The Great Depression of 2008 is upon US
By Sinclere Lee
Washington (BNW) — With oil and gas prices at an all time high, with customer spending and confidence at an all time low, plus, with home ownership at an all time low and falling, and with unemployment at an all time high… not to mention inflation, falling stock value and perhaps a run on the banks, it looks like 1928 all over again. In other words, the US is not in a recession, but a depression that will make the Great Depression 80-years ago look like ‘happy time are here again.’
While some maybe clueless to the economic wows of this country, others will stone the message for bring bad news, the handwriting is on the wall like ugly graffiti. A new book by billionaire investor George Soros warns that the US is suffering the worst financial crisis since the Great Depression — and the Bush administration is in the dark about how to deal with it.
In his book, “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means,” Soros — a major contributor to liberal causes — believes:
“The United States is facing both a recession and a flight from the dollar. The decline in housing prices, the weight of accumulated household debt, and the losses and uncertainties in the banking system threaten to push the economy into a self-reinforcing decline… Soros’ book is available only as an e-book, but a print edition published by PublicAffairs will go on sale on May 19.
“We are in the midst of the worst financial crisis since the 1930s.”
Measures to combat the financial decline increase the supply of dollars, while “at the same time, the flight from the dollar has set up inflationary pressures through higher energy, commodity, and food prices,” Soros writes.
Soros also notes that the European Central Bank’s reluctance to lower interest rates is putting upward pressure on the euro, and changes in the economy in China will “increase prices at Wal-Mart and put additional pressure on the already beleaguered U.S. consumer.
“Unfortunately this administration shows no understanding of the predicament in which it finds itself.
There are scary comparisons to what Soros is stating and what happened in the Great Depression. In October 1929 the stock market crashed, wiping out 40 percent of the paper values of common stock. Even after the stock market collapse, however, politicians and industry leaders continued to issue optimistic predictions for the nation's economy. But the Depression deepened, confidence evaporated and many lost their life savings.
By 1933 the value of stock on the New York Stock Exchange was less than a fifth of what it had been at its peak in 1929. Business houses closed their doors, factories shut down and banks failed. Farm income fell some 50 percent. By 1932 approximately one out of every four Americans was unemployed.
The core of the problem was the immense disparity between the country's productive capacity and the ability of people to consume. Great innovations in productive techniques during and after the war raised the output of industry beyond the purchasing capacity of U.S. farmers and wage earners. The savings of the wealthy and middle class, increasing far beyond the possibilities of sound investment, had been drawn into frantic speculation in stocks or real estate. The stock market collapse, therefore, had been merely the first of several detonations in which a flimsy structure of speculation had been leveled to the ground.
The presidential campaign of 1932 was chiefly a debate over the causes and possible remedies of the Great Depression. Herbert Hoover, unlucky in entering The White House only eight months before the stock market crash, had struggled tirelessly, but ineffectively, to set the wheels of industry in motion again. His Democratic opponent, Franklin D. Roosevelt, already popular as the governor of New York during the developing crisis, argued that the Depression stemmed from the U.S. economy's underlying flaws, which had been aggravated by Republican policies during the 1920s.
President Hoover like Stupid Bush replied that the economy was fundamentally sound, but had been shaken by the repercussions of a worldwide depression — whose causes could be traced back to the war. Behind this argument lay a clear implication: Hoover had to depend largely on natural processes of recovery, while Roosevelt was prepared to use the federal government's authority for bold experimental remedies.
The election resulted in a smashing victory for Roosevelt, who won 22,800,000 votes to Hoover's 15,700,000. The United States was about to enter a new era of economic and political change.
Today’s reality is food stamps are replacing soup lines; Richard Enright, the manager at this Morgan Williams, says the numbers of customers on food stamps has been steady but he expects that to rise soon. "In this location, it's still mostly old people and people who have retired from city jobs on stamps," he says. Food stamp money was designed to supplement what people could buy rather than covering all the costs of a family's groceries. But the problem now, Mr Enright says, is that soaring prices are squeezing the value of the benefits.
"Last St Patrick's Day, we were selling Irish soda bread for $1.99. This year it was $2.99. Prices are just spiralling up, because of the cost of gas trucking the food into the city and because of commodity prices. People complain, but I tell them it's not my fault everything is more expensive."
The US Department of Agriculture says the cost of feeding a low-income family of four has risen 6 per cent in 12 months. "The amount of food stamps per household hasn't gone up with the food costs," says Dayna Ballantyne, who runs a food bank in Des Moines, Iowa. "Our clients are finding they aren't able to purchase food like they used to."
And the next monthly job numbers, to be released this Friday, are likely to show 50,000 more jobs were lost nationwide in March, and the unemployment rate is up to perhaps 5 per cent. Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.
In the late 1980s and early 1990's Connolly worked for the European Commission analyzing the European monetary system in the run up to the introduction of the euro currency.
"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.
"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.
Legal changes would be needed to give the Federal Reserve and the U.S. government the authority to buy stocks. Currently the Federal Reserve can buy only debt issued by the Treasury, as well as U.S. agency debentures and mortgage-backed securities.
While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today.
The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said.
Then, investors were very optimistic about new technologies, and stocks rose against a backdrop of low inflation, and a trend toward globalization. There was even an equivalent of the modern day subprime mortgage debt meltdown in the form of U.S. loans to Latin American countries which had to be written off.
"The big difference is the attitude of central banks and specifically the attitude of the Fed," Connolly said.
Some economists have blamed the U.S. economy's travails in the 1930s on the Federal Reserve's hesitation to inject reserves into the banking system.
However, today's Fed has tried to preempt the danger of a protracted economic slump and has responded swiftly to a credit crunch in the past year and gathering signs of deterioration in the economy, Connolly said.
The Fed has stepped up its temporary additions of reserves to the banking system, and swiftly slashed its benchmark fed funds target rate to 3.0 percent from 5.25 percent in September. Analysts expect at least another 0.5 percentage point cut in next month.
At the same time, "the fed funds rate can't stay significantly above the 2-year note yield," Connolly said.
On Tuesday, the 2-year Treasury note yield was at 2.00 percent, not far above the lowest level since 2004.
The Fed "almost certainly" has to cut the funds rate to 2.0 percent by the end of this monetary easing cycle, he said. If conditions in the banking sector worsen, the Fed could cut the funds rate to 1.0 percent, a low last seen in June 2004.
Global banks have already written down more than $100 billion of bad debts associated with the U.S. subprime mortgage debt meltdown and housing market decline.
However, Fed rate cuts alone are unlikely to avert a prolonged period of economic weakness because the danger still exists that a burdened banking sector will choke off credit to consumers and households.
"The Fed probably can't fix it all on its own now," Connolly said. "There is a chance the Fed gets forced into unconventional cooperation with government," which could involve buying a range of assets to reflate their value.
That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.
One turning point came when agricultural prices were restored to their pre-slump levels, Connolly said. Such measures were among the New Deal programs that President Franklin D. Roosevelt launched to bolster the economy.
Either way, investors face bleak prospects now without some kind of further government intervention, he said.
Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets. He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.
Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.
"If we don't avoid depression, the only thing worth holding is cash," he added.