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March 28, 2006

Great Depression Redux

I read this in my college textbook today, a passage describing the decade prior to the Great Depression;

"In the United States, industries had overexpanded, boosting productivity by some 40 percent during the 1920's, but consumers did not have the money to buy the goods thus produced. Too much wealth had fallen into too few hands. Worker's wages had fallen far behind inflation, and farmers were bankrupted by chronically low crop prices. The stock-market collapse added to the momentum. Furthermore, consumer debt rose by 250 percent during the 1920's. A decentralized banking system had allowed banks to divert more funds into speculative investments. Still other factors in the Depression were an unregulated and shaky corporate structure as well as a high tariff." The Press and America, 9th ed., p 301

I'm no economics major, but if you're saying these are the problems that led to the Great Depression, then let's apply that logic to today, point by point, and see where it takes us;

Point 1: "Industries had overexpanded."
I would point to the U.S. housing industry, which contains today "more than $3 trillion in illusory wealth," representing a bubble which just simply must "pop" soon.

Point 2: "Too much wealth had fallen into too few hands."
We've all heard "the rich are getting richer," there's plenty of commentary on the subject, and a just-for-instance graph for ya here. Incidentally, even William F. Buckley acknowledges this to be true but doesn't think it's a problem, just the "market doing its work."

Point 3: "Worker's wages had fallen far behind inflation."
Again, lots of evidence here, I would direct the curious towards jobwatch.org, which among other things links to "The longest sustained labor slump since the Great Depression."

Point 4: "farmers were bankrupted by chronically low crop prices."
I don't think we can look today at the economic importance of farming in the same light as 1929. However, all American goods and services are at a distinct disadvantage today due to the high U.S. dollar, a fact which has the same implications. Why buy an American widget when a Chinese widget is cheaper by half? We currently import $450 billion a year more in foreign goods than we export, which if you listen to a real economist is a dangerous and unsustainable situation to be in. Note; we did not get here by accident, which among other things is why I am angry with Clinton about NAFTA.

Point 5: "The stock-market collapse added to the momentum."
Now George Bush and others will tell you that our economy has recovered from the stock-market crash of 2000, but the recovery has been weak, and is partly a product of the "astounding" run-up in housing prices. If, IF, the housing "bubble" crashes hard in the U.S., the financial fallout may be far worse than in 2000. The U.S. government is already over $8 trillion in debt today, so how is the FDIC going to bail out mortgage lenders to the tune of $3 trillion (our illusory housing wealth figure)?

Point 6: "consumer debt rose by 250 percent during the 1920's."
Today, we are a "nation of debtors." Last year, the American savings rate was negative for the first time since 1933. Today the "ratio of consumer debt to household income [is] at near record levels."

Scared yet? Hold on, we're almost done;

Point 7: "A decentralized banking system had allowed banks to divert more funds into speculative investments."
By definition, a housing bubble is "speculative." Consider the "reverse mortgage" and "interest only mortgage," so prevalent in today's market, which are essentially bad investments by banks; as interest rates rise, we may see record defaults on loans that never should have been made in the first place.

Point 8: "Still other factors in the Depression were an unregulated and shaky corporate structure [...]"
Enron, Worldcom, Arthur Andersen... these firms are cliches by now, but soon can we add Fannie Mae? Cripes!, a quick check of the Fannie Mae homepage turns up a March 13th, 2006 link to their filing of form 12b-25 with the SEC - they are delaying their 2005 Annual Report for various reasons including "certain accounting matters" and "certain key business and market issues that have affected the company"!? ... Here we go ... ?

Point 9: "[...] as well as a high tariff."
... Okay, well you got me there. If by "tariff" a "tax on imported goods" is meant, then tariffs on technology and luxury goods is low in the U.S. today, although tariffs on things like shoes and clothing are still relatively high.

So are we headed for the Great Depression II?

On a personal note, its hard to say exactly why I am such a persistent and vociferous pessimist on the economy, but it has something to do with a desire to be "always right," and an overdeveloped fear of being taken for a sucker. Over time, I realize more and more these feelings are not always productive. But that's okay, I'm enjoying who I am and where my interests are taking me today. End personal note.