From Daily Kos
by colinb
Mon Jul 24, 2006 at 10:35:49 PM PDT
Reading Bonddad's diary from earlier today, The 5 Major Flaws of Bush's Economy it struck me that it highlights some very worrying symptoms, but doesn't quite go so far as to quantify the disease.
So later today when I came across this essay from 1996, it hit on some things that seemed all too familiar
The Main Causes of the Great Depression
the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade...Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe.
The names have changed but the faces remain the same.
* colinb's diary :: ::
*
Replace the 1920's with the Late 1990's and Early 2000's
And add housing speculation to stock market speculation
And replace industry with technology and housing
And replace agriculture with manufacturing
And replace the automotive industry with the housing industry
And replace radio with computers, internet, and telecom
And replace installment credit and margin loans with interest only, home equity, and adjustable rate lending
And replace trade surpluses with trade deficits
And replace Europe with China/Japan
And replace Henry Ford with Bob Toll
And replace Andrew Mellon with Alan Greenspan
And replace Calvin Coolidge with George W Bush
Adjust for current dollars
And what do you get?
1920's:
The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade. Many factors played a role in bringing about the depression; however, the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade. The maldistribution of wealth in the 1920's existed on many levels. Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This imbalance of wealth created an unstable economy. The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the maldistribution of wealth, caused the American economy to capsize.
Late 1990's and Early 2000's:
The Possible Depression could be the worst economic slump ever in U.S. history, and one which could spread to virtually all of the industrialized world. The depression may begin in 2007 and last for about a decade. Many factors have played a role in bringing about the possible depression; however, the main cause for the Possible Depression is the combination of the greatly unequal distribution of wealth throughout the Late 1990's and Early 2000's, and the extensive stock market speculation that took place during the latter part of the 1990's and housing market speculation that took place during the early 2000's. The maldistribution of wealth in the Late 1990's and Early 2000's has existed on many levels. Money has been distributed disparately between the rich and the middle-class, between technology/housing and manufacturing within the United States, and between the U.S. and China/Japan. This imbalance of wealth has created an unstable economy. The excessive speculation in the late 1990's and Early 2000's kept the stock and housing markets artificially high, but eventually lead to large market crashes. These market crashes, combined with the maldistribution of wealth, has caused the American economy to possibly capsize.
1920's:
The "roaring twenties" was an era when our country prospered tremendously. The nation's total realized income rose from $74.3 billion in 1923 to $89 billion in 1929. However, the rewards of the "Coolidge Prosperity" of the 1920's were not shared evenly among all Americans. According to a study done by the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%. That same top 0.1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all. Automotive industry mogul Henry Ford provides a striking example of the unequal distribution of wealth between the rich and the middle-class. Henry Ford reported a personal income of $14 million in the same year that the average personal income was $750. By present day standards, where the average yearly income in the U.S. is around $18,500, Mr. Ford would be earning over $345 million a year! This maldistribution of income between the rich and the middle class grew throughout the 1920's. While the disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed a stupendous 75% increase in per capita disposable income.
Late 1990's and Early 2000's:
The "dot com and housing boom" has been an era when our country prospered tremendously. The nation's total GDP rose from $7.6 trillion in 1996 to $12.5 trillion in 2005. However, the rewards of the "Clinton/Bush Prosperity" of the Late 1990's and Early 2000's were not shared evenly among all Americans. According to a study done by the Federal Reserve Bank of Chicago, in 2001 the top 1% of Americans had a combined net worth equal to the bottom 90%. Home building mogul Bob Toll provides a striking example of the unequal distribution of wealth between the rich and the middle-class. In 2005 Bob Toll earned $34 million in the same year that the per capita income was $34,586 This maldistribution of income between the rich and the middle class grew throughout the late 1990's and Early 2000's. While worker pay grew 32% in the 1990s, executive pay grew a stupendous 500%.
1920's:
A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32% in manufacturing. During that same period of time average wages for manufacturing jobs increased only 8%. Thus wages increased at a rate one fourth as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits. In fact, from 1923-1929 corporate profits rose 62% and dividends rose 65%
Late 1990's and Early 2000's:
A major reason for this large and growing gap between the rich and the working-class people was the increased productivity growth throughout this period. From 1996-2004 the average output per worker increased approximately 28%. During that same period median hourly wages increased only approximately 10%. Thus wages increased at a rate one third as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits. In fact, from 1996-2004 corporate profits before tax rose 45% and dividends rose 66%
1920's:
The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge's administration (and the conservative-controlled government) favored business, and as a result the wealthy who invested in these businesses. An example of legislation to this purpose is the Revenue Act of 1926, signed by President Coolidge on February 26, 1926, which reduced federal income and inheritance taxes dramatically. Andrew Mellon, Coolidge's Secretary of the Treasury, was the main force behind these and other tax cuts throughout the 1920's. In effect, he was able to lower federal taxes such that a man with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,000. Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. In the 1923 case Adkins v. Children's Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional.
