Apr 25, 2009

Compare this crisis to anything but the Great Depression

We aren't the America most people think we are. We have relied on easy money, deficit spending and our designation as the world reserve currency to sell as much national debt as humanly possible. Why compare this crisis to the great depression when 1790-1795 France and the destruction of the Asignot is extremely similiar to the currency destruction our government had created via reckless fiscal and monetary policy.

The Great Depression: Most don't realize the inflationary act in the 1920's was to help the British out, but also kicked started the roaring 20's. Of course everyone was happy during the boom times, which only had the magnitude and duration it did because it became a bubble economy. But when the economy hit the wall and significant wealth was destroyed due to the governments intervention which distorted peoples time preference thus causing large missallocations of capital.  FDR's continuous government intervention such as price controls and artifical job creastion was the reason the crisis was prolonged, making a  2-3 years ordeal last  nearly a decade. So what it so different than the currenct crisis? Well the biggest difference lie in the foundation and health of the economy and its fundamentals.

 The 1930's America was one of, if not the biggest creditor nation in world as opposed to current conditions, which we have transformed ourselves into the biggest debtor nation.The previous point obvisouly lie in the fact that we had unparralled productive capacity realtive to the rest of the world. Today our productive capacity relies mostly on technology and services, which need much larger capital expenditures in order to compete in the global marketplace. 

The roaring 20's was a period of excess but doesn't compare to the unprecendented excesses americans have been living in the last decade. Our governemnt has squandered trillions upon trillions, which at somepoint have to be repaid with interest wihich will either come from the printing press or a default. the latter would likely cause the chinese to de-peg causing input pirces to increase. But more importantly it would undermine the U.S as the economic superpower and thus the USD would no longer remain the reserve currency. These both would result in an enormous influx of dollars back to the united states. remeber about half of our currency is outside our boarders.The great depression allowed for multiple bankrupties, which the government did not bailout and inflate the money supply exponentially. We have began to monetize our debt (which i talked about in the previous article).

 It's hard to count the bubbles being created as i write this. There is the bond bubble, the consumer credit bubble which will pop in the near future, and the housing bubble which has been popped but we still don't know the size of the balloon. Not to mention the fed marking the purchase of their CDS purchases and mark them to market while in reality i would be surprised if they were worth 10-15 cents on the dollar.

In other words even with the massive government intervention in the 1930's, the end game resulted in a 10 year recession. The current siutation has involved intervention to such a degree, the free market can't fight it off. Though i try to remain optimistic, the sheer fact the FED doesn't realize that this is a currency crisis, is brining us to the brink of hyperinflation.


If the Fed can only relate this to pre-revolutionary france, which involved abaonment of the gold standard (like we did at Bretton Woods), they would clearly see what the future holds. When France was in a recession the issue of abadoning the gold standard in favor of paper money (the asingot), which was initially defended by the best intellectual, government influence eventually took over. They began stimulus packages (or our equivalent to one) and sold of land such as churches etc and incurred rather large debts. These stimulus packages worked much like cutting the interest rate from 5% to 1% (greenspan) and Bernanke 4.55-0%. The french stimulus initally worked but each infusion became shorter lived. They did this until hyperinflation broke out in 1795. The U.S however was always able to get financing from other nations or buying treasuries (increasing the money supply). additionally our input costs have been held artifically low, keeping inflationary pressures to a minimum. But this can't continue much longer as the strength of our dollar which is propped up artificially high will soon see its demise. Although we have implemented other forms of stimulus than the french, the end result will be the same. I don't have a PHD, but is the fascination comparing this to the great Depression??


  1. Where were you in the 1920s and 30s? How can you compare the excessive spending then vs now? There are many distinctions between the two periods of history, degree of excessive spending not necessarily one of them. The relative amount of debt to GDP of the US vs Euro economy not as dramatically different now either.

  2. the biggest differences between then and now is americas job were here not elsewhere. and america wasn't backrupt then. time is runnig out.