Posted on 06/04/2010 3:15:53 PM PDT by blam
Key Indicators Of A New Great Depression II
Economics / Great Depression II
Jun 04, 2010 - 02:24 AM
By: John Browne
Neeraj Chaudhary writes: With the mainstream media focusing on the country's leveling unemployment rate, improving retail sales, and nascent housing recovery, one might think that the US government has successfully navigated the economy through recession and growth has returned. But I will argue that a look under the proverbial hood reveals a very different picture. I believe the data shows that the US economy is badly damaged, and a modern-day depression has begun. In fact, just as World War I was originally called The Great War (and was retroactively renamed after World War II), Peter Schiff has said that one day the world will refer to the 1929-41 era as Great Depression I, and the current period as Great Depression II.
For starters, look at unemployment. During Great Depression I, unemployment broke 25%. If government statistics are taken at face value, the current unemployment rate is 9.9%, but a closer look reveals that the broadest measure of unemployment is currently at 20% - and rising. So, today's numbers are in the same ballpark as the '30s even though the federal government is using unprecedented measures to keep the economy afloat. Remember, in Great Depression I, FDR never ran a deficit nearly as large as President Obama's. Moreover, the Federal Reserve of the 1930s still had a gold standard with which to contend, while today's Fed has increased the monetary base with impunity. Yet even with all that intervention, unemployment figures still indicate that we have entered depression territory.
What is demoralizing to an unemployed person is not simply being let go, it is being unable to find a new job for an extended period of time. And this is where Great Depression II really rears its ugly head. According to the US federal government's own data, the median duration of unemployment is now over five months - and rising. This is the highest it's been since the BLS started compiling this statistic in 1965. As workers start to go this long without jobs, they eat into their savings. Eventually - and especially in a country with a savings rate as low as ours and debt as high as ours - they run out of cushion and hit the street. Formerly middle-class people have to make decisions never thought possible: do I eat in a shelter or go hungry in my home?
It's no surprise, then, that about 40 million people - or one out of every eight Americans - are receiving food stamps in Great Depression II. During the height of Great Depression I, the rate was just one out of thirty-five Americans. Even with the stimulus programs, Great Depression II is actually worse on this measure than Great Depression I - and the USDA estimates that the program could grow by another 50%. Soon, out of ten people you know, one may depend on federal assistance for daily survival.
Despite tax credits that have created a rush of purchases this spring, housing is in just as bad shape. During Great Depression I, home prices dropped some 15% from their pre-depression peak (achieved in 1925). In Great Depression II, housing is down at least 30% from the pre-depression peak (achieved in 2005), with some markets down more than 50%.
So, many of the people expected to keep making mortgage payments as they eat tuna fish to stay alive will be paying double their home's resale value. This is a tremendous incentive to walk away, with disastrous consequences for the country's social fabric in these trying times. Empty homes breed crime and vandalism, encouraging more to flee in a negative feedback loop. Moreover, the many 'walkaways' may create a class of Americans with ruined credit - right when many employers have started checking credit scores before hiring.
Even more worrisome, the present drop in home prices is against a backdrop of price inflation. In Great Depression I, our grandparents may have lost value in their home, but everyday goods (milk, diapers, automobiles, etc.) got cheaper at the same time. That made their savings 'cushion' deeper when they needed it most. Today, as home equity (now our main store of savings) declines, prices for consumer goods are rising. It's a tight squeeze indeed.
From jobs to food to the roofs over our heads, the current period of economic turmoil is at least as bad as the First Great Depression, whether or not the financial media wishes to acknowledge it. The main difference is that unlike in the '30s, the US dollar is now the world's fiat reserve currency, so we are able to push our problems overseas for awhile. The plight of the rural Chinese is really our plight - we are living lavishly on the wealth they create. Were they to quit this dastardly arrangement, the full effects of Great Depression II would be felt in America.
By contrast, in Great Depression I, the US was on the gold standard like everyone else, which forced us to live within our means. This, in turn, made it easier to recognize that the economy was in decline and changes had to be made.
Unfortunately, because of the responses of the Administration and the Federal Reserve, which I believe to be deeply misguided, I remain concerned that Great Depression II could develop into something far more devastating than its predecessor, something that other countries in the world have experienced but was thought impossible in the United States: a hyperinflationary depression. As bad as the current downturn has been, inflation would make it immeasurably worse. It would require an honest accounting of the problems we face today to avert the disaster we see coming tomorrow. Neeraj Chaudhary is an Investment Consultant in the Los Angeles branch of Euro Pacific Capital. He shares Peter Schiff's views on the US dollar, the importance of the gold standard, and the rise of Asia as an economic power. He holds a B.A. in Economics from the University of California at Berkeley.
so you’re saying ‘wave 3’ too?
