The Great Depression and The New Depression

A worldwide economic depression began in 2008. This New Depression was caused by the same factors as the Great Depression and followed exactly the same pattern. Thus far, however, the New Depression has been milder than the Great Depression because the policy response this time has been completely different.

Both depressions were caused because governments began creating money. The Great Depression originated with the collapse of the gold standard in 1914. The New Depression had its origins in the 1971 breakdown of the Bretton Woods system. In the earlier period, the gold standard collapsed because the European nations created more credit to finance World War I than could be supported by their gold reserves. Similarly, the Bretton Woods system broke down because the United States created more credit to finance the Vietnam War abroad and social welfare spending at home than could be underwritten by American gold reserves.

In both instances, a great economic boom was brought about by an explosion of credit creation; and in both instances the boom turned to bust when that credit could not be repaid. At that point, a systemic crisis brought down the international banking system. Immediately thereafter international trade collapsed.

The Great Depression & The New Depression
1. Gold Standard Breaks Down (1914) = Bretton Woods Breaks Down (1971)
2. Credit Boom: The Roaring Twenties = Credit Boom: Global Economic Bubble
3. Boom Leads to Bust When The Credit Can’t Be Repaid (1930 and 2008)
4. Banking Collapse (1930 and 2008)
5. International Trade Collapses (1930 and 2008)

During the 1930s, the forces of creative destruction, largely unimpeded by government intervention, ravaged the global economy as the excesses produced by the credit boom bankrupted a civilization unable to repay its debts. This time governments have intervened and, in effect, taken over the management of the economy to prevent market forces from correcting the imbalances brought about by the paper money-induced credit bubble. The commanding heights of global finance have been nationalized or bailed out, either openly or furtively, while the broader economy is sustained by government life support.

Thus far, these measures have greatly mitigated the pain of the New Depression. However, the policies introduced to date have not resolved the causes of this crisis or even targeted them. Moreover, government resources, while vast, are finite. Government spending will not be able to carry the economy forever. Policymakers must aim to do more than simply perpetuate the existing global economic disequilibrium. So far, there is little indication they understand the origins of the crisis, much less how to permanently end it.

5 comments

  1. Great summary on both depressions, but how long can the U.S. carry this dept before it leads to a major depression/inflation? Is it possible to have another boom cycle for 5-10 years before this comes back to haunt us?
    Thank you for writing your books so others can get an understanding of what is happening, excellent!

  2. Democracy + paper money = guaranteed inflationary boom and bust (and other side effects)

    Theoretically, a well managed paper money could also well function in an economy, but the incentive to abuse the system by politicians, bankers and voters is just too big.

    There is no doubt that large chunks of paper wealth will be destroyed over the next few years and those who have invested in real assets, such as precious metals, real estate, stocks, etc can hope to preserve or even increase the value of their assets. Unless certain governments impose huge taxes on those assets or in the event of large scale-wars.

    It would be in vain to hope that policymakers will implement profound changes. Even if they wanted, it is too late already, given the amount of debt (both public and private) and the structure of the economy/global imbalances. The system eventually will clear itself one way or the other.

    In the meantime, let’s focus on how to protect our assets and even to increase them by taking advantage of the circumstances created by corrupt and/or stupid policymakers.

  3. Very interesting to see the interrelationships between the great depression and the new depression. For the time being Bernanke has managed to stop another great depression. The reality is thought he only has put off the depression, and if policies are not going to change the result will be disastrous.

  4. Great comparison! Could it be that the hyper-inflationary conditions most posit in the future are in reality already here, and stimulus is simply keeping it up in the face of deflationary force? Maybe historical examples we rely on for guides, have blinded us to the slow hyper-inflation over time, like the proverbial frog failing to jump out of the boiling water due to its slow ramp in heat.

  5. The Austrian school (von Mises) showed how central banks over stoke credit so that otherwise unsustainable companies and industry become sustainable for a period of time. The massive growth in credit has indeed overgrown our economy.

    But you might also explore other factors. One brought to my attention recently is how the ‘Great Depression’ of the 1930’s (and 1940’s) was exacerbated and extended, at least in part, by wildly changing, confiscatory policies by the Roosevelt administration. Investments weren’t made by businesses then due to how the rules were changed by the Federal government (such change in rules have been and are being made and pondered by different levels of government – today (2012.07.17) I saw the announcement that credit reporting agencies are now going to be regulated by the Federal government – giving them a chance to reward AND PUNISH S&P, Moody’s, and Fitch’s, if they do anything unliked by the US Government. Also, a contemplation of confiscating mortgages by certain California municipalities is now at least being mulled over. My bet is that lending in or near those towns, possibly even throughout California will be great decreased by potential lenders, fearing that possibility.

