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Great Depression

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The US Debt Crisis

30 July 2011

The US Debt Crisis

By Gwynne Dyer

By the time you read this, you will probably know whether the United States is going to default on its debts this week, or not for another ten to twelve months. Unless there is a deal by Tuesday, the US government runs out of cash right away. But either way, American politics is becoming utterly dysfunctional.

“The biggest threat to the world financial system comes from a few right-wing nutters in the American Congress,” said Vince Cable, Business Secretary in Britain’s Conservative-led coalition government. Fair enough, but the true believers of the Tea Party, which controls a large fraction of the Republican Party’s seats in Congress, haven’t the slightest interest in the world financial system.

“It’s like a form of economic terrorism,” Wall Street financier Steve Rattner told the British Broadcasting Corporation. “These Tea Party guys are like strapped with dynamite standing in the middle of Times Square at rush hour and saying either you do it my way or we are going to blow you up, ourselves up and the whole country with us.” But that’s not what they intend. They just want to blow up Barack Obama.

The permissible limit on US government debt, currently set at $14.3 trillion, has been raised by Congress 106 times since 1940, including 18 times during the presidency of Republican saint Ronald Reagan. It normally goes through without debate, almost unnoticed.

The Republican decision to withhold agreement this time is rooted in the Tea Party’s 19th-century belief that the only appropriate response to a financial crisis is to cut spending and balance the budget. But most Republicans have heard of John Maynard Keynes and learned the lessons of the Great Depression; it’s more than fifty years since the mainstream Republican Party preached that all government spending was sin.

When the 2008 financial crisis hit, President George W Bush (“This sucker’s going down”) did what he had to do to ward off a second Great Depression: spend huge amounts of money to keep the economy turning over and to bail out financial institutions that were “too big to fail.” Barack Obama did the same, but he may pay a high price for it.

For Republican strategists, the attraction of a crisis over the US government deficit is that it could sabotage Obama’s re-election bid in 2012. With Republicans controlling the lower house of Congress, raising taxes on the rich and on corporations is out of the question. The deficit can only be cut by raising the taxes and cutting the benefits of the poor. So withhold permission to raise the debt limit until Obama agrees to attack his own key constituency.

That was doubtless the original idea, but then the Tea Party faction took the bit between its teeth.

First they forced John Boehner, the Speaker (Republican majority leader) in the House of Representatives, to drop his plan for $3 trillion cuts in government spending over the next ten years. Instead, insurgent Tea Party members of his own caucus made him adopt a two-stage approach mandating only $1.3 trillion in cuts now, with more to follow later.

Under the Tea Party plan, Congress would also authorise only a small increase in the debt ceiling now, so that Obama would have to come back and ask for another increase in mid-2012. It is a ploy intended to prolong the political crisis into next year and make the budget deficit the sole focus of attention during the election campaign.

Then, when Boehner was trying to get that amended plan through the House of Representatives last week, the Tea Party members threatened to vote against it unless they got further concessions from him. The second-stage negotiations in mid-2012 could not even start unless Congress also began work on a new constitutional amendment that would oblige the federal government to balance its budget every year, forever.

Obama could thwart that strategy if he could reach a compromise deal with the mainstream Republican leadership in Congress, which is why the Tea Party has worked so hard to radicalise the Republican position. It doesn’t want a deal because it believes that if the US government cannot pay its employees or send out social security cheques, the victims will not be interested in the political details. Obama’s in charge, so it’s his fault.

That may be true, but the collateral damage would be extreme. About 40 percent of US federal government spending would stop at once (ongoing tax revenues would cover the rest), and millions of people who work for the government or depend on social security payments, veterans’ benefits and the like would suddenly have no income.

The US government would almost certainly lose its AAA credit rating, so interest rates would rise not just for government debt but for every mortgage and personal loan in the country. The US would tumble back into recession, and the rest of the world would probably be dragged in behind it.

Still, if you don’t believe that anything good can happen in the United States until that usurper Obama is driven from office, and you don’t care what happens to poor Americans and to foreigners, it’s a pretty good strategy.


To shorten to 725 words, omit paragraphs 3 and 11. (“It’s…Obama”; and “Then…forever”)

A Day Late and a Dollar Short

10 October 2008

A Day Late and a Dollar Short

By Gwynne Dyer

Speaking on Friday, President George W. Bush assured Americans and the world that the medicine was working: the recent $700bn rescue plan for Wall Street would restore order in the markets. “We are a prosperous nation with immense resources and a wide range of tools at our disposal,” he said. “We are using these tools aggressively.”

