Is the US economy more sound than in the 30s?
Posted on 05 April 2009 with no comments from readers
Economic commentators are quick to point out that the misery of the global economic crisis will be less in the 21st century than in the 1930s because wealth in advanced economies is more evenly spread and the absolute level higher.
That may be true. But it is interesting to compare JK Galbraith’s five pointers to an unsound US economy in the late 1920s and today. Not so much has changed.
Five economic tests from the 20s
First, a bad distribution of wealth. To be sure wealth is not as concentrated into the hands of the rich but the US has certainly become a far less equal society over the past decade with low pay levels static, and well there are those who get bonuses.
Second, a bad corporate structure. The 30s had its holding companies and investment trusts. The 2000s has private equity and hedge funds. Both committed the cardinal sin of over leveraging, and forgot that it works in reverse in a recession.
Third, a bad banking structure. History is doomed to repeat itself. The banking structure of the 30s was inherently weak with too many small banks. The modern banking system became besotted with derivatives and securitized subprime mortgages, and over leveraged real estate, stocks and just about every asset class.
Fourth, foreign balances worked in reverse in the 30s with a US surplus sucking liquidity out of the global financial system that gradually bankrupted its trading partners. That position could be reversed this time round.
Fifth the great Professor JK Glabraith cites poor economic intelligence as a reason for the decline. How many economists foresaw last year’s calamity? Did central banks take rising house prices as a hint to raise interest rates?
Never again?
In the conclusion to his classic ‘The Great Crash 1929′ JK Galbraith asks whether such a slump could happen again, and he says only when these lessons of history had been forgotten.
You have indeed to wonder if the US economy is really more sound than in the 1930s. It was big then and it is bigger now. But that does not mean a painful period of adjustment is not awaiting the US after its long boom period.
Unemployment may not rise to 25 per cent, but it is 8.5 per cent and rising, so is 15 or even 20 per cent unthinkable as the recession rolls out? The bankruptcy of General Motors and, or Chrysler would contribute greatly to the dole queue, and redundancies at the banks can only have begun.
However, the government is spending and not trying to run a balanced budget or erect trade barriers, so this is not entirely a repeat of the 30s, and it will nationalize the banks rather than allow them to fail.
no Comments posted by readers:
U.S. official statistics are fixed to suit political management; every month, the U.S. unemployment is announced, then revised upwards in later months by which time its number has been ‘managed’ on world financial markets.
One in ten people in the U.S. are now on food stamps, the anti-hunger program aimed at allowing the impoverished to feed themselves.
One in ten people in the world’s biggest economy would starve to death without this program.
The G8 are paid political hacks, funded by banksters, in my opinion. Only the G20 – if they get up off their knees and challenge the G8 lies – can save themselves, and others.
N’oblesse oblige. Gold, silver, land (agriculture and oil). That is the renewed world order. Same as it ever was. Same as it ever will be IF the G20 get up off their knees, and create a renewed world order – not the old world order promoted by morons like Gordon Brown.
Check out http://www.BearMarketComparison.com; it supports the notion that the current bear is similar to the bear of the Great Depression. Nice chart and some interesting unemployment info too.