The New Depression: 5 Decades in the Making and No End in Sight

In my opinion, the Great Depression originated in World War I. In World War I, all of the European nations went to war. They didn’t have enough gold to fight the War. So they went off the classical gold standard, and their government started issuing tremendous amounts of government debt, and their central bank started creating tremendous amounts of fiat money to finance the government debt. And all of the debt and fiat money created in World War I, led to a worldwide credit bubble that we call the Roaring 20’s.

And they say the Roaring 20’s were fun, but in 1930, the credit couldn’t be repaid, and at that point, the international banking system collapsed, and global trade collapsed, and policy makers really didn’t know what to do. They believed in laissez-faire and market forces. So they more or less stepped back and really just let market forces re-establish a market-determined equilibrium, and that’s pretty much what happened, but, unfortunately, that equilibrium was at a level of GDP that was 46 percent less than it had been in 1929 and at a level of unemployment between 15 and 25 percent all through the decade of the 1930’s.

During that decade, Germany turned fascist and took over Europe, Japan became militaristic and took over Asia, and then World War II started, and sixty million people died. And then United States increased its spending by 900 percent, and that radical expansion of US government debt and spending, that’s what finally ended the Depression.

Well, the same pattern has occurred again in the New Depression. This started in 1971 when the Bretton Woods system broke down. It was more or less a gold standard, and, afterwards, governments around the world started issuing more and more government debt and financing it with more fiat money creation.

This has been a five decade long global economic boom that we’ve enjoyed all of our lives, but in 2008, that credit couldn’t be repaid, and the international banking system started to collapse, and global trade started to collapse. Though, in this New Depression, instead of letting market forces re-establish a market-determined equilibrium, the policy response has been to do everything they possibly could to prevent market forces from re-establishing a market-determined equilibrium. They are terrified that that equilibrium would once again be at a level of GDP that would be forty or fifty percent lower than it was in 2006 and along with it come all of the implications for employment and geo-political crises.

So the policy response to prevent the New Depression has been to have trillion dollar budget deficits and trillions of dollars of fiat money creation to finance those deficits. And so far, as a result of that policy response, we have not collapsed into the New Depression we would have otherwise.

The Daily Reckoning