Jul 30 2008
Depression Fears (And A Response To The Housing Bill)
The “We are in the worst economic climate since the Great Depression” wackadoos sure put up a good fight. But now more folks are finally seeing through their flawed logic.
From a recent Newsweek article:
The specter of depression stalks America. You hear the word repeatedly. Are we in a depression? If not, are we headed for one? The answer to the first question is no; the answer to the second is “almost certainly not.” The use of “depression” to describe the economy is a case of rhetorical overkill that speaks volumes about today’s widespread pessimism and anxiety. A short history lesson shows why.
The Great Depression of the 1930s - the last time the term rightly applied - was industrial capitalism’s worst calamity. U.S. unemployment peaked at 25 percent in 1933; it averaged 18 percent for the decade. From 1929 to 1933, 40 percent of U.S. banks failed. People lost deposits; businesses and consumers lost access to credit. Over the same period, wholesale prices dropped a third, driving farmers and firms into bankruptcy. Farm foreclosures, shantytowns (called “Hoovervilles,” after the president) and bread lines followed.
This was a social as well as economic breakdown. Our present situation bears no resemblance to this. In June, employment was 5.5 percent, slightly below the average since 1960 of 5.8 percent. It’s true that banks and investment banks - Citigroup, Merrill Lynch, Wachovia - have suffered large losses. But on the whole, the banking system seems fairly strong. Although profits in the first quarter of 2008 were down 46 percent from 2007, they totaled $19 billion even after $37 billion set aside for loan loss revenues. Overall corporate profits are still running at a near-record annual rate of $1.5 trillion.
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Congressman Ron Paul explains in simple language the price Americans will pay for the recent housing industry bailout:
Here’s My Take: If you’ve read my book, you know that inflation and debasement of the dollar is going to be with us for a long time. Probably for the rest of our lives or until enough people get fed up with the current system.
That’s why the best advice I can give is to become a student of inflation, monetary policy, and their impact on your buying power. For as long as the government continues creating money out of thin air, any wise investor will keep the bulk of their long-term investments away from dollar-denominated paper assets.
But to quote the great U.S. economist Milton Friedman: There is no free lunch.
That’s why I put up with the short-term volatility that comes with trading my dollars in exchange for real assets. My goal is to accumulate more wealth, not money - it’s a big difference. Money can be created out of nothing but wealth (stocks, precious metals, businesses, raw materials, etc.) are tangible and carry greater value.
If we someday enter a stage of hyperinflation similar to what Germany experienced in the 1920s, which would you rather own: a pile of cash or a pile of companies located around the world? Money or wealth, you decide.
Only one can make inflation work for you instead of against you.
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- Gut Check Time and the Transfer of WealthWhen talking about the stock market these days, it's easy...
- Adrian Van Eck on the Housing MarketHere's editor Adrian Van Eck-- who I've followed for many years -- on...
- Stock Market Volatility & Investor ExpectationsWhen asked to state the average return of the stock...
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[...] NORML Blog wrote an interesting post today onHere’s a quick excerpt The “We are in the worst economic climate since the Great Depression” wackadoos sure put up a good fight. But now more folks are finally seeing through their flawed logic. From a recent Newsweek article: The specter of depression stalks America. You hear the word repeatedly. Are we in a depression? If not, are we headed for one? The answer to the first question is no; the answer to the second is “almost certainly not.” The use of “depression” to describe the economy is a case of rheto [...]
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Great post! Looking forward to many more……
Roland,
Those of us who grew up in the 40s and 50s can remember when times were a bit more challenging than today. Your article is a good reminder of all the things we have going for us, except our political leaders, who push our thinking to shorter and shorter range issues and totally ignore the long range killers.
Jim
The other inevitable result of this process of creating money is that we will owe more interest on these additional dollars created so benevolently for us by the Fed. And that additional interest can only be paid by higher taxes.
Love that picture of Germans (?) burning money for heat ’cause it was cheaper than coal…
Here is an article about the fed chairman during the time of the Great Depression and what he thought caused it. The same thing is happening again for the same reasons. Please read:
In Review: America’s Most Egalitarian Banker
Marriner S. Eccles, Beckoning Frontiers: Public and Personal Recollections. New York: Alfred A. Knopf, 1951.
At the start of the Great Depression, Marriner Eccles hardly seemed someone who might lead a charge against the economic orthodoxies that justified grand hoards of private fortune. By the early 1930s, after all, the Utah-born Eccles had become the top banker in the Mountain West, the organizer of the first multibank holding company in the United States.
But Eccles had also come to understand, after watching the great speculative bubbles of the 1920s pop into massive misery, that prosperity — to endure — needs to be shared. Eccles began speaking out on that theme, shortly after the Great Depression began, and soon caught the attention of the early New Dealers.
In 1933, Eccles would become an assistant secretary of the treasury. A year later, Franklin Roosevelt would appoint him to the Federal Reserve Board. He would become Board chair in 1935 and remain in that central position for the next 13 years. No one individual, over those years, had more of an impact on economic policy in the United States.
Looking back on those years, in his 1951 memoir Beckoning Frontiers, Eccles would do his best to explain the impact he set out to make. Mass production, he noted at the outset, demands mass consumption, but people can’t afford to consume if the wealth an economy generates is concentrating at the top.
In the years leading up to the Great Depression, that concentrating was accelerating. A “giant suction pump,” charged Eccles, “had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth.”
“In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands,” Eccles observed, “the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”
Sound familiar? The decade of the 1920s that Eccles describes in his 1951 memoir comes across today as eerily familiar. Then as now, the U.S. economy was floating on a sea of debt.
Then as now, inequality was hollowing out the nation. Eccles put the matter bluntly: “Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy.”
How would Eccles have reacted to our current debt-ridden, war-torn economy? We can’t, of course, know for sure what Eccles would do. But we do know what he did. In 1942, during World War II, a high-powered team of New Deal officials that included Eccles proposed to President Roosevelt that “a ceiling of fifty thousand dollars after taxes should be placed on individual incomes.”
In our current dollars, this $50,000 ceiling would equal about $700,000. What did FDR do with the Eccles proposal? He turned around and asked Congress to place a 100 percent tax on all individual income over $25,000.
Congress would eventually set the nation’s top tax rate at 94 percent on all income over $200,000, and that top tax rate would hover around 90 percent for the next two decades, years that would see the greatest period of middle class prosperity in U.S. economic history.
In 2005, the latest year with statistics available, America’s leading hedge fund managers and the rest of the nation’s top 400 income-earners faced a top tax rate of 35 percent. They actually paid, after loopholes, just 18.2 percent of their incomes in tax.
Marriner Eccles would not approve.
Stat of the Week
In the two decades between 1986 and 2005, America’s top 1 percent of taxpayers saw their share of the nation’s income jump from 11.3 to 21.2 percent. Over those same years, the federal income taxes the top 1 percent paid dropped by an equally stunning margin, from 33.13 percent of total personal income in 1986 to 23.13 percent in 2005, the most current year with IRS stats available. Taxpayers needed to report at least $364,657 in 2005 to enter the top 1 percent.
About Too Much
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org