The New Depression

Wednesday, May 19, 2010
By Paul Martin

Many economic observers have justifiably stated that the U.S. is in the midst of the greatest recession facing the nation since the Great Depression. In December of 2008, the National Bureau of Economic Research – the department responsible for categorizing our economic condition – finally acknowledged what most of Americans had known for some time: that the U.S. is officially in a deep and painful recession. It should be noted that no matter how bad things get NEBR refuses to use the term “depression.”

As the Treasury and Federal Reserve began pouring hundreds of billions of dollars into the financial market in the final quarter of 2008, there were many who worried these actions would result in inflation – prices rise as the purchasing power of each dollar falls.

At the same time, analysts worried that during and after the holiday shopping season deflation would plunge the U.S. economy deeper into turmoil as more and more consumers put off purchases waiting for even cheaper prices or perhaps better economic times. Their fears were met when the 2008 holiday season went on record as being the weakest shopping season in decades.

Other signs of economic despair – manufacturing at its lowest level in 26 years, 120,000 jobs being shed a month, the volatility on Wall Street, home price plummeting – suggest that the bottom may be a long way off.

When prices drop across the board companies are forced to lay off workers, lay offs lead to decreases in disposable income which in turn lead to decreased consumption. In order to bring in customers companies must drop prices further, thus setting off another cycle. If this spirals out of control we see massive joblessness, falling personal income, and prices so low companies cannot afford to produce or sell goods.

The U.S. now seems primed for an economy bust far beyond what is normally associated with natural economic principles. The only real comparison between our current state and any other historical perspective is the Depression era and Hoover administration.

The prosperity enjoyed by previous generations has been sapped dry over the past decade, leaving us with nothing but debt to build upon for the future. We are now destined to watch the housing market decline and unemployment skyrocket, hoping that at some point the government comes to our rescue.

In a desperate attempt to rescue liquidity, the Federal Reserve dropped key interest rates to a 50-year low in the last quarter of 2008. These rate cuts by the Fed did nothing to stop our economic crisis from deepening.

Unfortunately few, if any, are willing to place the blame of our current economic state where it belongs: on the job-killing “free trade” agreements and the push toward globalization. Both practices have decimated America’s manufacturing base and destroyed its ability to create wealth or compete in the modern world economy.

Ben Bernanke, the world’s foremost expert on the Great Depression, should have seen this coming. He, like the rest of those in government, was blinded by the money available to people in his position and balked at the notion of regulating trade.

During the Great Depression we had the capacity to innovate, manufacture and otherwise create wealth that could drag us out of the hole we were in. Today, we no longer have that capability. We have forfeited that ability through disastrous trade policies that have shipped the majority of America’s manufacturing prowess across the border and overseas. Without the capability to manufacture and create wealth, the U.S. will never truly recover.

Our country currently operates on foreign loans because our government constantly spends beyond its budget. With a lower credit rating, the government would find it more difficult to procure loans and eventually may be frozen out (just as “subprime” borrowers are today) of its needed credit lines. When that happens, the end will have officially arrived and the United States will without a doubt be in, possibly this nation’s worst depression. The question is no longer whether or not this is possible, the question is when this possibility will materialize.

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