THE PROGRESSIVE CONSERVATIVE, USA
An Online Journal of Political Commentary & Analysis
Volume XIII, Issue # 195, August 5, 2011
Dr. Almon Leroy Way, Jr., Editor
Government Committed to & Acting in Accord with Conservative Principles
Ensures a Nation's Strength, Progress, & Prosperity
FLIRTING WITH THE GREAT DEPRESSION 2.0
By Alan Caruba
FINANCIAL & ECONOMIC FUTURE OF THE U.S.A. IN GREAT PERIL: U.S. SOVEREIGN CREDIT RATING DOWNGRADED
FROM THE TOP RANK OF AAA TO THE RANK OF AA+ -- THE NATIONAL DEBT, THE ANNUAL GROSS DOMESTIC PRODUCT, &
NATIONAL BANKRUPTCY -- WHEN A SOVEREIGN NATION-STATE REACHES A POINT OF "MORAL HAZARD" THAT
THREATENS THE WEALTH OF EVERY ONE OF ITS CITIZENS -- THE LESSONS PROVIDED BY HISTORY -- THE STOCK MARKET
CRASH OF 1929 & THE GREAT DEPRESSION OF THE 1930S -- WHAT AMERICA & ITS LENDERS NOW FACE -- THE POTENTIAL
FOR A SECOND GREAT DEPRESSION -- THE GYRATIONS ON WALL STREET & WORLDWIDE -- GLOBAL FEARS -- THE NEED FOR
A SIGNIFICANT DOWNSIZING OF THE U.S. CENTRAL GOVERNMENT & A REDUCTION IN FEDERAL SPENDING & THE BURDEN
OF THE NATIONAL DEBT
FULL STORY:
“Credit rating agency S&P has downgraded U.S. debt from AAA, the first debt downgrade in U.S. history, the Associated
Press reported.”
When a nation’s debt equals its entire annual gross domestic product, it is bankrupt. It can still produce goods and services,
but it will likely encounter fewer customers worldwide, as they too are drawn deeper into their own debt crises.
When it must borrow billions daily just to meet its obligations to other nations and individuals who have purchased its
Treasury Notes, it is has reached a point of “moral hazard” that threatens the wealth of every single citizen.
When it raises its “debt ceiling” to $14.58 trillion, the amount its Congress permits, and one day later its Treasury Department
announces that its debt reached 100% of its GDP, it is in serious financial difficulty. Not since 1947, when the U.S.A. was
recovering from the cost of World War II, have we reached this point.
The nasty “debate” in Washington, D.C., over the debt ceiling included the Republican demands that we reduce our spending
and Democratic demands that we raise taxes. Those advocating sanity were called “terrorists” and “extremists.” The shallow
reductions agreed to were stretched over ten years and barely begin to address the immediate financial crisis. Harder decisions
were pushed off on a "super committee" that no one expects to agree on anything.
This news is bad enough for the United States of America, but it affects many other nations around the world in exactly the
same way the Crash of 1929 did, leading to the Great Depression of the 1930s and putting in motion the events that led to
World War II.
Does history repeat itself? Apparently so.
What is happening in America is happening around the world. Greece, a nation of 11 million people, had, by 2009, managed to
run up its debt to more than $500 billion. Its fellow members of the European Union took notice, even though Greece
accounted for only two percent of the EU’s economy. A year earlier, the tiny nation of Iceland, population 300,000, had
literally bankrupted itself, when its debt went from $8 billion in 2001 to more than $48 billion in 2007.
On September 29, 2008, the Irish cabinet held an emergency session by phone because the implosion of its housing market
threatened to bring down its financial system. To avoid a bank run, it guaranteed all deposits and, not long after, England did
the same thing.
Many people find history boring, but it does provide lessons, and what America and its lenders all face is the potential for
The Great Depression 2.0. The gyrations on Wall Street and worldwide are evidence of global fears.
