Washington is Powerless to Stop the Coming Economic Depression

Friday, November 14, 2008 by: Barbara L. Minton
Tags: U.S. economy, health news, Natural News

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(NaturalNews) The U.S. is in the grip of fear. People are so worried about the collapse of the economy that they've stopped going to the mall, and they're cutting every expense they can think of to save money for the hard times ahead. They've even stopped going to Starbucks. Bankers too have pulled their purse strings closed and refused to lend anything to anyone. Investors have been selling their stocks and converting what's left of their retirement accounts to cash that can be horded in a safe. Even the usually optimistic media now wonders if America is sinking into a depression. Everyone is waiting for Washington to do something to end the crisis and get the country back on track. But the truth is that even with its new administration, Washington is no more able to save the U.S. from depression now than it was in the 1930's.

Today's Americans have lived through unprecedented good times

Most Americans alive today have never witnessed a depression. They have lived through an unprecedented period of good times characterized by a predominance of peace, economic expansion and easy credit. Sure there were a few recessions along the way, but the general growth trend remained intact. People felt confident that this trend would continue, with each generation envisioning an even better future for its children.

People have come to think of wealth as ever-expanding. They have seen each year on the job entitling them to a raise, and the purchase of a house entitling them to capital gains. They have eschewed "safe" investments like certificates of deposit and government bonds, believing investment in stocks could pave the way to an early and cushy retirement. For many years Americans have contemplated their future with complacency. It's been a great time to be alive, but good times always come to an end.

What is an economic depression?

A depression is a severe downturn in economic activity that lasts for several years. It is a period during which the economy fails to grow at all and actually shrinks. The last depression, named The Great Depression, began in 1929 and lasted ten years. Several years during this period experienced huge economic shrinkage:

1930 -8.6%
1931 -6.4%
1932 -13%
1933 -1.3%

The unemployment rate during this time rose to 25%, and wages for those who still had jobs fell 42%. Total U.S. economic output fell from $103 billion to $55 billion and world trade sank 65% as measured in dollars. For many people during this period it was not a question of whether they could afford the latest styles for their children. It was a question of whether they were able to provide their families with a few potatoes to eat.

Like the coming depression of today, the Great Depression followed a period of monetary expansion and easy credit that sparked a real estate boom. Just like today, many people moved into mansions and bought stocks believing that the market had no way to go but up. During the period from October, 1929 to July, 1932 the Dow Jones Industrial Average fell from about 375 to 48, a decline of 89%. The Dow did not regain the levels seen in 1929 until 1954, and that was only as a result of World War II. Without the war, the downturn would have lasted longer.

Why did it get so bad? Many people think that the monetary policies of the Hoover administration were to blame. Instead of pumping money into the economy and increasing the money supply, the Federal Reserve allowed the money supply to fall by 30%. The "New Deal" period created many government programs geared to ending the Depression, but unemployment remained in the double-digits until 1941, when the outbreak of World War II created defense-related jobs.

Today it is believed that another depression of this magnitude cannot happen because those in charge of monetary policy paid attention to the lessons learned from the Great Depression. People believe that laws and government agencies exist to prevent that type of cataclysmic economic pain from happening again. But the fact is that Washington cannot save the world from the coming depression, and here's why:

The debt crisis is too big to be controlled by the U.S. government

Right now the government owes its creditors $52 trillion in interest-bearing debts. Based on estimates from the U.S. Government Accountability Office, there is another $60 trillion in contingency debts and obligations such as Social Security, Medicare and guaranteed pensions. Add to that $596 trillion (more than half a quadrillion) that represents the total value of U.S. debts and derivatives placed worldwide.

These are the numbers that are on the table as of now. They don't include the increasing line-up of companies doomed to fail, such as General Motors and Ford or the increasing need for handouts to companies already on the list of the "too large to fail", such as AIG. As times get harder for all Americans, more and more companies will begin to fail and look to the government to save them. The precedent has been set. The list also does not include the mortgages that will implode when the second leg of house price declines kicks in following increased job loss. The figures also don't include government handouts to those whose families are hungry because the parents are unemployed.