Late 1990's and Early 2000's:
The federal government also contributed to the growing gap between the rich and middle-class. George Bush's administration (and the conservative-controlled government) favored business, and as a result the wealthy who invested in these businesses. An example of legislation to this purpose is the Jobs and Growth Tax Relief Reconciliation Act of 2003, signed by President Bush on May 28, 2003, which reduced federal income and investment taxes dramatically. Alan Greenspan, Bush's Fed Chairman, was a leading proponent of Bush's tax cuts. In effect, Bush was able to shift more of the tax burden from the rich to the middle class, decreasing the effective tax rate for the top 1 percent by 19% while decreasing the tax rate for the middle 20% by only 4%. Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. In the 2006 DaimlerChrysler vs Cuno case, the Supreme Court ruled in favor of big businesses being able to extort state and local governments for tax giveaways, furthering the shift of the tax burden away from corporations and to wage earners.
1920's:
Three quarters of the U.S. population would spend essentially all of their yearly incomes to purchase consumer goods such as food, clothes, radios, and cars. These were the poor and middle class: families with incomes around, or usually less than, $2,500 a year. The bottom three quarters of the population had an aggregate income of less than 45% of the combined national income; the top 25% of the population took in more than 55% of the national income. While the wealthy too purchased consumer goods, a family earning $100,000 could not be expected to eat 40 times more than a family that only earned $2,500 a year, or buy 40 cars, 40 radios, or 40 houses.
Late 1990's and Early 2000's:
Three fifths of the U.S. population would spend essentially all of their yearly incomes to purchase needed goods and services such as food, clothes, computers, and cars. These were the poor and middle class: families with incomes around, or usually less than, $21,400 a year. The bottom 3 fifths of the population had an aggregate income of less than 23% of the combined national income; the top 10% of the population took in more than 44% of the national income. While the wealthy too purchased consumer goods, a family earning $256,000 could not be expected to eat 12 times more than a family that only earned $21,400 a year, or buy 12 cars, 12 computers, or 12 houses.
1920's:
Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel: credit sales, and luxury spending and investment from the rich.
Late 1990's and Early 2000's:
Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel: credit sales, and luxury spending and investment from the rich.
1920's:
One obvious solution to the problem of the vast majority of the population not having enough money to satisfy all their needs was to let those who wanted goods buy products on credit. The concept of buying now and paying later caught on quickly. By the end of the 1920's 60% of cars and 80% of radios were bought on installment credit. Between 1925 and 1929 the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion. Installment credit allowed one to "telescope the future into the present", as the President's Committee on Social Trends noted. This strategy created artificial demand for products which people could not ordinarily afford. It put off the day of reckoning, but it made the downfall worse when it came. By telescoping the future into the present, when "the future" arrived, there was little to buy that hadn't already been bought. In addition, people could not longer use their regular wages to purchase whatever items they didn't have yet, because so much of the wages went to paying back past purchases.
Late 1990's and Early 2000's:
One obvious solution to the problem of the vast majority of the population not having enough money to satisfy all their needs was to let those who wanted goods buy products on credit. The concept of buying now and paying later caught on quickly. By the end of 2005, 26% of all home loans were made with adjustable rate mortgages, and 11% were interest only loans. Between 1998 and 2002 the total amount of outstanding household debt doubled from $16 trillion to $32 trillion. Adjustable rate and interest only mortgages allowed one to purchase more expensive homes for smaller introductory monthly payments. Home equity loans allowed one to borrow on the value of their home to pay for other discretionary goods. This strategy created artificial demand for homes and discretionary goods which people could not ordinarily afford. It put off the day of reckoning, but it will make the downfall worse when it comes. By telescoping the future into the present, when "the future" arrives, there is little to buy that hasn't already been bought. In addition, people can no longer use their regular wages to purchase whatever items they don't have yet, because so much of their wages will be going to servicing their debt.
