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And I stood upon the sand of the sea, and saw a beast rise up out of the sea, having seven heads and ten horns, and upon his horns ten crowns, and upon his heads the name of blasphemy.
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Deja Vu
Finance
Perspective on the News
Tuesday, August 31, 2010
Ed DeShields

The U.S. government first realizes its options are probably limited in regulating the economy.  Its political solution demands it get prepared to cut back its stimulus policies.  The year was 1920 and the onset of the Great Depression had begun.

Last week Federal Reserve chairman Ben Bernanke admitted the Fed was in a similar predicament.  With bank rates down to zero its ability to stimulate demand hasn’t worked.  As we enter the third quarter, the opposite is occurring.  Consumers know that reducing the household debt is more important than new spending in this uncertain environment and our economy is threatening another contraction.   

The Great Depression began with an eerie resemblance of today’s economic atmosphere.  The 1920’s, like the 2000’s saw dramatic growth.  While the both economies grew dangerous bubbles, banks failed.  Mergers increased as the strong companies ate the weaker ones.  Soon there were a few companies that were deemed too large to fail. 

By the end of both decades much of the middle-class income-earners had been largely exempted from the tax rolls. By 1929, the richest 1% of the population owned 40% of the nation’s wealth. By the 2008 the richest 1% also owned the wealth.  Yet, in both decades productivity soared.  By 2009, 11 hours worked equaled 40 hours worked just 50 years earlier.  The same productivity was seen in just ten short years from 1919 to 1929. 

From 1928 to 1929 the stock market bubble was ready to burst.  By 2008, the housing bubble started unloading over 14 million foreclosures into the market with no buyers.  Two trillion dollars in homeowner equity evaporated. 

By 1929, fifty percent of the population was living below the minimum subsistence level when unemployment went to 8.7% as the stock market crashed.  In 2010, the unemployment rate soared to 9.5% as the Dow Jones flat lined as personal income fell sharply. 

One year later in 1930, just after the presidential election, Treasury Secretary Andrew Mellon decided to let the markets work themselves out;  liquidate labor, liquidate real estate.  Values will be adjusted and “enterprising” people will pick up the wreck from less-competent people.  The 2010 election will decide whether intervention from the Fed, or a hands-off policy will rule as one in every 7.5 homeowners in 2010 now fall into delinquency or foreclosure.  Housing prices on the coasts will not return to their 2008 levels until 2025 according to a recent study. 

Mid 1930 and mid 2010 are remarkably similar. And, from here the future story is yet to be told.  However, by the third quarter 1930, the economy fell suddenly into deflation with a GDP reduction of -9.4% followed by another drop of -16% the following year.  Unemployment soared to 16% and then to 23.6% one year later in 1931.  By 1932, the gross domestic product had fallen by 31% in two years.  Thirteen million people were jobless.

1933 saw a new U.S. president and massive new regulation.  It was the beginning of a new tax era.   The top tax rate soared from 25% to 79% and the remaining decade muttled along as it gradually dug itself out of its disastrous hole. 

It wasn’t until Hitler invaded Poland and triggered World War II did the economy recover, fueled by massive war spending. 

And, the top tax rate became 91%.  

There is one thing for sure.  The next ten years will be unlike the last ten.

About Ed DeShields

Last week: The Tax Era Has Dawned

 



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