The Great Depression and The New Depression

02/22/11 Stockholm, Sweden – A worldwide economic depression began in 2008. This New Depression was caused by the same factors as the Great Depression and followed exactly the same pattern. Thus far, however, the New Depression has been milder than the Great Depression because the policy response this time has been completely different.

Both depressions were caused because governments began creating money. The Great Depression originated with the collapse of the gold standard in 1914. The New Depression had its origins in the 1971 breakdown of the Bretton Woods system. In the earlier period, the gold standard collapsed because the European nations created more credit to finance World War I than could be supported by their gold reserves. Similarly, the Bretton Woods system broke down because the United States created more credit to finance the Vietnam War abroad and social welfare spending at home than could be underwritten by American gold reserves.

In both instances, a great economic boom was brought about by an explosion of credit creation; and in both instances the boom turned to bust when that credit could not be repaid. At that point, a systemic crisis brought down the international banking system. Immediately thereafter international trade collapsed.

The Great Depression & The New Depression

1. Gold Standard Breaks Down (1914) = Bretton Woods Breaks Down (1971)

2. Credit Boom: The Roaring Twenties = Credit Boom: Global Economic Bubble

3. Boom Leads to Bust When The Credit Can’t Be Repaid (1930 and 2008)

4. Banking Collapse (1930 and 2008)

5. International Trade Collapses (1930 and 2008)

During the 1930s, the forces of creative destruction, largely unimpeded by government intervention, ravaged the global economy as the excesses produced by the credit boom bankrupted a civilization unable to repay its debts. This time governments have intervened and, in effect, taken over the management of the economy to prevent market forces from correcting the imbalances brought about by the paper money-induced credit bubble. The commanding heights of global finance have been nationalized or bailed out, either openly or furtively, while the broader economy is sustained by government life support.

Thus far, these measures have greatly mitigated the pain of the New Depression. However, the policies introduced to date have not resolved the causes of this crisis or even targeted them. Moreover, government resources, while vast, are finite. Government spending will not be able to carry the economy forever. Policymakers must aim to do more than simply perpetuate the existing global economic disequilibrium. So far, there is little indication they understand the origins of the crisis, much less how to permanently end it.

Regards,

Richard Duncan
for The Daily Reckoning

P.S. For more perspective from Richard Duncan you can visit his blog on economics in the age of paper money at www.richardduncaneconomics.com.

Richard Duncan

Richard Duncan is author of The Dollar Crisis: Causes, Consequences, Cures, an international bestseller, and The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. He began as an equities analyst in Hong Kong, and has since served as global head of investment strategy for ABN AMRO Asset Management, financial sector specialist for the World Bank, and head of equity research for James Capel Securities and Salomon Brothers. He also consulted the IMF in Thailand during the Asia Crisis, and is now chief economist at Blackhorse Asset Management in Singapore.

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• February 28, 2010 -- Seeds of War
• December 30, 2009 -- Taxpayer-Supported Colossal Blunders
• April 25, 2012 -- Ben Bernanke’s Paper Dollar Embodies Systemic Risk

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