Comparing to depression.
A post by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, is making rounds on a number of blogs today. They give us comparisons between the Great Depression and today’s downturn.
I think it is a good read.
I am going to strongly disagree with their statement "The good news, of course, is that the policy response is very different."
I made a comparison to the depression early in the down turn, this one about a year and a half ago. And when I looked at the data I considered most important about the health of the economy, well, I concluded things are simply worse then the depression.
If you look at the post by the historians they show that what is happening today is very comparable to what happened in the depression. What they don't show is that leverage is much higher this round, as this graph shows. I have seen other graphs that simply show we are in a worse mess then during the depression, imho.
So, what exactly is debt? It can be described as a lot of things, but to me it represents future goods and services. So, how exactly does policy work around this enormous promise of future goods and services? Some policy direction has been given unproven merit and I think it will be a disaster, this business of increasing govenment spending, which at this point is rewarding those that got us into this mess rather then taking back the unearned wealth. There was simply more new billionaires and the majority simply did not do anything fundamentally good for the economy, but rode on investment returns caused by gross misuse of leverage. Policy has enabled them to keep far more of this wealth which transfers the burden of repaying the goods and services to taxpayers. I know so many that hardly make ends meet, and that have been going into debt for not being able to keep up with increasing costs.
Truly, my feelings about the debt burden that Canada went through and the high taxes we paid to get through it was resentment in that I have felt the natural order has been upset. The generation ahead of me is supposed to pay for the costs to enable me to be a productive person and I am supposed to pay those costs for those coming up behind me. With the level of government debt that I inherited coming into my adult years, well, the generation above me paid for little, although their belief is way out of line with reality, and my tax burden has been paying back what I got as well as paying for the next generation. That is simply how I have felt about it.
Right now the US has a higher relative level of debt then what Canada ever had and we are going into an era where the burden of an aging population drawing on government support will be increasing faster then population. That is simply another expectation of the government delivering goods and services.
Who ultimately provides those goods and services? Workers of course and the burden expected of them simply can not be met, as the burden of saved wealth, or future goods and services.
Policy might somehow put more people to work, but doing what? Even if you had every eligible worker working the burden of what they are expected to repay is already beyond realistic.
So, when I started looking at this problem I concluded that the wealthy would have to give back much of their wealth, health care plans would fall apart and there will be enormous wage resetting in that industry, and pensions would have to be cut and eventually a devaluation of savings, but not yet. I suppose those things are all about policy. Right now policy has increased the transfer of wealth from the poor to the rich and from tax payers to the rich. I think they have made it worse at this point. And have you read about the record bonuses at Goldman?
Policy can not make this problem go away or make it better. There is simply going to be significant hardship going around.