- WHY THIS ECONOMIC CRISIS IS DIFFERENT FROM THE 1930'S
DEPRESSION
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- I have pointed out before several differences of today's
recession and that of the Great Depression, including the fact that fiat
money creation has been going on so strongly since the 1990s that recent
times a speculative economy grew so large that it literally dwarfed the
real economy. Almost all the banks and investment firms involved in the
buying of sub-prime mortgages and derivatives were part of this giant speculative
economy that was not directly investing in real business. Why? They knew
the real rate of inflation was over 10% and weren't satisfied with the
slow growth of real business investments. The high rates of return on speculation
and derivatives gave them a place to grow their money much faster. Had
the public understood and demanded that these speculators NOT be bailed
out, this speculative economy could have collapsed without actually destroying
the real economy. I estimate there was only a 20% crossover of funds. Michael
Pollaro wrote an excellent article on the technical and economic difference
between then and now.
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- "1. Quite simply, today's monetary and political
framework is built for inflation, as much inflation as the government,
the Federal Reserve and their banking partners want. And inflation, and
a whole lot of it, is exactly what we are about to get.
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- "2. On the eve of the Great Depression and until
1933, there was nothing to protect banks from prudent depositors wanting
their money, that being currency or gold, or conversely, to assure depositors
that their money was safe when they feared for their savings. Fractional
reserve banking, where banks are permitted under law to loan out depositor
money, while pretending the money is still in their vaults, redeemable
on demand, is an inherently unstable system, always susceptible to a bank
run.
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- "3. On the eve of the Great Depression and until
1933, the US was on a gold standard, whereby domestic and international
dollar holders could redeem dollars for gold. Gold redemptions, and the
ever present threat of those redemptions, limited the amount of money the
Federal Reserve could create.
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- "4. the Federal Reserve's monetization activities
were essentially limited to Treasury securities, banker's acceptances and
direct loans to member banks, the latter largely consisting of rediscounted
business paper. In 1932, the government greatly expanded those monetization
tools by broadening the assets eligible as collateral against Federal Reserve
loans. Today, with the passage of the Monetary Control Act of 1980 and
several other "tweaks" along the way, the Federal Reserve can
pretty much buy anything it wants, from any bank or non-bank that it wants,
by writing a check on itself.
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- "5. Until the establishment of social security and
unemployment insurance in 1935, there was no large scale federal social
safety nets through which money could be injected into the economy. Today,
we have a plethora of long standing, and deeply imbedded safety nets, overseen
by politicians able, willing and ready to use them, especially when they
are funded, not by taxes, but stealth through the printing press of the
Federal Reserve. Think about that. The ability to inject an unending stream
of newly printed money to needy recipients sure to spend. How big is this
stream of money? Given that the unfunded liabilities of social security,
medical insurance and other trust funds are some $55 trillion, about 3.5
times nominal GDP, and growing rapidly, very big indeed.
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- "6. Hoover, FDR, indeed all subsequent administrations
have given us all sorts of bailout packages over the years. But I think
we can agree that we have never seen anything like this before. Some $30
trillion in bailout money has been advanced or guaranteed by the Treasury,
FDIC and Federal Reserve in response to this crisis. And it's likely not
over. Simply unprecedented. Combine government bailout packages and social
nets with the Federal Reserve's printing press, and throw in a few government
make-work programs for good measure, and what do you get? A huge and determined
spender of last resort, with bottomless pockets. This year's federal deficit,
the one the Federal Reserve is now telling us it plans to increasingly
monetize, is likely to surpass $2 trillion. And by the looks of it, we
are only getting started
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- "7. On the eve of the Great Depression, the US was
a nation of savers and a creditor to the world. Today we are the largest
debtor in the world. Given that inflation favors debtors, vote seeking
politicians can be 'excused' if they see the "value" in inflation;
and voters, neck deep in debt, with little savings to boot, can be 'excused'
for voting them into office. And if foreigners take dollars in return for
their mercantilist toil, only to deposit those dollars in US government
IOU's wholly denominated in currency they know is coming off a printing
press, then hey, what's not to like about inflation. Sure the US is paying
off its foreign obligations in deflated dollars, but foreigners don't vote,
right.