Well, maybe, but the markets were not convinced. By the end of Friday the markets were down by an average of 7 percent from Tokyo to New York. Over the previous two weeks stocks on Wall Street had fallen by an average of 30 percent, and they are almost 50 percent down on this time last year. A lot of this has been driven by blind panic and herd psychology, of course, but there is certainly a case for saying that not enough is being done, especially in the United States, which is the origin and heart of the crisis.

One striking measure of the shortfall in the United States was the size of the rescue package for British banks that was announced in London on Wednesday. There are only one-fifth as many people in Britain as in the United States, and the British economy is about one-fifth the size of the American. British banks are probably holding proportionately less bad debt than American banks, and certainly not more. But the British rescue package was £500 billion ($875 billion), which is substantially bigger than the Bush administration’s.

In times like these, it is fashionable for despairing brokers and bankers to quote Rudyard Kipling’s poem “If” — or rather, to misquote it: “IF you can keep your head when all about you/Are losing theirs and blaming it on you/You simply don’t understand how bad the situation is.” It is entirely possible that the White House, concerned to downplay the scale of the crisis in the midst of an election campaign, is not frightened ENOUGH.

Consider what John Maynard Keynes wrote in 1931, two years after the Wall Street crash and some distance into the Great Depression that ensued: “The present signs suggest that the bankers of the world are bent on suicide. At every stage they have been unwilling to adopt a sufficiently drastic remedy. And by now matters have been allowed to go so far that it has become extraordinarily difficult to find any way out.”

When he wrote that, Keynes could not know that the Depression would get even worse and last for almost a decade, but he knew that it was already too late for a quick fix. This time around at least the governments are willing to get directly involved in saving the banks and other financial institutions from paying the full cost of their folly, which is why ninety-nine out of a hundred observers will tell you that there will not be another Depression.

They are probably right, but there is a depressingly similar pattern of too little, too late in the actions of governments in the face of this crisis. The rescue packages that are on the table now would have fixed most of the problem if they had been available three months ago. The packages that will probably be on the table in two weeks’ time would save the situation now. But politicians are just as scared of the voters as the bankers were of their shareholders, and so they do nothing big or radical until the last possible moment.

There are still lots of reasons to believe that no replay of the Great Depression is in the offing. Not only are governments now willing to save failing banks, but they do understand (thanks mainly to Keynes) that balancing the budget and cutting spending are the worst things to do when tax revenues start to fall. Running up enormous deficits when the economy is growing, as the Bush administration did, is fiscal lunacy, but deficit spending is the best cure for a shrinking economy.

Other differences from the time of the Great Crash include the fact that there is now international cooperation on financial and economic issues, not the intense national hatreds that led to the beggar-my-neighbour trade barriers and currency devaluations of the 1930s. (World trade halved between 1929 and 1939.)

We are also the beneficiaries of the longest period of sustained growth that the world has ever known (over sixty years of it, by now), not the shell-shocked survivors of the First World War, which destroyed half of the accumulated wealth of the 19th century. And there is a “consumer of last resort” to keep world demand from shrivelling up entirely: China.

So we’re not heading for a repeat of the Great Depression, but every day that passes with lending frozen, prices collapsing and confidence evaporating before this global financial panic bottoms out will cost us a month of painful days on the way back up. Delay has a very high price at the moment.

If the current hesitancy in the United States persists, we may well end up with a Great Recession, worse than anything since the 1970s. Not 25 percent of the population out of work for most of a decade (as it was in the 1930s in the United States, where the pain was worst), but quite possibly 10 percent unemployment for two or three years. Not an attractive prospect.


To shorten to 725 words, omit paragraphs 9 and 10. (“Other…China”)

The Second Time as Farce

5 October 2008

The Second Time as Farce

By Gwynne Dyer

This is not the Crash of 1929 revisited, and we are not heading into a second Great Depression. No developed country this time round is going to face the 25 percent unemployment rate that the United States experienced in the 1930s.

“Capitalists can buy themselves out of any crisis, so long as they make the workers pay,” Lenin said, but it’s more complicated than that. The capitalists didn’t manage to buy themselves out of the Depression, mainly because they didn’t know how to use the government (i.e. the taxpayers) to restore credit and confidence. They know now, however, and they can still buy themselves out of this crisis. With a little help from the government, of course.

