Posted 9/28/2008

IS THE WORLD HEADED FOR SECOND GREAT DEPRESSION?

If we look back to the 1930s and examine the causes of the Great Depression, we see that there are many similarities to 2008.

Four individual economic storms came together in 1930 to create the perfect storm which submerged the world's economies into hopelessness – and led to the rise of political extremism and World War II.

The four storms which converged to create the Great Depression were (1) the U.S. stock market crash in October 1929, (2) the bank failures of the 1930s, (3) the massive decline in consumer spending and (4) the Hawley-Smoot Tariff Act of 1930.

These conditions in whole or in part exist today.

Are we headed for a 21st century version of The Great Depression?

The stock market crash of October 1929 was the initial storm. Over $40 billion was wiped out overnight, a monstrous sum in the 1930s when a $50,000 income defined a rich man.

Today the market has not fully crashed, even though it has been flirting with the 20% tipping point. Promise of the $700 billion bailout has kept the market at reasonable levels. But the current Dow Jones and S&P data is highly suspect.

It is artificially high since the Securities and Exchange Commission has prohibited so much short selling. Without short sellers in the market, the stock market looks healthier than it really is. Without the props of the shorts prohibition and the bailout, the market could easily crash, wiping out hundreds of billions of wealth.

Bank failure was the second storm. Before we could fully recover, banks started to go down like ten pins. In the 1930s, over 9,000 banks failed. Surviving banks stopped lending to protect their own precious capital. The resulting lack of credit strangled the economy. Businesses failed, workers were laid off and unemployment reached 25%.

We have reached, and possibly exceeded, this condition in 2008. Huge financial institutions are going belly up. Depositors are fleeing major banks despite the protections of the Federal Deposite Insurance Corporation. Our rapidly failing large banks, commercial banks and insurance companies sparked the panic in Washington which has led to a series of bailouts, mergers, acquisitions and the big bailout.

The sharp drop in consumer spending was the third storm. Frightened for the survival of their families, consumers simply stopped buying anything that was not essential. The price of pork fell so low that farmers were told by Agricultural Secretary Henry Wallace to "plow your new piglets into the ground."

In 2008, nobody is plowing baby pigs into the ground, but the drop in consumer spending is beginning to accelerate. At first the poor were hurt as construction jobs dried up. Mexican immigration has dropped dramatically. Then the middle class reined in its spending as "family restaurants" began to lose business. Now the rich are being hit. Upscale stores and restaurants have moved to the down escalator. Even the recession-immune luxury home market has stalled out. With all the job losses on Wall Street, we may soon see investment bankers jumping out of windows, just like 1929.

Hoover's signing of the anti-trade Hawley-Smoot Tarriff bill in 1930 was the fourth massive storm. In attempting to protect American companies from foreign competition and international trade, Hoover inadvertently set off a worldwide trade war. U.S. trading partners retailiated with their own tariffs. As trade dried up, so did the companies who were to be protected.

There is no Hawley-Smoot in 2008, but there could be one in 2009 if the Democrats win both houses and the White House in the November elections. Practically every Democrat is promising to halt the "sending of jobs overseas." Barack Obama, Nancy Pelosi and Harry Reid are particularly strong on this point. Pelosi and Reid have already blocked the trade bill with Columbia. If their sentiment prevails in 2009, we might have an anti-trade act which would be every bit as destructive as Hawley-Smoot was in 1930.

As you can see, we are periously close to achieving the perfect economic storm which sank the world in the 1930s.

Obama is running like a reincarnation of Jack Kennedy.

But if he is elected – and his programs are enacted – he will more likely be seen as a reincarnation of Herbert Hoover.

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