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World Affairs Brief

By Joel Skousen
World Affairs Brief  
5-16-9

 

WHY THIS ECONOMIC CRISIS IS DIFFERENT FROM THE 1930'S DEPRESSION   I have pointed out before several differences of today's recession and that of the Great Depression, including the fact that fiat money creation has been going on so strongly since the 1990s that recent times a speculative economy grew so large that it literally dwarfed the real economy. Almost all the banks and investment firms involved in the buying of sub-prime mortgages and derivatives were part of this giant speculative economy that was not directly investing in real business. Why? They knew the real rate of inflation was over 10% and weren't satisfied with the slow growth of real business investments. The high rates of return on speculation and derivatives gave them a place to grow their money much faster. Had the public understood and demanded that these speculators NOT be bailed out, this speculative economy could have collapsed without actually destroying the real economy. I estimate there was only a 20% crossover of funds. Michael Pollaro wrote an excellent article on the technical and economic difference between then and now.   "1. Quite simply, today's monetary and political framework is built for inflation, as much inflation as the government, the Federal Reserve and their banking partners want. And inflation, and a whole lot of it, is exactly what we are about to get.   "2. On the eve of the Great Depression and until 1933, there was nothing to protect banks from prudent depositors wanting their money, that being currency or gold, or conversely, to assure depositors that their money was safe when they feared for their savings. Fractional reserve banking, where banks are permitted under law to loan out depositor money, while pretending the money is still in their vaults, redeemable on demand, is an inherently unstable system, always susceptible to a bank run.   "3. On the eve of the Great Depression and until 1933, the US was on a gold standard, whereby domestic and international dollar holders could redeem dollars for gold. Gold redemptions, and the ever present threat of those redemptions, limited the amount of money the Federal Reserve could create.   "4. the Federal Reserve's monetization activities were essentially limited to Treasury securities, banker's acceptances and direct loans to member banks, the latter largely consisting of rediscounted business paper. In 1932, the government greatly expanded those monetization tools by broadening the assets eligible as collateral against Federal Reserve loans. Today, with the passage of the Monetary Control Act of 1980 and several other "tweaks" along the way, the Federal Reserve can pretty much buy anything it wants, from any bank or non-bank that it wants, by writing a check on itself.   "5. Until the establishment of social security and unemployment insurance in 1935, there was no large scale federal social safety nets through which money could be injected into the economy. Today, we have a plethora of long standing, and deeply imbedded safety nets, overseen by politicians able, willing and ready to use them, especially when they are funded, not by taxes, but stealth through the printing press of the Federal Reserve. Think about that. The ability to inject an unending stream of newly printed money to needy recipients sure to spend. How big is this stream of money? Given that the unfunded liabilities of social security, medical insurance and other trust funds are some $55 trillion, about 3.5 times nominal GDP, and growing rapidly, very big indeed.   "6. Hoover, FDR, indeed all subsequent administrations have given us all sorts of bailout packages over the years. But I think we can agree that we have never seen anything like this before. Some $30 trillion in bailout money has been advanced or guaranteed by the Treasury, FDIC and Federal Reserve in response to this crisis. And it's likely not over. Simply unprecedented. Combine government bailout packages and social nets with the Federal Reserve's printing press, and throw in a few government make-work programs for good measure, and what do you get? A huge and determined spender of last resort, with bottomless pockets. This year's federal deficit, the one the Federal Reserve is now telling us it plans to increasingly monetize, is likely to surpass $2 trillion. And by the looks of it, we are only getting started   "7. On the eve of the Great Depression, the US was a nation of savers and a creditor to the world. Today we are the largest debtor in the world. Given that inflation favors debtors, vote seeking politicians can be 'excused' if they see the "value" in inflation; and voters, neck deep in debt, with little savings to boot, can be 'excused' for voting them into office. And if foreigners take dollars in return for their mercantilist toil, only to deposit those dollars in US government IOU's wholly denominated in currency they know is coming off a printing press, then hey, what's not to like about inflation. Sure the US is paying off its foreign obligations in deflated dollars, but foreigners don't vote, right.   "8, During the Great Depression, there were numerous voices, even inside the Federal Reserve, calling for free markets and advising against government intervention. Who today argues against an active government and for free markets? Very few. Think no further then the highly respected Federal Reserve Chairman Ben Bernanke. This is a man who has waited his whole career to prove that it was the Federal Reserve and its tight monetary policy before and after the stock market crash that gave us the Great Depression, that the correct policy response by the Federal Reserve post the stock market crash was to print money and to continue printing money until economic recovery was assured. Unfortunately, the opposite is the case, and it is why a Bernanke led Federal Reserve virtually guarantees inflation. Contrary to what Bernanke thinks, the Great Depression was caused by the low interest rate and loose monetary policies of the Federal Reserve in the 1920's. These policies created the 1920's boom which necessitated the stock market crash of 1929"   Peter Schiff warns: "Don't Be Fooled by Inflation." What he really means is don't be fooled by the temporary deflation. With all the massive creation of money, hyperinflation is inevitable. In fact, he gives several examples of why certain up markets are really a sign of people dumping dollars for businesses and commodities before it loses its value. That means the insiders know where the dollar is eventually headed.   "Once again, the facts do not support the euphoria [of the Dow's 25% rise]. Over the past few months, the government has literally blasted the economy with trillions of new dollars conjured from the ether. The fact that this 'stimulus' has blown some air back into our deflating consumer-based bubble economy, and given a boost to an oversold stock market, is hardly evidence that the problems have been solved. It is simply an illusion, and not a very good one at that. By throwing money at the problem, all the government is creating is inflation. Although this can often look like growth, it is no more capable of creating wealth than a hall of mirrors is capable of creating people.   "We are currently suffering from an overdose of past stimulus. A larger dose now will only worsen the condition. The Greenspan/Bush stimulus of 2001 prevented a much needed recession and bought us seven years of artificial growth. The multi-trillion dollar tab for that episode of federally-engineered economic bullet-dodging came due in 2008. The 2001 stimulus had kicked off a debt-fueled consumption binge that resulted in economic weakness, not strength. So now, even though the recent stimulus administered a much larger dose, we will likely experience a much smaller bounce. One can only speculate as to how much time this stimulus will buy and what it will cost when the bill arrives. My guess is that, at most, the Bernanke/Obama stimulus will buy two years before the hangover sets in. However, since this dose is so massive, the comedown will be equally horrific.   "In the meantime, stocks are not rising because the long-term fundamentals of our economy are improving. If anything, the rise in global stock prices is due to investors realizing that cash is even riskier then stocks. The massive inflation that is the source of the stimulus is essentially punishment for those holding cash. To preserve purchasing power, investors must seek alternative stores of value, such as common stock [and commodities]. Commodity prices are also rising, with oil hitting a five-month high." China is buying strategic minerals as fast as they can ship.   In other financial news, after spending $750 on the TARP program without buying up any toxic debt--the supposed purpose of the bill--Treasury Secretary says he will finally start buying up toxic debt if Congress authorizes another $100 (for starters). The problem is, there are no fixed criteria to determine who gets the money. Like all other bailout funds, the distribution is totally at the discretion of the Fed or the Treasury-who always seem to favor their insider friends more than the smaller non-insider connected banks.   - End Excerpt -   World Affairs Brief, May 15, 2009   Commentary and Insights on a Troubled World.   Copyright Joel Skousen. Partial quotations with attribution permitted.   Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com