President George W. Bush’s radio talk just after the crisis broke in mid-September was all about getting the workers to pay: “When the government asks you to pay for mistakes on Wall Street, it does not seem fair, and I understand that. And if it were possible to let every irresponsible firm on Wall Street fail without affecting you and your family, I would do it. But that is not possible.” So we’re going to bail Wall Street out with $700 billion of your money.

All right, it’s not “real money.” It is credit that the US government will create by the electronic equivalent of printing money, and it doesn’t come out of current taxes. It is debt that will eventually come out of the next generation’s taxes, so not to worry. The boomer generation have spent their whole lives loading debt onto the following generation, so why stop now? But perceptions are everything, and for a moment there the tax-payers thought it was real money. They didn’t like that.

It was the deluge of e-mails, letters and calls from outraged voters that caused the bail-out legislation to be thrown out the first time it went to the House of Representatives on 29 September. Some Republicans argued that they could not support “socialistic” measures like nationalising banks and capping executive salaries, but what really drove the House’s rejection of the bill was the fact that every member faced re-election in five weeks’ time. All 435 Representatives had their jobs on the line in the elections on 4 November, and those in marginal constituencies knew that they would be severely punished at the polls if they used “the taxpayers’ money” to bail out Wall Street now.

But the Senate (only a third of whose members face re-election this year) passed the bill easily on 1 October, once some crowd-pleasing sweeteners had been added. By the time the members of the House were herded back into the chamber to vote again on Friday, 3 October, the fix was in. A majority of Republicans, still hoping to cling to their seats in an anticipated Democratic landslide, still voted no, but enough Democrats had been persuaded to vote yes (by that same perception of an impending landslide) that the legislation slid through. The workers have been persuaded to save the capitalists (“because it’s not about Wall Street; it’s about Main Street”) once again.

It’s not all over yet. There will probably be further bank failures and piecemeal government bail-outs in many countries, for the “toxic” financial instruments based on sub-prime mortgages are widely held by banks and other financial institutions around the world. This does not add up to an economic Armageddon, however, although strenuous efforts are being made in the media to portray it as exactly that.

The stock market can crash (as it did in 1987) without having much effect on the real economy. Bank failures are more serious, but they do not have to entail wider economic disaster either. The business cycle was overdue for a recession anyway, and there is certainly going to be one now, but despite all the apocalyptic talk it hasn’t arrived yet.

Even the countries where the housing bubble was biggest and the mortgage lending most reckless, the United States and Great Britain, are not yet technically in a recession. When it does arrive, it will probably be worse than the mild recession of the early 2000s, but maybe not as bad as the recessions of the early 1980s and the early 1990s. It will almost certainly not be as bad as the economic stagnation and runaway inflation of the 1970s, and it may be less bad in the big developing economies than in the developed ones.

As for a rerun of the Dirty Thirties, that is not on the table even in the United States, where deregulation was most extreme and the creation of impenetrably complex financial “derivatives” of doubtful value was most enthusiastic. So you might as well take what entertainment you can from this spectacle of mass folly among the high and the mighty.

The Masters of the Universe have been revealed as naive speculators who believed that property values could only go up. The journalists who preached the blessings of unregulated free markets have been unveiled as blind ideologues at best, and at worst paid propagandists. The response of American politicians at all levels has been pathetic.

This mass folly will go largely unpunished, of course: these people are not going to lose their homes and end up poor. Most won’t even lose their jobs. It takes another old Commie (a pre-Commie, actually) to sum it up. In 1852 Karl Marx wrote: “Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce.”

Not the Great Depression, but the Reign of Folly.


To shorten to 750 words, omit paragraphs 3 and 9. (“President…money”; and “Even…ones”)

The Great Crash

24 September 1979

The Great Crash

By Gwynne Dyer

LONDON: The ideal capitalist enterprise, it was once suggested, would be a brothel over a five- minute carwash. But all the best ways of making one’s capital multiply involve the owner no work at — like the stock market. What goes up must come down, however, and 50 years ago next month Welt Street came down with a crash that still reverberates in Western memory.

The Crash of 1929 inaugurated the grim decade of the Great Depression. In the United States, one quarter of the population was out of work by 1932. The gross National Product of the U.S. dropped by a third in four years, and it did not recover to its 1929 dollar value until 1941.