1920's:
Maldistribution of wealth within our nation was not limited to only socioeconomic classes, but to entire industries. In 1929 a mere 200 corporations controlled approximately half of all corporate wealth. While the automotive industry was thriving in the 1920's, some industries, agriculture in particular, were declining steadily. In 1921, the same year that Ford Motor Company reported record assets of more than $345 million, farm prices plummeted, and the price of food fell nearly 72% due to a huge surplus. While the average per capita income in 1929 was $750 a year for all Americans, the average annual income for someone working in agriculture was only $273. The prosperity of the 1920's was simply not shared among industries evenly. In fact, most of the industries that were prospering in the 1920's were in some way linked to the automotive industry or to the radio industry
Late 1990's and Early 2000's:
Maldistribution of wealth within our nation was not limited to only socioeconomic classes, but to entire industries. While the technology and housing industries were thriving in the Late 1990's and Early 2000's, some industries, manufacturing, in particular, were declining steadily. In the 3rd Quarter of 2005, the same quarter that saw Home Builder Toll Brothers report record quarterly revenues of $1.56 billion, the manufacturing sector saw a net job loss of 51,000 jobs. The prosperity of the Late 1990's and Early 2000's was simply not shared among industries evenly. In fact, most of the industries that were prospering in the Late 1990's and Early 2000's were in some way linked to the technology industry or to the housing industry, which accounted for about 43% of the increase in private sector payrolls from 2001 to 2004.
1920's:
The problem with such heavy concentrations of wealth and such massive dependence upon essentially two industries is similar to the problem with few people having too much wealth. The economy is reliant upon those industries to expand and grow and invest in order to prosper. If those two industries, the automotive and radio industries, were to slow down or stop, so would the entire economy. While the economy did prosper greatly in the 1920's, because this prosperity wasn't balanced between different industries, when those industries that had all the wealth concentrated in them slowed down, the whole economy did. The fundamental problem with the automobile and radio industries was that they could not expand ad infinitum for the simple reason that people could and would buy only so many cars and radios. When the automotive and radio industries went down all their dependents, essentially all of American industry, fell. Because it had been ignored, agriculture, which was still a fairly large segment of the economy, was already in ruin when American industry fell.
Late 1990's and Early 2000's:
The problem with such heavy concentrations of wealth and such massive dependence upon essentially two industries is similar to the problem with few people having too much wealth. The economy is reliant upon those industries to expand and grow and invest in order to prosper. If those two industries, the technology and houing industries, were to slow down or stop, so would the entire economy. While the economy did prosper greatly in the Late 1990's and Early 2000's, because this prosperity wasn't balanced between different industries, when those industries that had all the wealth concentrate in them slow down, the whole economy will. The fundamental problem with the technology and housing industries is that they cannot expand ad infinitum for the simple reason that people can and will buy only so many homes and computers. When the technology and housing industries go down all their dependents, essentially all of American industry, falls. Because it has been ignored, manufacturing which is still a fairly large segment of the economy, is already in ruin when American technology and housing industries fall.
1920's:
A last major instability of the American economy had to do with large-scale international wealth distribution problems. While America was prospering in the 1920's, European nations were struggling to rebuild themselves after the damage of war. During World War I the U.S. government lent its European allies $7 billion, and then another $3.3 billion by 1920. By the Dawes Plan of 1924 the U.S. started lending to Axis Germany. American foreign lending continued in the 1920's climbing to $900 million in 1924, and $1.25 billion in 1927 and 1928. Of these funds, more than 90% were used by the European allies to purchase U.S. goods. The nations the U.S. had lent money to (Britain, Italy, France, Belgium, Russia, Yugoslavia, Estonia, Poland, and others) were in no position to pay off the debts.
Late 1990's and Early 2000's:
A last major instability of the American economy had to do with large-scale international capital distribution problems. While America was consuming in the Late 1990's and Early 2000's, fueled by wealth created by consecutive stock market and housing market booms, Japan and China were busy producing all of the goods needed to meet US demand. To fuel this trade deficit, both Japan and China were forced to buy U.S. dollar demoninated debt in the form of US Treasury bonds. In addition, the U.S. fiscal policy led to staggering budget deficits. The U.S. national debt grew a staggering 60% from 1996 (approximately $5 Trillion) to 2006 (approximately $8 Trillion)
1920's:
The weakness of the international economy certainly contributed to the Great Depression. Europe was reliant upon U.S. loans to buy U.S. goods, and the U.S. needed Europe to buy these goods to prosper. By 1929 10% of American gross national product went into exports. When the foreign countries became no longer able to buy U.S. goods, U.S. exports fell 30% immediately. That $1.5 billion of foreign sales lost between 1929 to 1933 was fully one eighth of all lost American sales in the early years of the depression.
Late 1990's and Early 2000's:
The weakness of the international economy will certainly contribute to the Possible Depression. Japan and China are reliant upon U.S. consumer spending to finance their manufacturing industries, which in turn finances the U.S. national debt. If in 2007, consumer spending shows a considerable decline, Japan and China will see their exports to the U.S. shrink considerably, giving them less cause to purchase U.S. treasuries. If Japan and China scale back their buying of U.S. debt at the same time the U.S. sees an economic slowdown, this will be a double whammy to U.S. debt financing. Interest rates will be forced higher to account for less investment, which will create a higher debt service ratio and further slow domestic U.S. business investment. The U.S, government will become like the U.S. consumer, indentured to their own debt service.