-
- "8, During the Great Depression, there were numerous
voices, even inside the Federal Reserve, calling for free markets and advising
against government intervention. Who today argues against an active government
and for free markets? Very few. Think no further then the highly respected
Federal Reserve Chairman Ben Bernanke. This is a man who has waited his
whole career to prove that it was the Federal Reserve and its tight monetary
policy before and after the stock market crash that gave us the Great Depression,
that the correct policy response by the Federal Reserve post the stock
market crash was to print money and to continue printing money until economic
recovery was assured. Unfortunately, the opposite is the case, and it is
why a Bernanke led Federal Reserve virtually guarantees inflation. Contrary
to what Bernanke thinks, the Great Depression was caused by the low interest
rate and loose monetary policies of the Federal Reserve in the 1920's.
These policies created the 1920's boom which necessitated the stock market
crash of 1929"
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- Peter Schiff warns: "Don't Be Fooled by Inflation."
What he really means is don't be fooled by the temporary deflation. With
all the massive creation of money, hyperinflation is inevitable. In fact,
he gives several examples of why certain up markets are really a sign of
people dumping dollars for businesses and commodities before it loses its
value. That means the insiders know where the dollar is eventually headed.
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- "Once again, the facts do not support the euphoria
[of the Dow's 25% rise]. Over the past few months, the government has literally
blasted the economy with trillions of new dollars conjured from the ether.
The fact that this 'stimulus' has blown some air back into our deflating
consumer-based bubble economy, and given a boost to an oversold stock market,
is hardly evidence that the problems have been solved. It is simply an
illusion, and not a very good one at that. By throwing money at the problem,
all the government is creating is inflation. Although this can often look
like growth, it is no more capable of creating wealth than a hall of mirrors
is capable of creating people.
-
- "We are currently suffering from an overdose of
past stimulus. A larger dose now will only worsen the condition. The Greenspan/Bush
stimulus of 2001 prevented a much needed recession and bought us seven
years of artificial growth. The multi-trillion dollar tab for that episode
of federally-engineered economic bullet-dodging came due in 2008. The 2001
stimulus had kicked off a debt-fueled consumption binge that resulted in
economic weakness, not strength. So now, even though the recent stimulus
administered a much larger dose, we will likely experience a much smaller
bounce. One can only speculate as to how much time this stimulus will buy
and what it will cost when the bill arrives. My guess is that, at most,
the Bernanke/Obama stimulus will buy two years before the hangover sets
in. However, since this dose is so massive, the comedown will be equally
horrific.
-
- "In the meantime, stocks are not rising because
the long-term fundamentals of our economy are improving. If anything, the
rise in global stock prices is due to investors realizing that cash is
even riskier then stocks. The massive inflation that is the source of the
stimulus is essentially punishment for those holding cash. To preserve
purchasing power, investors must seek alternative stores of value, such
as common stock [and commodities]. Commodity prices are also rising, with
oil hitting a five-month high." China is buying strategic minerals
as fast as they can ship.
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- In other financial news, after spending $750 on the TARP
program without buying up any toxic debt--the supposed purpose of the bill--Treasury
Secretary says he will finally start buying up toxic debt if Congress authorizes
another $100 (for starters). The problem is, there are no fixed criteria
to determine who gets the money. Like all other bailout funds, the distribution
is totally at the discretion of the Fed or the Treasury-who always seem
to favor their insider friends more than the smaller non-insider connected
banks.
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- - End Excerpt -
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- World Affairs Brief, May 15, 2009
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- Commentary and Insights on a Troubled World.
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- Copyright Joel Skousen. Partial quotations with attribution
permitted.
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- Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com
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