Thursday, October 9, 2008

This is Not The Great Depression II Or Is It?

Carmen Wong Ulrich, author of "Generation Debt: Take Control of Your Money--A How-to Guide" and host of CNBC's "On The Money" posted in a recent column about someone who asked her whether this is another Great Depression in which she replied “Nope.”

For the record, I have done some investing in the stock market, but I never ever throw all my eggs in one basket.

While I enjoy her writings, I think she has it wrong on this one. Why? Well for two reasons. Because history always repeats itself. Plus, even the "experts" get it wrong, much more often than not. They just don't tell you that. For those few people old enough to know, World War I wasn't referred to that by the people who were alive then because it was the "War to End All Wars". But alas, history repeats itself. Then came along the "Roaring 20's", then the Stock Market Crash in October of 1929 which has too often been referred to as the cause of the Great Depression. Again, they are wrong.

At the time and still today, the pundits blamed gold and the stock market for this calamity. The root cause of the Great Depression was neither as these were merely symptoms of the disease. Today, Treasury Secretary Henry Paulson essentially blames American homeowners for the rash of foreclosures sweeping the nation. Again the symptom is being blamed as the cause. Is it any wonder why I don't trust doctors especially those with Ivy League degrees?

So what caused the Great Depression? What is the root cause of today's events? In one word: credit. They know it, but rely on people's ignorance about money to force feed propaganda and generally false information in order to obtain power. There is no greater power that one can have over another than fear and ignorance. Those stories from your grandparents about staying out of debt ring true as much today as they did then. Most people can't even give you the definition of a dollar.

But the symptom was blamed for the disease rather than the cause: "If shortage of bank reserves was causing a business decline, why not find a way of supplying increased reserves to the banks so they never need be short!" If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. While publicly claiming to be a government agency, the 'Fed' is in fact a group of "privately owned and locally controlled corporations." Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government.

"When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. By 1929 the speculative imbalances led to a demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures." Alan Greenspan, Gold and Economic Freedom

No comments: