Could the Great Depression happen again? (2020)

  • Could the Great Depression happen again?

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    To understand why another Great Depression is possible, it is necessary to understand why the original one happened.

    It wasn’t because of some inherent property of capitalism, or a failure of government and monetary authorities to act to prevent or remedy the Depression.

    The Great Depression happened BECAUSE the government acted, first to inflate the stock market bubble in the first place, then to try to fix the situation after the bubble collapsed.

    The Fed inflated by bubble by excess money creation on the theory that recessions are caused by deflation in consumer goods prices. While the supply of consumer goods was increasing, their plan was to keep the price steady by increasing the supply of money. They succeeded in keeping CPI steady, but in the process inflated the stock market bubble.

    The Lure of a Stable Price Level | Murray N. Rothbard

    Federal Reserve credit expansion, then, whether so intended or not, managed to keep the price level stable in the face of an increased productivity that would, in a free and unhampered market, have led to falling prices and a spread of increased living standards to everyone in the population. The inflation distorted the production structure and led to the ensuing depression-adjustment period. It also prevented the whole populace from enjoying the fruits of progress in lower prices and insured that only those enjoying higher monetary wages and incomes could benefit from the increased productivity.

    When the economy crashed, Herbert Hoover responded with what is now known as Hoover’s New Deal. He pressured businesses to keep wages high, when the economy had recovered in the past by letting wage rates fall. He increased government spending, ran deficits, implemented public works projects, and destroyed international trade with the Smoot Hawley Tariff Act.

    What – or Who – Started the Great Depression?

    Before FDR, Herbert Hoover Tried His Own ‘New Deal’

    FDR took all of Hoover’s interventions and did a Nigel Tufnel on them, turned them up to 11. Hoover had already raised taxes to 60%, and FDR raised them to over 90%. He created cartels, outlawed price cutting, and practically everything that businesses needed to do in order to get the economy running again. He continually demonized businessmen, threatening them with new punishments, and kept adding more new regulations at a rate that businessmen and investors had trouble adapting.

    Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War | Robert Higgs

    FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression | Burton W. Folsom, Jim Powell

    The policies of both Hoover and FDR remind me of that quote, probably falsely attributed to Captain Bligh, “The beatings will continue until morale improves.”

    What both of these Presidents did kept beating the economy down, preventing recovery. What could have been just a short recession was turned into THE Great Depression.

    The same could happen again. Vastly too many people still believe that the cause of The Great Depression was laissez-faire, including the inaction of Herbert Hoover. They also believe that FDR brought us out of the Depression. Democrats want to impose their “Green New Deal”, inspired and maybe partly modeled on FDR’s New Deal. Even Republicans believe you need a lot of stimulus spending and bailouts to help the economy recover.

    It doesn’t really matter too much which party is in power. Both are likely to repeat the same mistakes as those that caused The Great Depression. The worse the economy gets as a consequence of their policies, the more they will be convinced of the necessity of those policies, and they will increase them even more, driving the economy deeper into a new Great Depression.

    So yes. It could happen again.

    The chances of another great depression depend squarely on International trade. At the time of the great depression, a very large part of our national wealth and jobs came from the export market. If there was a trade war, it would send us into a depression. The Smoot-Hawley acts increased tariffs in America, and other nations followed suit. A trade war followed, making our export manufactured goods difficult to sell overseas.

    Factories produced too much, couldn’t sell the goods. Eventually, this caught up with most of the factories which had been rising on increased sales internationally. This caused a cascade effect on stock prices. Additionally, people were used to borrowing in order to buy more shares of stock come out sometimes putting only 10% down. If the stock moved 10% negatively, they would have to come up with a margin call. Of course, you can come up with money for a margin call if you’re employed, but what happens if your company goes out of business because they can’t sell to France, Italy, etc?

    This kind of depression was a perfect storm. Could it happen again? Yes and no. It can’t happen exactly the same, because of SEC reforms instituted between 1932 and 1936. But something similar could happen, especially in the money and banking area and derivatives.

    The big issue is to keep people working, because as long as they have a job, they can pay bills.

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    It is difficult to say. It is doubtful that a 1929 style Depression could happen in the same way. Financial matters, like commercial and investment banking, are substantially regulated, although regulations have been cut back over the last thirty years. Still regulations remain in place that may not prevent Depression but may soften the blow.

    As others have noted, recession and depression are regular and recurring features of the economy. As I noted, one thing different now is that the economy is regulated like it never was before. We have gone through one recession (2008) which had the potential of becoming a bona fide depression. Existing regulations staunched the damage long enough to permit the enactment of bailout and stimulus measures that got the economy going again. A depression was avoided. Other Quorans may recall over the last 40 years or so the Mexican bailout, the Asian financial “flu” and the S&L crisis here in the US. Whether the protections that have worked perfectly well for 90 years can still work, or will even still be there in a few years given the current political climate, is hard to say.

    One other thing is remarkably different now than in the past. We now have a global economy to a far greater extent than we had in 1929. It is worth considering that the 1929 depression which started in New York soon became global even though the extent of commercial and financial integration then wasn’t anything like it is now. In this regard I am particularly worried about China which is said to have significant problems in the commercial and investment banking sectors and nothing close to the kind of protections it should have.

    Other factors of concern are the obscene growth of debt (governmental, corporate and personal) and the apparent skepticism about the utility or even desirability of government action to address big problems.

    Given the global nature of the problem and the local nature of the protections, if we have another Great Depression it will make 1929 look like a day at the beach. It would be like trying to fight a forest fire with a garden hose constructed 90 years ago that is now shot full of holes and a bunch of morons with knives are hacking away at the few parts of the hose that are still good.

    Yes, it could happen again.

    According to business cycle theory, there are recessions and depressions every so often.

    It’s rooted in human behavor, but truthfully, no one knows for sure why business cycles happen.

    In American history, before the Great Depression there had been recessions and depressions. However the depressions never lasted very long; usually they were 6-18 months.

    Interestingly, the depression of 1921 was much more severe than the Great Depression, which started at the end of 1929. However, nobody talks about it because it was over so quickly, and thus easily forgotten.

    We talk about the “Great Depression” because it lasted from 1930-1941. The searing poverty that many people experienced left a mark that has been felt for generations. America was an otherwise prosperous nation that plunged into poverty for a decade, and then left it.

    According to renowned economist Milton Friedman-the most influential economist of the 2nd half of the 20th century-the Great Depression started off as a typical depression. If history had simply repeated itself, it would have ended within a year.

    However the Federal Reserve made a huge mistake. Instead of putting more money and credit into the economy, it took them out of the system. In economic terms, they contracted the money supply when they should have expanded it.

    This collosal error turned a typical cyclical downturn into a prolonged “great” depression.

    It’s unlikely that the head bankers and economists will make that mistake again. The threat that many people speak of now is a different type of depression: an inflationary depression. Instead of too little money in the system, which causes deflation, there is now a threat of too much money in the system, which causes inflation.

    Some people speculate that the US will default on the national debt. The thinking is that if that happens, basically it would trigger a chain of events that would lead to another Great Depression.

    According to the wealth cycle theory, there is a reorganization of the worldwide monetary system every 80 years. The last one happened about 80 years ago at the Brettonwood Council.

    Will there be another Great Depression in our lifetime? Will there be another world war?

    No one knows for sure. But one thing is for sure: that history repeats itself.

    Yes, we are.

    If we do not make urgent, substantial – and unprecedented – changes in our societies, we will blindly repeat the events, processes of the 1920’s. 30’s and 40’s (in a much faster, condensed manner) going through another, greater Depression culminating in another, greater World War – on a truly global scale.

    It does not matter how we try to reassure, justify, and fool ourselves. Human history is a helplessly recurring chain of vicious cycles that become increasingly shorter and their ending explosion increasingly more intense.

    Even before the virus, we were already heading for a complete collapse of our system we stubbornly tried to keep alive with all kinds of artificial machinations for decades. The virus simply brought the inevitable forward.

    But it also gave us a unique time to think, assess where we are, how we got here in order to make crucial changes that could divert us from the terrible tragedy that could unfold within a short time if we blindly follow the instinctively egocentric, individualistic, exploitative program in us.

    We can already see the instinctive reactions, rhetoric preparing another Cold War that will inevitably lead to a real war as there is no other “historic solution” for a civilization that has run out of steam, goals. It would also serve some hidden agendas for reducing the Human overpopulation some – mistakingly – blame for our problems

    Unless of course we awaken our unique Human ability for critical self-assessment and realize that the only true solution is changing ourselves, our own inherently selfish, individualistic, exploitative nature, program. Only if we learn how to build mutually responsible, mutually complementing global connections above everything that tries to separate, reject us from one another, only then can we prevent the already visible global disaster around the corner.

    From the COVID-19 virus, we have received the first truly free choice in Human history, giving us the option to stop the instinctive cycles and to take our fate into our own hands – together.

    The Financial Crisis May Trigger A World War | Laitman.com

    “If Everything Is Here For A Reason, What Does Coronavirus Teach Us About?” (Quora) | Laitman.com

    Wall Street quietly predicts massive market event in 2021.

    The biggest power players on Wall Street have already seen it coming – this will affect your money.

    Yes!!! I don’t think there’s any doubt, and in fact the recent crisis in 2008 could very nearly have resulted in one.

    Proper interventions were taken that prevented a complete meltdown, mainly by shoring up the banks and offering a crutch to the auto industry. We were on the verge of something akin to a run on the banks, because not all money market accounts were FDIC insured, and with so many other insured accounts at risk, people were getting very fearful, threatening to quickly drain liquidity.

    (Our biggest mistake was in not following up with severe penalties after the crisis subsided).

    But we had built up an economic system that relied on this financing infrastructure. Letting it fail would lead to implosion. Lending on all levels keeps the engine running. This goes from lending your money to the bank, in deposits, to businesses that borrow to fund their payrolls. Banks and institutions constantly lend to each other, with different time periods. Some are repaid within the day.

    When confidence in payback erodes, this liquidity freezes up.

    The first big domino to fall and trigger the panic was the Lehman collapse. When they went bankrupt, any institution that held Lehman debt now had some amount of toxic assets. But no one knew the amount of this that anyone had, and so how solvent they were. So this lack of confidence led to the abrupt and huge drop in lending.

    This then triggered major consequences, which caused businesses to panic and soon lower their overhead costs, in order to weather the storm. Others just folded.

    When lending stops, everyone demands money a lot of their money at once, and the system just can’t handle that stress. Assets quickly devalue, as people are forced to sell holdings. Basically a giant bank run, with everyone panicking in a rush to the doors.

    Whatever was done to shore up confidence in this banking-lending system stopped the ship from sinking. Besides TARP, they ran stress tests on the banks, to reduce their opacity.

    Separately, Obama bravely “bailed out” the auto industry, although many experts rang the alarms. That might have been the smartest $35 billion ever spent, or lent.

    1 out of every 6 jobs in the U.S. is related to maintaining the auto supply chain, if I remember correctly. So in my mind, not doing this would have assure a massive depression.

    A final note about understanding the dynamics here. Anything that ultimately results in major job losses will trigger a depression, since consumer and business demand suffers acutely.

    But this can have other causes than the collapse of a big asset bubble, which ultimately results in the job losses. People often worry about China, some other big economy, or another debt bubble, like perhaps college loans.

    But a major and imminent threat may come from loss of jobs due to robotics and AI. Driverless trucks and cars are coming in the near future. There are 3.5 million commercial truck drivers (although this would happen slowly and progressively) and there are also taxi drivers, besides whatever else.

    It will take awhile to get to that point. First Trump has to destroy public lands with mining and oil wells, has to isolate us from the rest of the world completely, and has to pollute the major rivers and streams so that they cannot be used for crops nationwide. Once there is no water for growing food, and once the light bulb goes on that drinking oil is not an option, once all of our trade agreements and partners have abandoned our markets and joined forces with China instead, yes, then we’ll see a deep recession, and possibly a depression if someone doesn’t pull us out before that happens. Traditionally, democrats are elected about the time republicans in power have figured out that giving tax breaks to big business and their rich friends doesn’t net more jobs or stimulate anything but massive bonuses at the top. We’re usually deep into it when that realization happens nationally, then democrats are expected to fix it. We’ll see how this plays out with Trump. It’s hard to tell yet whether what he does will actually be different or more of the same. Right now, he’s still in “let me see what they think of THIS!” mode as he slashes things people need and threatens businesses. We’re in wait and see mode. Hopefully we’ll have the opportunity to prosper, but I’m not holding my breath. Liars usually don’t produce good results.

    Most certainly, Yes!

    The way things are folding up in the past one year or so, it looks like that we might hit a recession perhaps in 2018.

    The change in power in US has a lot to do with it along with China’s slowing economy. Last year was not good for them monetarily and this may create a bubble soon.

    Trump’s assuming power as POTUS and leader of the free world, tells us that the decisions he might take in the near future will make perfect sense for the world economies to crash.

    His recent announcement about putting 20% surcharge on Mexican imports if Mexico doesn’t pay for his stupid wall, brings a conflict in the region. We just have to see how will Mexico respond to it. I am sure Canada might feel a little insecured at this moment.

    If trump continues on his bad intentions of creating a wall, closing all agreements with Nafta and pulling out of NATO, will definitely create a hysteria and markets could tumbling down resultantly.

    Right now we don’t know what steps will his administration take in keeping the IT and scientific community in confidence so that businesses continue to flourish, if not, then it’s surely doomsday like situation. The multinationals will start leaving US slowly and setup their bases outside of US if they find that the talent they need in R&D and IT are not going to be available easily in US.

    The current situation with the two major players US and China are surely hinting towards another Great Recession. Let’s hope it doesn’t end up like that and good sense prevails in the leaders of the both country.

    As an Indian and somebody working on a visa in US, I am content because even if we have to leave US due to visa issues(as Visas and issuing Green Cards could become an issue in the near future like the way trump has flip-flopped recently on the H-1B issue) then India is a booming economy and fingers crossed there should not be any problem in finding jobs there. But if Recession comes then it will impact all the countries and will impact us as well.

    Here is a great article that states clearly the reasons why we may be already in recession or it’s just round the corner. [1]

    Footnotes

    Am I about to fall off this cliff I have climbed ?

    Possibly.

    Trump has inherited a “legacy” economy that has been cooking up problems since 1971 – when Nixon took the US Dollar off the tenuous, but still visible, gold standard. Since then the number of fiat dollars has increased rapidly: this is known technically as “inflation of the money supply” – or, more shortly, “inflation.” It leads to price increases, but these are an effect, not the cause. Many people do not understand this, which is tough for them, and for the economy. Amongst the people who do not understand this are most politicians, and most journalshits -(sorry, typo, but I think in this case I should let it stand !) Most economists understand this, but many dishonest ones keep very quiet about it.

    Because this inflation (otms) has been continued unchecked for (2017 – 1971 = 46 years) – a long time, the resulting correction will probably be a whopper, too. After all, the depression of the thirties had only had about eight years to build up – this one has been a’brewing for more than five times as long: and the clowns now in charge of US monetary policy at the Fed have zilch demonstrable skills or understanding of the issues involved, so look not there for “expert” advice to save us. This is the economic equivalent of iatrogenic disease.

    Are we about to start a new Great Depression ? Depends on what you mean by “Great.” If you mean “involving huge sums of money, enormous debts, lots of zeroes on the end of bounced checks, hitherto unheard of bad news, then, yes, all this is inevitable.

    If, as an additional pain, you mean “of Great duration, lasting for a decade or more, possibly providing the seedbed for a new world wide war,” then this is avoidable, at least in theory. But you would need to avoid the fascist policies of FDR, and look to the depression of 1921, which was short and sharp, without the government stepping in to “do something” – and the market corrected in eighteen months (I think it was; my memory is not so good, these days.) Trump might have the balls to do it, but the opposition from the deep state, the MSM and the MIC would probably prevent this. I will not take a bet on Trump being dead before four years have passed, but I would be surprised if anyone is offering good odds.

    The question could have been phrased more elegantly. “Are we about to ..” do something to start a depression suggest that all the fault lies with us, and what we do. It is more like an avalanche, like the one in Italy this week – nobody “did” anything, it just “happened.” And a truly M A G N I F I C E N T depression is what “we” – that is, the people who voted for Nixon/Ford/Carter/Reagan/Bush/ Clinton/Bush/Obama/Trump – have wished upon ourselves (i.e. for those of my readers who are US citizens: the rest of us can plead mea non culpa !) Chickens come home to roost.

    Keep calm, and carry on carrying on. If you can.

    Peace.

    The inverted yield curve had indicated in late 2018 that a recession was forthcoming. The curve is not a guarantee but has been 100% correct for the last 60 years.

    The FED had raised rates 4 times in 2018 (one too many for me) but then the world started slowing with a problem with the huge amount of debt that had grown to impossible levels. The FED dropped rates 3 times in 2019. Then the world tilted with the pandemic. The FED immediately dropped rates further with a 0.5% reduction and then a panicked 1.0% drop. So we then had a recession with a pandemic on top of it.

    There are all sorts of scenarios that could/will evolve.

    IF- and that is a big ‘IF’- we have a vaccine by the end of the year, it might be possible to avoid a depression. If there is no vaccine at that point- and certainly if there is NO vaccine at all- then we drop into a depression in the U.S. with most other countries in the same mess.

    My comments can only address the data that is available now. If the re-review of 11,000,000 in Wuhan for infections says that even if you were shown to be NOT infected- it simply might mean it was dormant and then popped up.

    If the opening up of the U.S. was premature- that does concern me since the revelers at the pool party as seen on TV- might mean the partygoers will probably be responsible for many infections and two deaths

    This is a moving target with not enough facts.

    No matter- the world will be changed to a lower standard of living due to the HUGE amount of additional debt that can never be paid off

    The beauty of economics is nobody knows for sure what’s going to happen for sure.

    To predict any scenario an economist applies theories and models to project an outcome. The problem is many of this theories tends to miss or overlook an important input or assumption.

    Hence for any scenario there can be any of number of outcomes. So its pretty difficult to say for sure any outcome for any situation.

    Now coming to your question, nobody can say for sure. The data though points towards recovery, unemployment rate is going down. Federal reserve have also increase the rate to stimulate growth.

    Though there is an Education loan bubble waiting to bust in USA but I think they are preparing for that burst and have some counter measures ready to absorb the shock.

    China could give the world economy a shock but they have enough lever to pull to consolidate there position.

    Japan’s CENTRAL BANK has already introduced negative interest rate to stimulate growth.

    India is doing good.

    In my opinion we are on a path to recovery and things will improve from this point.

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