All about ideas…

Great Depression vs Great Recession

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The market crash of 1929 and the Great Depression were brought on by the very same behaviors that caused the Great Recession and financial crisis. Overconfidence in the belief that prices would never fall. Over-speculation. Debt levels too high. Leverage too great.

While the financial instruments that sparked this crisis did not exist, the euphoria brought on by rising profits and wealth caused everyone to “get in on the action.” Greed overcame prudence…and thoughts of risk were pushed aside as everyone told themselves the market will never fall.

Well, the market did crash in 1929 just as it did again in 2008.

Jesse’s Café Américain, an economy blog, wondered if the monetary expansion seen today as a response to the Great Recession had an historical equivalent in the Great Depression. He found it and offers, as well, his recommendations on changing the current economy. It follows closely what many other well respected economists are saying…and could help Congress in its financial regulatory deliberations if they were willing to take the advise of someone outside of the Beltway and Wall St.

Let’s take a look again at a prior period of dollar devaluation and monetary expansion in a period of deep recession, the period in the 1930’s in which the US departed from specie currency to facilitate the radical expansion of the monetary base.

monetarybase to 1939

As you can see, the Federal Reserve increased the monetary base in several steps, resulting in an aggregate increase of about 155% in four years. In this chart above one can also nicely see the contraction in the monetary base, the tightening, that caused a dip again into recession in 1937.

It is also good to note that the recession ended and the economy was in recovery prior to the start of WW II, which I would tend to mark from Hitler’s invasion of Poland in August, 1939. There was a military buildup in Britain before then, but I believe that the common assumption that only the World War could have ended the Great Depression was mistaken.

If real GDP is any indication, the recovery of the economy was underway, but somewhat anemic compared to its prior levels, reflected in a slow decline in unemployment. It is absolutely essential to remember that the US had become a major exporting power in the aftermath of the first World War. The decline therefore of world trade with the onset of the Depression hit the US particularly hard. But the recovery was underway, until the Fed dampened it with a premature monetary contraction that brought the country back into recession, a full eight years after the great crash. Such is the power of economic bubbles to distort the productive economy and foster pernicious malinvestment.[…]

The status quo has failed in its own imbalances and artificial distortions. But while avoiding bubbles in the first place through fiscal responsibility and restraint is certainly the right thing to do, plunging a country which is in the aftermath of a bubble collapse into a hard regime, such as the liquidationists might prescribe, is somewhat like taking a patient which has just had a heart attack and throwing them on a rigorous treadmill regimen. After all, running is good for them and if they had run in the first place they might not have had a heart attack, so let’s have them run off that heart disease right now. Seems like common sense, but common sense does not apply to dogmatically inclined schools of thought.

What the US needs to do now is reform its financial system and balance its economy, which means shrinking the financial sector significantly as compared to its real productive economy. This is going to be difficult to do because it will require rebuilding the industrial base and repairing infrastructure, and increasing the median wage.

The US needs to relinquish the greater part of its 720 military bases overseas, which are a tremendous cash drain. It needs to turn its vision inward, to its own people, who have been sorely neglected. This is not a call to isolationism, but rather the need to rethink and reorder ones priorities after a serious setback. Continuing on as before, which is what the US has been trying to so since the tech bubble crash, obviously is not working.

The oligarchies and corporate trusts must be broken down to restore competition in a number of areas from production to finance to the media, and some more even measure of wealth distribution to provide a sustainable equilibrium. A nation cannot endure, half slave and half free. And it surely cannot endure with two percent of the people monopolizing fifty percent of the capital. I am not saying it is good or bad. What I am saying is that historically it leads to abuse, repression, stagnation, reaction, revolution, renewal or collapse. All very painful and disruptive to progress. Societies are complex and interdependent, seeking their own balance in an ebb and flow of centralization and decentralization of power, the rise and fall of the individual. Some societies rise to great heights, and suffer great falls, never to return. Where is the glory that was Greece, the grandeur that was Rome?


One Response

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  1. Hmm… I don’t think I can agree with you on that but hey, very interesting thought you got there, makes a lot of sense.

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    December 2, 2010 at 5:29 AM

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