Now, consider that even after the additions to the ever lengthening list of pledged government bailouts in recent months, the total amount of rescue money announced in the U.S. so far is $2.7 trillion, a huge sum but miniscule in comparison to the massive debt that needs to be accounted for.

Yet the mantra still exists that Washington can save us from another Great Depression because they won't repeat history and make the mistakes that were made in the 1930's. Americans continue to think that Great Depression Part II will not come to pass. It's time for Americans to start adding up the numbers and drawing some conclusions.

Washington is powerless to raise the kind of money needed without borrowing

The U.S. economy is like a ship that has struck an iceberg and is taking on water. With the economy sinking, Washington is unable to fund the bailouts and reign in the debt with higher taxes. Higher taxes would crimp even more the amount of money available to be spent by consumers to keep the economy propped up. And as more and more people lose their jobs, the tax base gets smaller and smaller.

Many people think it is no problem for Washington to get its hands on money since it owns the printing presses. This would be the easiest solution to the problem - print up huge amounts of money and cause hyperinflation. That would solve everything. Salaries would increase and therefore taxes would increase. GDP would expand in dollar terms and the debt would begin to seem small since it would have been conceived in "old dollars", and the "new dollars" would be hyperinflated. But this won't work because a huge amount of U.S. debt is held by foreign creditors who have insisted on stability for their investments. There is no way they would stand for the U.S. launching a mode of hyperinflation because it would drastically decrease their value of their holdings. Right now these foreign debt holders are the country's benefactors. Without them, American is sunk. They are calling the shots and America is scrambling to keep them happy.

There is nothing for the government to do but go out into the world with its hat in its hands and try to borrow more money. In fact, this has already started with the borrowing of $550 trillion dollars in the fourth quarter of this year, more than the entire deficit of fiscal year 2008. According to Goldman Sachs, the immediate needs of the Treasury will be a whopping $2 trillion to finance the bailouts, the existing deficit, and the next refunding.

This huge refunding of the federal deficit will result in an avalanche of new Treasury securities that have to be sold to someone. In order to beat the bushes for buyers in these skittish times, the Treasury will have to increase the interest rates offered on these securities, adding even more fuel to the debt fire.

Americans realize they have too little savings and too much debt

The reason given to Congress as need for speedy approval of the bailout was that without it, no one would be able to get a loan. The specter of the masses with their credit cards planted firmly on their hips was a scary thought to the Secretary of the Treasury and the Fed Chairman. Washington needs consumers to borrow more, spend more, and save less. But consumers are doing just the opposite. Recent sales figures point to a collapse in retail sales.

Washington is pushing bankers to lend, but they won't do it. It's as though everyone has been slapped in the face with cold water. As a result, the economy is left to fall on its face. It is this coming together of debt and deflation that makes a depression inevitable. It's what happened in the 1930's and it's what is happening now.

Debt and deflation produce a powerful downward spiral

The downward spiral is across many areas and will inevitably encompass most of American life. Consumers and businesses slash spending and lay off workers, leading to fewer consumers with money to spend at the businesses, resulting in the need to lay off more workers and so on. Mortgage delinquencies and foreclosures bring on selling of more real estate, driving the prices lower and lower. These falling prices then bring on more mortgage defaults. Fear of bankruptcy forces selling of stocks in companies, and the selling of stocks brings on more bankruptcies. It is the inevitable unwinding of the good times that lasted for 30 years. It will take awhile for all this unwinding to play itself out. The unwinding of the Great Depression took 10 years and the debt overhang was nothing like it is today.

Source for facts about the Great Depression:

Kimberly Amadeo, "What is a Depression?", US Economy.

About the author

Barbara is a school psychologist, a published author in the area of personal finance, a breast cancer survivor using "alternative" treatments, a born existentialist, and a student of nature and all things natural.

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