The Third Depression
The US economy as we know it has collapsed. This has happened before, twice, and history is repeating itself again. This is the Third Depression the United States has suffered, and it will be the worst.
In the Gilded Age of the 1890′s, and the Roaring Twenties, improvements in technology and industry fueled rapid economic expansions. Capitalism was revered as the new engine of progress, onerous government regulations were seen as an impediment to growth. These were the days of “laissez faire” economics and unscrupulous Robber Barons.
Sound familiar?
Inevitably there was a growing disparity in incomes, but the majority of Americans were more concerned with getting rich than helping the poor. Most investors believed these economic booms would last forever, but this optimism proved to be their undoing as exuberance bid up share prices. The day came when prices fell, and markets collapsed.
The Gilded Age ended with a monetary crisis in the first decade of the twentieth century. Incoming President Teddy Roosevelt was forced to borrow money from wealthy elites to finance the government. The Roaring Twenties ended in a more spectacular fashion, the stock market crash of 1929 ushered in the Great Depression.
Depressions are created when money disappears. People suddenly become poorer, and they spend less money. With less demand for goods and services, production declines and prices fall, causing a downward spiral of unemployment and falling incomes.
Over 20 trillion dollars has evaporated from the market value of the world’s companies since the financial meltdown began. Obviously this has not just bankrupted Wall Street. Pension funds, 401ks, and municipalities hold stocks and securities that deflated along with the stock market.
American households have lost $10 trillion, a record decline in our standard of living. Most of this represents the loss of home equity from the collapsing housing market. Adding insult to injury, one in five US homebuyers now owe more on their mortgages than their homes are worth.
Unemployment is the only statistic that is climbing. 663,000 Americans lost their jobs in March, the fourth straight month of record layoffs. So far, the economic crisis has cost 5.6 million jobs, and the national unemployment rate has climbed above eight percent.
This is not a “severe recession”, we are in an economic depression, no matter what the government and pundits claim.
Three banks failed in the United States in 2007, another 25 failed in 2008. So far this year 20 banks have gone into receivership, and the FDIC warns that the list of troubled banks is increasing. If not for the Federal Deposit Insurance Corporation, we would have bank runs in this country again.
During the Great Depression depositors rushed to the banks to withdraw their money as the economy collapsed. Since we have a fractional reserve banking system, banks did not have enough cash on hand to cover the withdrawals. There was no insurance for deposits, so those who were first in line got their money, everyone else lost their savings, and the bank went under.
By the time Franklin D. Roosevelt was elected, banks had either failed, or placed restrictions on how much money depositors could withdraw. On March 6th, 1933 the President declared a national “bank holiday”, closing the banks for a week. FDR reassured the American People that this would solve the bank crisis with the famous line; “The only thing we have to fear is fear itself.”
The following week only banks that had enough cash on hand to cover all their deposits were allowed to reopen. Banks that were unsound stayed closed until they received a government loan to rebuild their reserves, or declared bankruptcy. Millions of Americans lost their life savings during this “bank holiday”.
Today we don’t have bank runs or bank holidays, we have bank bailouts.
The Federal part of FDIC’s name refers to the US government, (not to be confused with the privately owned Federal Reserve). When a bank in the United States goes into receivership, the FDIC uses taxpayer money to cover all the insured deposits at the bank. This has been done for small, local banks that create bread-and-butter loans for homes and businesses.
But the really big financial firms like Citigroup, AIG, and JP Morgan, the ones that made this mess, simply won’t be allowed to fail.
Last October the Bush administration passed the $700 billion Troubled Asset Relief Program. Just like the bank holiday of the Great Depression, TARP was sold to the American people as a way to end the economic crisis. Instead the money is being used to bail out Citigroup, Bank of America, and the other institutions that have caused this depression.
The “troubled assets” referred to are of course derivatives. TARP has funneled billions of our taxdollars to Morgan Stanley, Goldman Sachs, and other financial firms in exchange for these worthless assets. Unfortunately, the nominal value of all derivatives contracts held by US banks has reached 200 trillion dollars, so TARP is just a drop in the bucket.
Since President Obama’s election, the Federal Reserve and Treasury Department have tried various ways to contain the economic meltdown.
The Fed has launched an alphabet soup of new auction facilities that have purchased over one trillion dollars worth of derivatives. Two weeks ago the U.S. Treasury created the Public Investment Corporation. This aptly named government agency will invest another trillion in derivatives, using our taxdollars as collateral.