Much the same happened in Europe, although rearmament – and so recovery – came earlier. Nor was what we now call the Third World spared: Most of the world lost a full decade of economic growth.

Most historians also blame the Great Depression for Hitler’s rise to power in Germany and for Japan’s desperate grab for an economically self-sufficient empire in East Asia. On that reckoning, the Crash of 1929 also led eventually to the Second World War, – and so to the end of the European empires, the Soviet conquest of half of Europe and the Communist victory in China.

Somehow it all seems much too large a result from the mere fact that the average value of industrial shares on the New York Stock Exchange declined by half between mid-September and mid-November of 1929.

That is why the popular memory has embroidered and dramatized the events of late 1929. ‘Everyone’ in America was caught up in the speculative fever, we are told, and everyone lost their shirts when the crash came. The crash was supposed to have happened on a single day – most often called ‘Black Friday,’ October 24th – by the end of which ruined speculators were raining onto the sidewalks of New York in formation suicide leaps.

The facts, as usual, are rather different. The total number of customers on all American stock exchanges in 1929 was only 1.5 million in a United States population which was then 120 mIllion. The panic of ‘Black Friday’ was over by the afternoon, and the market closed for the day only 12 points down. The suicide rate in New York in the autumn months of 1929 was no higher than normal.

And yet the slow-motion Crash of 1929, beginning with a slight downward movement in stock values September 5 and accelerating into a sickening slide in late October, really did cause the Great Depression. The reason was that it came at the end of one of those mercifully rare bouts of specutative lunacy which leave hang-overs of historic proportions.

The major economic advantage of the capitalist system – renamed free enterprise for propaganda reasons during the Cold. War – over the various models of centrally planned economies is its greater flexibility. But the flexibility comes from tens and hundreds of thousands of companies and individuals making independent decisions, which naturally also means unpredictability.

And unpredictability inevitably brings speculation. Each individual’s business decisions depend on his estimate of what all the other individuals, and so the economy as a whole, will decideto do. The business cycle is basically a product of collective psychology, and the stock market is its most sensitive barometer.

Normally the collective expectations of economic growth or recession move within quite narrow and rational limits, and so does the stock market. But once in a great while people will be seized by the belief that the expansion of the economy (or more precisely, the rise in the stock market prices) will be rapid, continuous and unlimited., In fact, only the most naive believe this literally. Insiders know that the rise in stock values must end some time, and plan to, sell out just before that moment. But since the whole momentum of the expansion is psychological, they must not give any hint by word or deed that they think this will ever happen for fear of breaking the spell and precipitating the collapse.

When such a speculative fever hits the market (for reasons that would be best understood by lemmings), speculators will buy any stock, at any price – usually with a great deal of borrowed money (on margin) – in the belief that they will be able to sell it again in a few weeks or months at a far higher price. The true worth of a particular stock, or even what kind of enterprise it represents, entirely ceases to matter.

Just before the first great crash of modern history, the South Sea Bubble of 1720, speculators willingly poured their money into, amongst other curiosities, a promotion ‘For an Undettaking which shall in due Time be revealed.’ The same get-rich quick psychology had taken over in1929, with expectations of infinite rises in stock prices. When the collapse came, as it eventually had to, the disillusionment was correspondingly deep and long lasting.

The higher you rise, the farther you fall. By November 13, 1929, the prices of industrial stocks had fallen by half. There followed a brief recovery, but the decline then continued relentlessly until June, 1932, by which time the prices were on average only one-eighth of their value three years before. And it was the psychological hang-over of the Crash – the ever more deeply entrenched belief that things would go on getting worse – that made the Great Depression so deep and so long.

Could it ever happen again? The human capacity to suspend disbelief under the goad of greed has certainly not diminished, as witness the ever green schemes for chain letters and pyramid selling. Stock markets are more closely regulated nowadays but that did not prevent utterly implausible but hugely successful promotions like Bernie Cornfeld s Investors Overseas Services (Do you sincerely want to be rich? ) in the late 1960s.

The, main deterrent to another round of lunatic speculation like that before the Great Crash of 1929 is the memory of that event. In the present pessimistic economic climate it could not possibly happen. But some day the economic prospects may seem rosy again, and memory fades.


Appreciation to Ronald Knowling, Assistant Manager – Central Division

Provincial Information and Library Resources Board Gander, NL for the submission of archived article by Gwynne Dyer.