In America, the Congress merely applied a band-aid to a gaping wound, the result of the “solutions” instituted during the
Great Depression of the 1930s, the entitlement program of Social Security and, in the 1960s, the addition of Medicare. In the
1930s, the U.S. federal government guaranteed mortgages by creating Fannie Mae and later Freddie Mac.
When the financial crisis arrived in 2008, they owned half of all the mortgages issued by the nation’s banks. The government
was forced to step in and seize both “government sponsored entities” to avoid bringing down the nation’s financial system.
At the same time, it agreed to buy up the “toxic assets” owned by a number of banking firms and by the insurance giant, AIG.
Billions in public funds were allocated to this.
There probably was no alternative.
In the same way the government in the 1930s initiated all manner of programs to put Americans back to work, the Obama
administration created a “stimulus” program, while, at the same time, taking ownership of Chrysler and General Motors. The
Federal Reserve reduced interest rates close to zero, lending banks and nations billions. By contrast, during the Great
Depression, the government had allowed hundreds of banks to fail which, in hindsight, contributed the nation's ills.
Franklin D. Roosevelt had been elected to end the Depression, but after nearly eight years of the New Deal has passed,
FDR’s Secretary of the Treasury, Henry Morgenthau, Jr., addressed the U.S. House Ways and Means Committee on May 9,
1939, to say, “We have tried spending money. We are spending more than we have ever spent before and it does not work.”
Unemployment remained high, and would continue to remain high, until World War II intervened in 1941.
Much has changed since the 1930s, but much has not.
In 2010, power in the House of Representatives was returned to the Republican Party, but the debate over the debt ceiling
revealed the difficulty it had marshalling support for raising it. Many new Tea Party caucus Representatives opposed it.
Others argued that only massive spending cuts could remedy the growth of the nation’s debt. In the Senate, controlled by
the Democratic Party, any deal that did not include raising taxes was dead on arrival.
Other than the socalled “stimulus” programs, the President devoted all of 2009 to legislation dubbed Obamacare, which
would have created a government takeover of twenty percent of the nation’s economy. By May, 2010, a million people
marched in Washington, D.C., to protest it. It has since been repealed in the House of Representatives, and has 26 states
allied against it in the courts.
In the 1930s, efforts to keep the world’s economy from imploding found little political support for the measures needed to
sustain an integrated world economy. In the modern era of globalization, the same problems have been encountered and,
sadly, the United States has shown little taste for reducing its spending as it continues to borrow until, at some point,
other nations decide to put their money elsewhere. So far, that has not happened.
The United States’ financial future is in peril without a significant downsizing of the federal government, and the
international economy faces similar challenges as nations share similar debt levels that exceed their ability to meet their
obligations.
It will take a minimum of a decade to meet the USA’s present need to reduce spending and reduce the burden of its
borrowed debt. Let us hope the voters in 2012 take the first steps toward the political resolve needed by returning power to
the Republican Party in the Senate and the White House. Then let us hope they show real political courage.
Let us hope it doesn’t take another world war to focus our attention on survival of a different kind.
Author’s Note: This commentary was greatly aided by data in the Lost Decades by Menzie D. Chinn and Jeffry A.
Frieden, recently published by W.W. Norton & Company.
---------------------------------------------------------------
© Alan Caruba, 2011
Republished by Permission Alan Caruba
Republished From Politico, "Breaking News"
August 5, 2011
LINKS TO RELATED TOPICS:
Political Economy -- Philosophies, Systems, & Public Policies:
Government, the Economy, & Economic Prosperity
Fiscal Policy: Taxation & Government Spending
Alan Caruba's commentaries are posted daily at Warning Signs, his popular blog -- and thereafter on dozens of other
websites and blogs. His monthly report on new books is posted at Bookviews.
A business and science writer, Caruba is the Founder of The National Anxiety Center, a clearinghouse for information
about "scare campaigns" designed to influence public opinion and policy.
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THE PROGRESSIVE CONSERVATIVE, USA
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Dr. Almon Leroy Way, Jr., Editor
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Conservative Government Ensures a Nation's Strength, Progress, & Prosperity