Finally, the Obama administration has passed a massive 3.5 trillion dollar federal budget, the largest in history. Half of the budget for 2009 is debt. And nearly half of this year’s $1.85 trillion federal deficit is the administration’s $787 billion “stimulus”.
In the Great Depression when the imaginary wealth created by speculators disappeared, the money vanished during the bank runs. Trillions of dollars worth of wealth has disappeared again, only this time the Treasury and Fed are printing trillions to cover the losses. The Obama administration has put the world on notice that they will simply create the money to bail out our economy.
So the question is: Who is going to finance our debt? That is to say, who is going to purchase nearly three trillion in U.S. treasury bonds in exchange for dollars?
China, Japan, and Sovereign Wealth Funds buy 70% of our debt. Our merchandise trade deficit with the rest of the world surpassed $800 billion last year. Which is of course where these foreign interests get the money to buy U.S. Treasuries.
Six months after the 1929 market crash world trade had declined by 30 percent. According to the Progressive Policy Institute, merchandise imports in the United States have fallen by a third, to $210 billion a month from $310 billion six months ago. Japan’s exports plunged a record 49 percent in February, automobile exports tumbled 71 percent.
In addition to plummeting revenues from imports to the U.S., foreign interests have lost billions on their investments. Norway’s state pension fund lost 90.5 billion dollars last year. The Government of Singapore Investment Corp. lost as much as $33 billion in 2008. Kuwait’s sovereign fund lost 31 billion dollars a a result of the global economic crisis. The worst losses were from high-flying financial stocks like Leyman Brothers, (now bankrupt), and Citigroup, down 80 percent.
The world has been badly burned by our financiers, and they are not too keen to invest more money here. We’ve exported our depression to the rest of the world, now we expect them to rescue our economy. The day will come when they cannot or will not purchase enough U.S. Treasuries to finance our deficits.
Interest rates on our national debt are low only because bondholders are confident in our ability to make payments. The US dollar maintains its value on world markets because foreign nations believe we can afford our appetite for imported goods. As our economy implodes and our deficits skyrocket, the world is losing faith in the dollar.
Our currency lost one third of its value between 2002 and mid-2008. Only recovering because of its status as a safe haven during the crisis. The one thing holding up the dollar right now is fear, of the consequences should the world’s reserve currency collapse.
The danger of course is that as the dollar declines in value, it becomes less profitable to hold, and the incentive to sell dollars increases. If enough central banks and foreign investors began unloading US assets, other investors and financial institutions will see the dollar rapidly losing value. They will have to sell their US securities quickly, to protect themselves from further losses on their dollar denominated holdings.
This will cause another financial panic, and the hyperinflation of the US dollar.
A run on the dollar is inevitable, and will create a vicious cycle causing our currency to depreciate even more. As our dollar loses value, foreign goods purchased with dollars become more expensive. Since we are now dependent on imported goods, (see the trade deficit figures above), our shrinking dollar means higher prices for those goods.
The United States has endured boom and bust cycles in the past. But the Robber Barons who gave us the Great Depression also built railroads, steel mills, and car factories. The entrepreneurs who created the dotcom bubble also gave us the internet and world wide web.
These oligarchs have created nothing but debt.
During the Great depression the United States was the world’s largest creditor. The Federal budget was balanced, and we had trade surpluses with the rest of the world. We were the world’s number one producer of cars, we made our own clothes, and our oil came from Texas.
Debt, and our dependence on imported oil and manufactured goods will make the coming collapse much worse.
We don’t have an auto industry anymore. General Motors and Chrysler are on the brink of bankruptcy. Even if the government extends loans to keep them afloat, they will simply be corporations on welfare like our banks. No one can afford to drive their SUVs, and the cars Americans do want are imported.
American ingenuity created the modern computer revolution, then we exported it. Today we cannot manufacture LCD monitors, DVD drives, most of our semiconductors, and the other components of our hi-tech economy. We are completely dependent on Asian companies like Samsung and Sony, and they are the beneficiaries of our digital world.
The Chinese are not going to fill our Wal-Marts with electronics, the nations of the Middle East are not going to pump our oil, and the Mexicans won’t pick our crops in exchange for worthless paper.
When the dollar collapses, everything will be gone.
America survived the Great Depression, and went on to victory in World War II. After the war the United states emerged as the pre-eminent nation on this earth. We will survive the Third Depression as well, but our days as an economic superpower are over.
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