Tuesday, May 25, 2010

Laughing in the Face of Financial Depression

Euro worries prompt global stock market falls

We must place what is happening today in proper perspective. That Great Depression lasted from October 1929 to 1942. And it was not Roosevelt's quasi-socialist/fascist "New Deal" that ended the Depression. Rather it was the massive wartime production required by World War II that finally ended the downturn - but at the heavy price of 72 million lives, including over 400,000 Americans.

In the Great Depression, there were massive layoffs, with U.S. unemployment rates of over 25% by 1933 (April 2010 it is about 9.5%).

Banks that financed huge stock investment binges began to fail as debtors defaulted. Millions of dollars worth of stocks had been bought on "margin," meaning they only paid a fraction of the purchase price.

When the banks suddenly demanded payment on this margin debt, depositors tried to withdraw their money en masse, triggering multiple bank runs. In those days before the FDIC, with only meager government guarantees and few Federal Reserve banking regulations, bank failures caused the loss of billions of dollars in assets.

As unpaid debts mounted, farm and other commodity prices and incomes fell by 20% to 50% - deflation with a vengeance.

After the 1929 stock market crash, during the first 10 months of 1930, nearly 800 U.S. banks failed. (In all, over 9,000 banks failed during the 1930s.) By 1933, individual bank depositors had lost about US$140 billion, (which adjusted for inflation would be well over US$1.5 trillion in 2008 dollars).

With a creeping fear gripping America, capital investment and construction slowed, then almost completely ceased. In a crisis of bad loans and worsening future prospects, surviving banks became even tighter in lending. Banks built up their capital reserves and made few loans, which further intensified deflationary pressures.

A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process ballooned a 1930's recession into the Great Depression.

Must we repeat this national economic suicide from 2008?

Are we, as an American people, so abysmally ignorant that we learn nothing from history?

If you want to better understand what is happening now, go to www.google.com and enter Panic of 1837, Panic of 1873, the Depression of 1893, the Panic of 1907, and the Great Depression et al. What is happening today is neither new nor unique.

In 2008, the ambitious Senator Barack Obama ridiculed Senator John McCain for stating the truth - that the economic fundamentals of America are indeed sound.

Our vast natural resources, abundant commodities, our human productivity, our world trade, our accumulated capital, still lead the entire world economy in this age of financial globalism.

Yet because of mortgage bankers' rapacious greed and a near total lack of risk judgment, Wall Street traders, financial "experts" (and their power-hungry political allies), we're now facing financial panic and paralysis.

Americans and the world at large collectively need to stop for a few moments of serious reflection.

That could lead to the inevitable realization that history teaches us:

a) That for the most part we are causing this panic ourselves

b) That we can and will survive what some day will be looked back upon as another in history's many economic backslides - certainly serious, but certainly not fatal.

President Franklin Delano Roosevelt's words at his inauguration on March 4, 1933, still ring true:
"This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself - nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance."

1 comment:

  1. I received this comment: 'What you write about us causing this panic ourselves and that we will survive, no matter what, is true. However, what you don't address is how you get the average American (and non-American for that matter, because it applies to everyone in our global economy) to really SEE, FEEL & HEAR that truth and to begin to turn this mess around. Everyone is so busy blaming everyone else, when really we need look at only person - ourselves.'

    My response:
    I try to get the average person to be aware of the problem by writing about it in historical context. It's not a matter of blame. It's a mater of confidence in the economy and production of people and countries. People are selling off in panic and taking huge capital losses. Most "average" people are in mutual funds where the fund managers are doing that for them and adding fees on top of it. The "average" person does not 'see, feel, or hear' sell offs like today until they get their monthly statement. Some people are so numb they don't even look at their monthly statement. I'm only encouraging people to wake up and face reality and have confidence that people are still working and producing and surviving. Solutions only come after an awareness of reality. Most average people took a huge bath today in capital losses. Most average people invest and base their net worth on capital gains/losses rather than cash flow. In a bad stock or real estate market, capital gains are almost impossible to be reliable. The average person can write their representatives about fascist programs like the bank bailout rewarding the failed few in Wallstreet at the expense of our great grand children. The Obama administration pumps out an incredible amount of economic PR. I say PR because most of it is sentiment base and not fact based. A lot of it is hope based and has stemmed some of the market bleeding. It is a different tune than during the election campaign. Do people listen to it? One can lead a horse to water, but can't make them drink.

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