Another Great Depression?

The United States is in the midst of the worst financial crisis since the Great Depression. The question is: How close are we to another Great Depression?

The answer is: Very close. Here’s why.

The Great Depression was the result of the combination of the 1929 financial crisis and serious structural problems in the American economy such as widespread poverty. After the 1929 stock market collapse these factors cut deeply into business investment and personal consumption. The consequence was a downward spiral that created the worst economic collapse in American history.

Today’s economy is hurtling downward on a similar path. The mortgage and financial crises have constricted credit and largely cut off business investment. Stagnant wages and over-borrowing have curtailed consumer spending.

The collapse of a stock market bubble in 1929 triggered the chain of events that led to depression. When stock prices fell in October 1929, investors, financial institutions and banks were caught overextended. The fall in stock prices produced a financial panic that bankrupted many. To repair damaged balance sheets, surviving banks and financiers dramatically reduced lending. The result was a long and steep decline in economic activity.

Much as in 1929, the 2008 collapse has been the consequence of a speculatory bubble, this time in real estate. It was pumped up by over-lending by banks and financial companies and over-borrowing by Wall Street. Rising interest rates helped burst the bubble. Subsequent property owner defaults caught investors, financiers and businesses holding mortgages, or investments based on them, short. Enormous losses for investment firms and banks followed. Despite government bailouts and aid, the country’s surviving major banks have severely cut lending.

The 1920s stock market bubble hid serious structural problems in the underlying economy. The same is true for the real estate bubble in the 2000s.

In the 1920s widespread poverty and an inequitable distribution of wealth contributed to the depression of the next decade. In 1929 42 percent of American families were living in severe poverty. Consumer credit provided some purchasing power to those in society’s bottom half, but by the end of the 1920s that group had exhausted its borrowing power. The bulk of the U.S. economy’s income went to the to top 1 percent of the nation’s families, who earned the same amount as the combined income of the bottom 40 percent.

A similar situation occurred at the end of the 1990s when workers’ wages stagnated while the income of the wealthiest Americans rose. By 2003 the distribution of income had reached the 1929 point, with the richest 1 percent of families received the same income as the bottom 40 percent.

The decline of working Americans’ income was somewhat masked by rising real estate and stock prices, as well as the rapid extension of consumer credit. To maintain their standard of living, middle class Americans turned to borrowing more through credit cards and home equity loans. By 2006 these practices had turned Americans’ savings rate negative — its worst performance since the Great Depression — as many spent more than they earned.

The 1929 financial collapse combined with poverty and the distribution of income to significantly cut spending for all levels of American society. Demand was down, businesses could not get the credit needed to finance operations and employees were laid off. Declines in business and worker income followed, consumption dropped, and firms went bankrupt. This caused yet more banks to fail and created a downward spiral.

A similar process is underway now. The collapse of housing and stock prices and the credit freeze cut off borrowing as a means to support middle class consumption. Even worse, too many of those who over-borrowed are unable to pay; they’re now defaulting on their mortgages, car loans, and credit-card debts. The result is rapidly falling levels of spending and consumption. These consumption declines are merging with the constriction of bank credit; many companies cannot get even short term loans to carry on operations.

Much as was the case in 1929 the twin declines of consumer and business spending are rippling through the economy. They’re causing worker income and general consumption to fall and bringing on mounting layoffs. As unemployment rises, more individuals will be unable to pay their debts and additional personal and business bankruptcies will follow. This means more bank and investment company failures and bailouts.

The American economy in 2008 is following the same path it took in 1929. The collapse of a speculatory bubble has merged with problems of the distribution of wealth, working Americans’ incomes and consumption. The consequence is that the economy is rapidly spiraling downward into the next great depression.

John Paul Rossi

John Paul Rossi is an associate professor of history at Penn State Erie, The Behrend College. He is co-author of “Entrepreneurship and Innovation in Automobile Insurance” and is a writer for the History News Service.

Reprinted with permission of the History News Service.


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  4. says

    Demonstrations and violent protests are on the rise. I believe the time is drawing near where the unemployed and hungry will forcibly take back the wealth that was stolen from them by politicians and executives.

  5. Rich says

    The very second our government Nationalizes CitiBank there will be a run on the banks. Let the Wealthy be (poor) for a while. The citizens have been for a while now. We can adapt, they cannot!
    It is time for a U.S. (Tea Party) Toss your bills and debt papers into the shredder. Just stop paying all bills.

  6. Timeparticle says

    Mr. Rossi, when you introduce the question, “Who benefits from this and why?” to most problems, the answer can create greater understanding of the situation. Who might be benefitting from this economic downturn? Is a group of elite pulling the economic strings to greater assure their status continues?

    One is tempted to posit a general rule: periods of wide and increasing income and wealth inequalities always precede long and deep recessions/depressions. The other rule is that GOP tax cuts have always preceded periods of sustained and increasing transfers of wealth to the upper classes.

    In America, the theft has been overt. Bush called his beneficiaries his ‘base’. Indeed, they were his sponsors.

    Reagan’s tax cut of 1980 benefited only the upper quintile. When all the data is in, Bush’s tax cuts will prove to have benefited only about one percent of the nation, a fraction of those who benefited from Reagan. In both cases, only those who were already very, very, very wealthy benefited. Everyone else got poorer both in real terms and comparatively.

    The effect of this on the economy is not only that the wealthy will get to live in better houses, get adequate health care, ‘better neighborhoods’, better educations, or drive more reliable cars. It means that many amenities that you might have previously enjoyed on your present income will become off limits to you even if you retain your job and your current income. That’s because the very, very wealthy will have ‘bid up’ the prices on homes, educations, health care, cars, and other items.
    There are yet other results that follow from GOP ‘economics’.

    Although the US economy produces tremendous wealth, it is always accompanied in GOP regimes by tremendous poverty. The US, for example, was most egalitarian in the years immediately following World War II. During GOP regimes, income inequality increased and is, in fact, measured with the GINI index. Higher Ginis indicate greater levels of income inequality. These indices have been significantly greater in every GOP regime since World War II.

    Certainly –there is enough wealth to go around. Instead, wealth flows upward —not down, as the propagandists of ‘supply side’ i.e. ‘trickle down theory’ would have you believe. The problem is systemic –the result of identifiable, right wing policies.

    The lower and working classes pay more than their fair share of taxes. The government has it backward. The government taxes labor and gives capital a free ride with numerous dodges. This is the recipe for the impending economic collapse, a collapse that appears to be well underway and beyond anyone’s power or ability to stop. But that has not stopped the government from playing it’s well-rehearsed role as the shakedown arm of the nation’s tiny and shrinking elite.

    If because of GOP transfers of unearned wealth to this increasingly tiny elite of about one percent of the population, labor becomes unproductive or impoverished and the productivity of the nation declines. It will ultimately collapse like the house of cards that it is. That is what we see happening as I write this. If the poor can no longer afford decent housing or food because elites have bid up prices on commodities, the house of cards will not stand. If you can no longer afford decent housing, health care or food, you have then, perhaps recently under Bush, fallen off the ladder. It’s the GOP way…. excerpts from The Existentialist Cowboy, Nov. ’08.

    There will never be enough money in the world to pay back the huge debt the banks have created.( See Money as Debt movie online.) So, to postpone a money collapse of our system, the elite 1% needs to create an economic shift, a great change within the current monetary structure to ensure their status is sustaining.

    We, as progressives, must educate ourselves in the current economic problems in order to help facilitate change. With certain calmness, and without radical provocation, we can seek a better way to create money and ensure the well being of everyone.


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