Tuesday, June 12, 2012

A New Depression Era

For once I have to agree with Paul Krugman, at least on one point, we are in a depression. This is a depression of our own making and many of the reasons are similar to our last recession. This is not really the Obama depression but rather probably the Clinton depression. Bush entered office in the midst of the start of the depression and missed the signs and passed off the 2000-2001 recession as being a normal recesssion that started under Clinton and was exasperated by the 9/11 attacks. However, if one was to compare the roaring '20's with the irrational exuberance of the '90's we would see some of the same conditions that led to the great depression. The 1920's saw a rapid pace of new technology and innovations. Before WWI, automobiles were seen as a luxury item, throughout the 1920's, mass produced automobiles became common across the US. Radio became a means of mass communication. Aviation was coming into its own and advances in the chemical industry led to advances in the medical industry. In the 1990's most of the technological advances came in the form of computer industry. The internet proved invaluable for expanding business growth. The DOTCOMS became vital to our economic prosperity. The 1920's also saw government growth policies and construction booms. The real estate bubble of the 1920's is eerily familiar with the real estate bubble in the late '90's through 2007. Like the 1920's the consumer had become the engine of the economy. Easy money policies allowed individuals to leverage everything they owned to borrow more which fueled even greater spending. What all of this means is we should not be shocked that we are in a depression similar to the one in the 1930's. The excesses of the 1920's is what caused the great depression and the excesses of the 1990's have created this depression. The economic bubble burst in 2007. Debt and deflation are the root cause of both this depression and the greta depression. We have similar debt liquidation and distress selling occuring. Much of the stimulus that went to individuals was and is spent on reducing debt rather than purchasing new products. The American home is one of an individuals best investments assets but as the value of homes decreased once the real estate bubble burst there was less money to be spent. Like the 1920's there has been a loss of unemployment. Since the 1990's jobs have been outsourced and technology meant less people had to work to produce the same output. Interest rate are in free fall and the margins banks were forced to maintain were at lows in both the late 1990's and the 1920's. All of these indications are similar and are the cause of the situation we now face. We are in these conditions because of the irrational exuberance on the 1990's. We should have seen this coming. Just like the great depression we have had our ups and downs already. The signs were there with the Clinton recession. Bush was able to increase government spending spending with Keynesian policies buth that only hid the underlying problems. Obama is using similar if not the same policies as Bush at an even greater rate pushing us even further over the cliff. What we need now is a push towards private investment. We need less government and more entreprenuership. We need consumers back and not increased government spending. The reality is that once government grows beyond its means we create conditions for depressions. The Great depression was overcome only because we created hyperinflation which resulted in WWII. We are seeing many of these same signs today. Remember the Axis regimes including Franco, Mussolini, and Hitler came to power out of economic distress. Today, the PIIGS, are under duress and the people are revolting against "austerity" measures. Greece is just an example. France went the Socialist route. Spain may only have a few days before their bailout fails. If Greece is forced out of the Euro or the EU collapses hyper inflation will again rule the day in Europe. One never knows what a populist revolt will bring into power. The world is again at the brink. The Arab Spring may turn into the Autumn rebellion. Let there be no doubt we are in a world wide depression. We don't know what regime will manifest or where the next coflict will be but just like WWII was caused by economic distress, so may be the next world wide conflcit. We are in very dangerous times right now and unless we learn the lessons of the 1930's we may well be doomed to repeat them. We need to get our economic house in order. That means reducing the size of our government. We have to remain at the forefront of world leadership and not relegate our sovereignity to the United Nations. We can not become an isolationist country. We need private investors and get the government out of the investment business. Once government decides the winners and losers we are all doomed to failure. FDR initiated large government reforms and that is the same route taken by Obama and even Bush. However, the Great Society reforms are not what allowed us to climb out of the depression, WWII led us out of the depression. I would say we are closer to WWIII today than we have ever been. Hard economic times are always what cause social unrest. The Arab Spring was about the have's and Have not's. In our own society we have had the Occupy movement which was social unrest based on the have's and have not's. The economy will not work again until the government gets out of the way of business and allows private industry and consummerism to again reign free. Our conditions today are not that much different than the 1930's Obama hasn't saved us from a depression; he is steering us over the cliff. We need to reverse course and get out of the ditch. We had better hope that Europe saves itself and doesn't again allow hyperinflation that will allow despotic populist leaders come to reign. We are on the brink of catastrophy just compare the roaring '20's to the irrational exuberance of the 1990's. The excesses were similar. My question is will the result become the same?

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