A Depressing Recession
We’re battling a recession and it’s getting depressing.
Analysts say our current economic situation cannot compare with the great depression. But MSN Money disagrees; and they’ve found ten reasons that prove otherwise. For example today anyone holding Greek bonds has a reason to be nervous. And our stock market rises and falls based on the news from Europe.
MSN says much like the great depression the causes and effects of today’s recession are global. When the treaty of Versailles ended World War I Germany was given a bill for reparations. And to pay back the victorious European countries they borrowed from U.S. banks then defaulted. Today if a Greek default can’t be prevented the problem could spread to Italy, then Spain and so on.
Another similarity can be seen in cities all across the country. As the occupy protesters like to point out the gap between the rich and the poor in America is widening. Analysts say the divide between the richest people in the country and the poorest now sits at depression levels. For more unfortunate similarities keep reading; as the saying goes, those who do not learn from history are bound to repeat it.
Hard times don't happen overnight
Let's not blame just 2008 and 1929 for our economic troubles now and then. It's easy to peg those years as the start of the Great Recession and the Great Depression, respectively, but the causes go back years, even decades.
An analysis of the Great Recession could start with the 1980s, when Asian countries benefiting from cheaper labor jumped into the world economy and became major exporters. Another factor was legislation passed during the Clinton administration that ended the split between commercial banks and investment banking and brokerages.
Oct. 29, 1929, has served for years as the starting point of the Depression, but the day of the nation's biggest stock market crash was preceded by "a decade of stagnation in agriculture, flattening sales in the automobile and housing markets . . . and the woes of the anarchic banking system," according to the 1999 book "Freedom From Fear: The American People in Depression and War, 1929-1945."
The causes and effects are global
The Treaty of Versailles that ended World War I sent Germany a $33 billion bill for reparations to the victorious European nations. To pay them, Germany borrowed from U.S. banks. France and Britain used the reparations money from Germany to pay back loans to the U.S. government made during the war.
This vicious circle flew apart in 1931 when panic hit Austria, then Germany, then neighboring countries. The German and Austrian debt held by U.S. banks was rendered worthless, depositors rushed to withdraw their money from banks, and a weak two-year recovery was swamped in bank failures and currency gyrations dancing to the gold standard that still connected many nations.
Today, the gold standard is gone, but the connections are not. Anyone in the world holding Greek bonds right now has to be nervous. If those European nations using the euro, or some financial institutions, don't step in to prevent a Greek default, then the next ashen-faced investors might be holding Italian government bonds, then Spanish, and on and on it could go.
Living on credit brought us down
We can't blame it all on foreign sources. But we can start there.
Over the past 20 years, the world's labor supply doubled as China, India and former Soviet republics moved into the world economy in a big way, producing goods at lower costs to U.S. consumers, according to a new book.
Those export-led nations also invested in the U.S. bond market, driving down interest rates. This and the loosening of financial regulation and lending standards meant there was more credit available to households. Increased borrowing, to buy homes and then to take out additional loans against them, masked the loss of real income in wage stagnation.
Markets are flooded with goods
Markets are flooded in the sense that no one can afford to buy enough goods to crank up production lines and put more people back to work.
Consumers today may have money, but despite a promising Christmas shopping season, they aren't spending it as they did before 2008. Hockett said that the private sector today is choosing instead to pay down debt, put more in savings or withhold investments until there is evidence of a likely return. The result is that companies don't hire -- and may fire -- workers because there is excess production capacity and a lack of consumer demand, resulting in no labor income growth, further reduced consumption and, ultimately, destruction of sales, revenue and profits.
Unemployment is persistent
The jobless rate started a steady climb from 4.4% in May 2007, hitting 5% in December of that year and 7.3% a year later. It went above 9% in May 2009 and has rarely fallen below that for the past two and a half years, though the rate dropped to 8.6% last month. October 2009 had the highest recent unemployment rate, at 10.1%.
All that despite lowered interest rates, two rounds of quantitative easing by the Federal Reserve to put more money in circulation and four economic stimulus programs passed by Congress.
In the Depression, the unemployment rate reached 24.8% in 1933. The percentage of people out of work stayed above 14% from 1931 to 1940. Not only were the numbers greater; so was the impact.
The social impact was even more dramatic, because in the 1930s less than 10% of wives worked.
The gap between rich and poor is widening
During the Depression, individuals who made up the top 0.1% of income levels had overall incomes equal to the bottom 42%, and Kennedy said the divide between the richest in the United States and the poorest is now at levels similar to the 1920s.
Most Americans are remarkably complacent
Given this disparity in the distribution of wealth, you might think there would be riots in the streets or at least general surliness on the part of the populace.
But before Occupy Wall Street, which has yet to prove that a relatively leaderless resistance movement of "the 99%" can do much about the "greed and corruption of the 1%," outward displays of outrage had been limited.
Leaders divided by economic philosophies
The road to recovery is a divided highway, with solutions traveling in opposite directions. Both today and in the 1930s, the general direction of the solutions is determined by how much or how little the government ought to be involved in fixing the economy.
Presidents Herbert Hoover and Franklin Roosevelt both involved the government in trying to end the Depression, but FDR much more than Hoover.
Recovery doesn't happen overnight
The Depression lasted from 1929 to 1941. If the Great Recession shares that timetable with the Great Depression, 2020 or 2021 becomes the modern-day 1941.