70% of GDP. But in a replay of the New Deal playbook, where much of the consumerism was funded by make-work projects and federal transfer payments, the federal government has thrown billions of dollars at consumers to buy houses, cars, and appliances. Consumer expenditures as a percentage of GDP actually rose to 71% in 2009. It should be readily apparent that until consumer expenditures are narrowed to a level that leads to a sustainable balanced economy, the current depression will continue indefinitely.

Bureau of Economic Analysis National Income and Product Accounts Table

Table 1.1.6A. Real Gross Domestic Product, Chained (1937) Dollars [Billions of chained (1937) dollars]
 
 1929 
 1930 
 1931 
 1932 
 1933 
 1934 
 1935 
 1936 
 1937 
 1938 
 1939 
Gross domestic product
87.3
79.8
74.6
64.9
64.0
71.0
77.3
87.4
91.9
88.7
95.9
Personal consumption expenditures
63.1
59.7
57.8
52.6
51.5
55.1
58.5
64.5
66.8
65.8
69.4
Gross private domestic investment
12.2
8.1
5.1
1.5
2.3
4.1
7.6
9.7
12.2
8.0
10.3
Net exports of goods and services
0.8
0.4
0.2
0.0
-0.1
0.2
-0.5
-0.3
0.1
0.9
1.0
Government consumption expenditures and gross investment
9.2
10.2
10.6
10.2
9.9
11.1
11.5
13.4
12.8
13.8
15.0

The Depression Within the Depression

The Great Depression lasted from 1929 until 1940. What is not well known is that GDP was at the same level in 1936 as it had been in 1929. In no small part because GDP soared by 37% between 1933 and 1936. The unemployment rate in 1929 was 5%. In 1936, even after GDP had recovered to pre-depression levels, the unemployment rate was still 15%. It spiked back to 18% in 1938 and stayed above 15% until World War II. Tellingly, in 1936, private domestic investment was 21% below the level of 1929. 

By contrast, government expenditures surged by 46% between 1929 and 1936. With the government creating agencies and hiring people into make-work projects, private industry was crowded out. The extensive governmental economic planning and intervention that began during the Hoover administration was expanded significantly under Roosevelt. The bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending on public works prolonged the Great Depression.

unemployment

The evidence strongly contradicts the notion promoted by Krugman and other Keynesian worshippers that the supposed 1937-38 Depression within the Great Depression was caused by Roosevelt becoming a believer in austerity. In fact, GDP only dropped by 3.5% in 1938 and rebounded by 8.1% in 1939. What actually collapsed in 1938 was private investment, which fell 34%. By contrast, government spending declined by only 4.5% in 1938, confirming that Roosevelt did not slash spending. To the extent that he eased up on the accelerator, it was by cutting back on jobs programs like those provided by the Works Progress Administration and the Public Works Administration.

The reason private investment collapsed in 1938 was Roosevelt’s anti-business crusade. He denounced big business as the cause of the depression. In March 1938, FDR appointed Yale University law professor Thurman Arnold to head the antitrust division of the Justice Department. Arnold soon hired some 300 lawyers to file antitrust lawsuits against businesses. Arnold launched cases against entire industries, with lawsuits against the milk, oil, tobacco, shoe machinery, tires, fertilizer, railroad, pharmaceuticals, school supplies, billboards, fire insurance, liquor, typewriter, and movie industries.

The Greater Depression and Excessive Debt

gdp

Some Conclusions

The mainstream media’s popular narrative about the causes and cure for the Great Depression invariably start with the storyline that the stock market crash caused the Great Depression. Herbert Hoover purportedly refused to spend government money in an effort to reinvigorate the economy. Franklin Delano Roosevelt’s New Deal government spending programs allegedly saved America. 

This storyline is a big lie. 

The Great Depression was caused by Federal Reserve expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. When the Federal Reserve belatedly tightened in 1928, it was too late to avoid financial collapse. According to Murray Rothbard, in his book America’s Great Depression, the artificial interference in the economy was a disaster prior to the depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. Government intervention delayed the market’s adjustment and made the road to complete recovery more difficult. 

The parallels with today are uncanny. Alan Greenspan expanded the money supply after the dot-com bust, dropped interest rates to 1%, encouraged a credit-driven boom, and created a gigantic housing bubble. By the time the Fed realized they had created a bubble, it was too late. The government response to the 2008 financial collapse has been to expand the money supply, reduce interest rates to 0%, borrow and spend $850 billion on useless make-work pork projects, encourage spending by consumers on cars and appliances, and artificially prop up housing through tax credits and anti-foreclosure programs. The National Debt has been driven higher by $2.7 trillion in the last 18 months.

The government has sustained insolvent Wall Street banks with $700 billion of taxpayer funds and continues to waste taxpayer money on dreadfully run companies like Fannie Mae, Freddie Mac, General Motors, and Chrysler. The government is prolonging the agony by not allowing the real economy to bottom and begin a sound recovery based on savings, investment, and sustainable fiscal policies. President Obama continues to scorn business by creating more burdensome healthcare, financial, and energy regulations. 

Today’s politicians and monetary authorities have learned the wrong lessons from the Great Depression. The result will be a second, Greater Depression and more pain for the middle class. The investment implications of government stimulus programs are further debasement of the currency and ultimately inflation and surging interest rates. Owning precious metals and mining stocks, and shorting U.S. Treasuries will pay off over the next few years.  

Regular Casey Report contributor James Quinn is the head of strategic planning for one of the world's most prestigious business schools and the host of TheBurningPlatform.com blog.

Gleaning emerging big-picture trends by putting all the puzzle pieces together is the specialty of The Casey Report. Following the theory that only a prepared and well-educated investor is a successful investor, the team of editors analyze current and historical data – and then recommend the profit opportunities that make the trend your friend. Read more here.

© 2010 Copyright Casey Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014