Well, I have a global economy ‘biorhythm’ for lack of a better word. (8centuries of evidence) that says we’re in for a 10 year downturn.
Got out of the market Feb 24,2007.
All of this is a whole lot scarier than anything that ever came out of Hollywood. It’s like we’re all riding downhill on a train, the brakes have failed, we’re going over 120 MPH and there’s a BIG curve up ahead.
I sometimes think the Republicans “threw” the 2008 election by nominating McLoser.
They left the economy as a flaming bag of dog poo on the dims front porch.
Actually, I think this hypothesis is only a joke. To do something so Machiavellian would imply that they put a lot of thought into it.
I think his mantra was 'drink your way out of trouble'
Well-reasoned on all accounts!
“Frankly, the system will need to totally collapse before reform will take place”
Bondzilla will take no prisoners.
There are some basic, simple ideas in economics that we all need to remember. What will happen in our economy, as complex as it might sound, is still reliant on these simple ideas.
1) There are real products and services. These are why we have an economy at all. So it is important to know how much of these we have, and how much of these we need, and how to get them from where they are to where they are needed.
Even at the worst part of the Great Depression (GD), during the Dust Bowl crisis, wiping out farmland from Texas through middle America, all the way to Canada, America still had too much food. Corn was even being burned for fuel, because we had too much of it.
Yet at the same time many Americans were starving. So the government destroyed the excess food to raise food prices for the farmers, and transported some of the food to the people who were starving. Real products to real people.
2) We use ‘tokens’ (money) to pay for real goods and services. It used to be based on specie (gold and silver), and then it was based on the trust of the paper it was printed on. But then people figured out ways to exchange money without paper.
And most importantly, how to “leverage” imaginary money to make more imaginary money. Yet we pretend that paper and imaginary money are the same.
In the GD, the creation of this imaginary money, through buying stock on margin, grew far beyond the physical paper money and coins that existed at the time. And since it could irrationally expand, making more imaginary money, when the bubble collapsed, suddenly everyone wanted to convert their imaginary money to “real” paper money. And there just wasn’t enough paper money to go around.
Today, only 5% of America’s daily retail purchases are backed with paper money. The other 95% is imaginary money, that only exists on computers.
So if suddenly, everybody wanted to turn their electronic money into paper money, it couldn’t be done.
And a simple theory in economics is, that if a bunch of people want a limited number of things, the price of those things goes up. In this case, we can call it “deflation”, because even on the surface, a single nickel should be able to buy $1 worth of stuff. Right now.
This doesn’t happen, yet, because people are still content with having and using electronic money. But if there is an economic crisis, there may be a problem with electronic money.
On the front of paper money is printed “This Note Is Legal Tender For All Debts, Public And Private”. This means that if someone sells you something, and you owe them money, they *must* accept paper money. But importantly, nothing in the law says they *must* accept any other form of money. Not credit or debit cards, nor checks or other instruments.
During the GD, when the stock market crashed, vast amounts of imaginary money were also wiped out. And the way our economy is set up today, much the same thing could happen.
A person could have a million dollars in the bank, and not be able to buy a stick of gum.
I’m thinking more like Pelosi and Reid as Thelma and Louise shooting off the cliff into the abyss.
“It’s like we’re all riding downhill on a train, the brakes have failed, we’re going over 120 MPH and there’s a BIG curve up ahead.”
And everyone but the insane and the morons (liberals and Obamabots) are screaming for the engineer to apply the brakes, but instead he pours on more coal.
Makes you appreciate the Second all the more, don't it?
Having guns means (generally) not having to use them.
Me and all my old buddies agree.
And then pay for the best lawyers to tie up the system and dazzle ‘em with BS ... and remind them that he is a Kennedy.
Thanks. I posted this “elsewhere”.
MARKING
Keynes was never so stupid.
Wishful thinking. Where will the engine of growth come from? What will create the jobs? Hope for the best, but plan for the worst.
Unless we start searching for the "Made in USA" label instead of just looking for the cheapest price when we buy stuff, probably won't happen.
I think we are at the point that an austerity program wouldn’t help. Laying off thousands of workers government or private sector won’t solve the financial crisis, if there are no jobs to be found. Under the current regime even cutting the tax rates won’t spur the economy.
I am beginning to think November isn’t going to make the big difference we’re looking for, even if the GOP takes both chambers.
We can’t continue to pay them and laying them off isn’t going to stop the decline. The tax loop and become a noose around everyone’s neck.
Some say we went though the hyper-inflationary phase with asset inflation. Homes and real estate rising. Same for the stock market and other sectors. That we have been in the deflationary stage since oil topped at $150 in summer 2008 and since real estate started the decline. There are many deflationary signs around such as Greece and other Euro-zone nations on the verge of imploding via unmet debt obligations. When debt gets repudiated this destroys money, making each remaining unit of money more valuable which is deflation
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