Why Democracy Won't Survive the New Depression

People often ask me, “How severe would the New Depression be?” And I think the best way to think about it is to consider what happened with the last Depression. After all, the two occurred for the same reason; a fiat money credit bubble formed when we broke the link between dollars and gold both times.

So what happened in the 1930s? Well international trade collapsed and the international banking system collapsed; 1/3 of all the U.S. banks failed and international…so people lost all of the savings they thought they had. Without very aggressive government intervention to save the banks, in other words, if we allow a laissez faire solution, then all the saving in the world would be destroyed and trade barriers would go up as they did in the 1930s, so global trade would collapse.

And what would that mean, for instance, for a country like China? China’s economy is entirely dependent on exporting to the United States. If the United States stops taking China’s imports into the United States, China’s economy would not have a recession, it would implode. There would be starvation in the cities and in the countryside. Regardless of what the Chinese government wanted, the starving Chinese would float down the Mekong River and invade Southeast Asia and eat all the rice in Thailand…and how would the government respond to that?

With the complete collapse of government revenues, the United States could no longer afford to maintain a string of military bases around the world, so our global economic dominance would evaporate. We also couldn’t afford to continue paying Social Security or Medicare and so, once again the old people in this country would be on the verge of starvation (if not starving) as they were in the 1930s. It would be more or less a collapse of civilization as we know it.

Unemployment would be at least 25 percent in this country, I would imagine, and how would those people vote? They would vote for parties that promised to give them money and food. In other words, we would take a very, very hard turn to the left and that may be met with the response from the right that involved a military coup.

So it’s not at all certain that democracy could survive this sort of New Depression, and that’s why our government is so keen to make sure that that doesn’t happen. That’s why they’re going to continue supporting the economy with very large budget deficits when necessary and finance those deficits with quantitative easing when necessary.

The Daily Reckoning