    The last, but perhaps biggest, factor I would have you consider is birth rates. After 1910, in the US, birth rates began to plummet. WWI and the 1918 flu pandemic undoubtedly decreased the number of young adults available for marriage in the 1920’s. But increased “live for today” sentiment led to the rebellion against prohibition and ‘moral’ laws (like getting married before having sex), as the post WWI mentality and mood among many of the young became cynical and more atheistic. This, in turn, resulted in both fewer marriages, and even fewer children being born (those who didn’t marry had fewer children, and those who did, in the aggregate, also had fewer children).

    Clarence Lyle Barber, University of Manitoba economist, in a paper written in 1978, called, “On The Origins of the Great Depression”, noted that demand for housing in the US began to decline in 1926 (3 years before the stock market crash). In early 1929, housing demand plummeted in the US. And, of course, the stock market evidenced the economic depression with it’s plummet in October of 1929.

    Once everyone “knew” things were bad, economically, birth rates declined even further.

    Many have supposed WWII got us out of the Great Depression. If it did, it was only because we “won” the war,and because US factories were largely unaffected by the war in the way that those in Europe and Japan were affected (many destroyed, of course). This allowed a generation with improved optimism, and chances to work and earn, (to rebuild shattered Europe and Japan), to do what their parents didn’t do. And that was to have a nearer ‘normal’ number of children. (Actually, birth rates during the ‘baby boom’ years of 1946 to 1964 were still below the decade from 1900 to 1910. But, they were closer to that ‘normal’ in the US than they had been for decades, and would be for decades following the ‘baby boom’ years. It was, in fact, I propose, the ‘baby boom’ that began the years of prosperity we have enjoyed for most of six decades!

    Watch the nearly one hour video “Demographic Winter” on YouTube to get an idea of the scale and scope of the great birth dearth we are and have long been in, and which, worldwide, is worsening in more and more countries year by year. ‘Population Bombs’ don’t only explode—they can, and are IMPLODING, like nobody’s business!

    Lack of demand in the US, and the world, is the result of lack of babies being born for a number of decades. The turn from Communism to Democracy saw a whole generation in Eastern Europe and Russia turn from child bearing and rearing to pursuing the ‘fruits’ of democracy and capitalism— “stuff”.

    Also, the “sexual revolution” that began in the 1960’s (or even 1950’s or before) has led to an ever increasing number of people “shacking up” together (for sex) rather than getting married (for sex AND to have children). This, too, has led to ever fewer children born.

    The LGBT revolution has sought to legitimize relationships that are also anti-family. The “anything goes” among heterosexuals was picked up by homosexuals. ‘No fault’ divorce laws made marriage dissolution easier, also decimating families. Increased immorality all around has made the hearts of many “wax cold” as predicted in Matthew 24. There appears to be an inverse relationship between increases in pornography and decreases in childbirths. As the former has soared, the latter has shrunk.

    Lastly, the increased needs for specialists in many fields, which has fueled the need for more and ever high college degrees, has added to the Peter Pan effect of promoting and prolonging adolescence via delayed marriage and delayed child bearing. The increased debts of an ever more expensive post-high school educational system has pushed ever more young people into an ever greater amount of debt (as your credit driven money system helps to further explain). This, of course, has also had a severe dampening effect on birth rates, as young couples struggle to pay back student loans.

    My father-in-law, still alive (age 96), retold to me the other day how his parents’ farm in South Dakota grew less grain at harvest for three successive years (1932, 1933, & 1934) than was planted. Though 1935 produced a bumper crop for them, the drought of 1936 resulted in another harvest dearth for them. In 1937 they moved to southern Minnesota, where droughts were less likely.

    Collapses in harvest in the short run can lead to financial ruin. In the longer run, they can lead to starvation. Regarding human births, the same is essentially true.

    Though populations have exploded, as Nick Eberstadt, a demographer has pointed out, it has not been because people suddenly started breeding like rabbits, but rather because they quit dying like flies! Greatly increased and improved nutrition, made possible by increased crop productivity, and refrigeration, canning, etc, as well as greatly improved and expanded healthcare (vaccines,anti-biotics, etc) have made it possible to keep many more people alive from childbirth through old age.

    Our efforts, therefore, to decrease this worldwide population growth at the ‘front end’ (by decreasing births via contraception, abortion, and ‘sterilization’) is wrong-headed. We are now seeing inverted human population pyramids where there are many more old than young people. This makes for an unsustainable economy. Especially given that the burden of debt falls on the working. And when older people ‘retire’ from the economy, the debts for their pensions fall on the younger who are working. Since there are too few working to sustain those receiving pensions, not only national and international bankruptcy occurs, but we eventually have the complete collapse of civilization.

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