1920's:
Mass speculation went on throughout the late 1920's. In 1929 alone, a record volume of 1,124,800,410 shares were traded on the New York Stock Exchange. From early 1928 to September 1929 the Dow Jones Industrial Average rose from 191 to 381. This sort of profit was irresistible to investors. Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. One such example is RCA corporation, whose stock price leapt from 85 to 420 during 1928, even though it had not yet paid a single dividend. Even these returns of over 100% were no measure of the possibility for investors of the time. Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them. Buying stocks on margin functioned much the same way as buying a car on credit. Using the example of RCA, a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the broker). That makes a return of over 3400%! Investors' craze over the proposition of profits like this drove the market to absurdly high levels. By mid 1929 the total of outstanding brokers' loans was over $7 billion; in the next three months that number would reach $8.5 billion. Interest rates for brokers loans were reaching the sky, going as high as 20% in March 1929. The speculative boom in the stock market was based upon confidence. In the same way, the huge market crashes of 1929 were based on fear.
Late 1990's and Early 2000's:
Mass speculation went on throughout the Early 2000's. In 2005 alone, a record 7 million housing properties were sold. From early 2004 to early 2005, median condo prices rose 16%. This sort of profit was irresistible to investors. Mortgage to Rent relationships became of little interest; as long as housing prices continued to rise huge profits could be made. One such example is Phoenix, AZ, whose median home price rose 43% in one year, even though area income and rental growth remained in the single digits. Even these returns of over 40% were no measure of the possibility for investors of the time. Through the miracle of buying houses pre-construction, one could buy homes without putting any money down and gain equity without ever paying a mortgage payment. Using the example of Phoenix, a Mr. John Doe could put a $5,000 deposit down on a $200,000 house that had yet to be built. If he sold the house at $250,000 a year later after the home was finished, he would have turned his original investment of just $5,000 into $35,000 ($250,000 sales price less $200,000 purchase price less 6% closing costs). That makes a return of over 700%! Investors' craze over the proposition of profits like this drove the market to absurdly high levels. By 2005 the total of outstanding mortgage debt was $9 trillion, on par with the equally staggering federal government national debt. Interest rates are on the rise, with no clear end in sight. The speculative boom in the housing market was based upon confidence. In the same way, the huge market crashes of 2007-2008 will be based on fear.
1920's:
This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy. Due to the maldistribution of wealth, the economy of the 1920's was one very much dependent upon confidence. The market crashes undermined this confidence. The rich stopped spending on luxury items, and slowed investments. The middle-class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able to pay the interest. As a result industrial production fell by more than 9% between the market crashes in October and December 1929. As a result jobs were lost, and soon people starting defaulting on their interest payment. Radios and cars bought with installment credit had to be returned. All of the sudden warehouses were piling up with inventory. The thriving industries that had been connected with the automobile and radio industries started falling apart. Without a car people did not need fuel or tires; without a radio people had less need for electricity. On the international scene, the rich had practically stopped lending money to foreign countries. With such tremendous profits to be made in the stock market nobody wanted to make low interest loans. To protect the nation's businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930). Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe. The Great Depression had begun.
Late 1990's and Early 2000's:
This speculation and the resulting stock and housing market crashes may act as a trigger to the already unstable U.S. economy. Due to the maldistribution of wealth, the economy of the Late 1990's and Early 2000's was one very much dependent upon confidence. The market crashes have and may further undermine this confidence. The rich may stop spending on luxury items, and slow investments. The middle-class and poor may stop buying things with home equity loans for fear of losing their jobs, and not being able to pay the interest. As a result industrial production may fall. As a result jobs may be lost, and soon people may start defaulting on their adjustable rate mortgages. Homes bought with adjustable rate mortgages may be foreclosed, discretionary purchases of technology items may grind to a halt. Real estate markets and technology companies may begin piling up with inventory. The thriving industries that had been connected with the technology and housing industries may start falling apart. Without a home to flip people may not need granite countertops or new flooring; without the latest high definition plasma tv, people may have less use for the latest high definition dvd. On the international scene, the currency rich nations may move away from U.S dollars. Foreigners have already stopped buying American products, and we won't be able to get our competitive advantage back if other countries start devaluing their currencies in order to sell excess supplies of products to other Non-U.S markets. More jobs may be lost, more stores may be closed, more banks may go under, and more factories may close. Unemployment may grow. The country may spiral quickly into catastrophe. The Possible Depression may begin.
Bonddad is all gloom and doom? I'd say he has reason to be.
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