Financial topics

[Reality Check]

The only thing holding back the government at all from even more
massive fiscal stimulus is the debt. If the U.S. were a creditor
nation, then this wouldn't be an issue, and there would be even more
fiscal stimulus, creating even larger bubbles and distortions. Maybe
that would make the outcome of the current crisis even worse.

This statement suggests that government stimulus was greater during the 1930s, than today, because U.S. debt today is restraining U.S. government stimulus today.

Fed policy today is being driven by a man who believes the problem with the 1930s was there was not enough FED stimulus in the 1930s.

Has the fact that the U.S. is a Debtor nation today, and was a creditor nation in the 1930s, actually resulted in less U.S. government ( both FED and U.S. Government ) stimulus of the U.S. economy in this crisis than during the 1930s?

The only fair comparison would have to be on a per year basis ( before the massive military build prior to World War II began in the 1930s) and measuring U.S. Government and FED stimulus, combined, as an average annual percentage of the pre-crisis economy.

Ignoring FED stimulus would be to ignore the Trillions the FED pumped into the economy for the purpose of preventing the ( prior to 2007, non-government insured ) Investment banks and other banks from collapse. The U.S. government Tarp fund and the Obama stimulus package failed to really have an impact on the banking system, as it can also be argued that the FED stimulus failed to stimulate the U.S. economy and only enriched the owners of the banks as the means to save the banking system.

[John]

Your analysis may be completely right, but I still believe that the
debt is inhibiting Washington politicians from spending even more
money than the enormous amount they're spending now.

[Reality Check]

Your analysis may be completely right, but I still believe that the
debt is inhibiting Washington politicians from spending even more
money than the enormous amount they're spending now.

Based on my own beliefs, feelings toward, and observations of, our current, and recent leaders in the United States, I agree.

But I am not sure that what has actually happened, as a opposed to what we both believe would have happened, is irrelevant to what is going to happen.

[Higgenbotham]

In previous paragraphs, the authors covered some of the points brought up in recent posts and I'll quote some of what they said. This book was published in 1994 and it's called The Great Reckoning.

"A characteristic that America clearly shares with the Britain of the 1930s is that America has ceased to act like a creditor. It now acts like a debtor. The United States of the 1990s, like Britain after 1931, has shown little interest in preserving the value of its currency. Indeed, during the Bush Administration, Treasury Secretary Nicholas Brady took every opportunity to express his hope that the dollar would fall in value against the currencies of other leading countries. The administration backed that ambition with an eagerness to slash interest rates - precisely the policy that a debtor would prefer."

"Just as Britain suffered a very mild depression in the 1930s, when it was the fading power, the depression in North America so far has been less traumatic than it might have been, in both cases because of aggressive and early interest rate cuts.
We continue to expect that a deeper downturn lies ahead. But it is at least possible that the duration of America's slump in the 1990s will match that of Britain in the 1930s, which was just two and a half years. British growth resumed by the last half of 1932, and output for the entire year was actually up, although by an almost invisible 0.2 precent. It then rose by 4.2 percent in 1933, and averaged over 5 percent through 1936.
In spite of its many structural problems, the British economy significantly outperformed the US economy during the 1930s. In fact, British growth was so much stronger that taking the 1920s and the 1930s together, British growth matched US growth of 40 percent. In other words, while the fading power lagged behind during the disinflationary financial boom decade of the 1920s, it recovered all of the lag during the decade of outright deflation in the 1930s."

[Reality Check]

In spite of its many structural problems, the British economy significantly outperformed the US economy during the 1930s. In fact, British growth was so much stronger that taking the 1920s and the 1930s together, British growth matched US growth of 40 percent. In other words, while the fading power lagged behind during the disinflation financial boom decade of the 1920s, it recovered all of the lag during the decade of outright deflation in the 1930s."

Another way of saying this is that for the 20 years after 1920, U.S. economic growth, and Great Britain's economic growth was the same. The debt bubble that expanded in the U.S. in the 1920's was bigger, and the fall, after the bubble burst, was a little steeper in the U.S., but the net growth was the same for both countries. Forty percent ( 40%).

Of course that is a gross over simplification of the average growth in the two countries, and many in the United States suffered the fall without ever feeling the rise ( farmers for instance, who, as a group, did very poorly in in the U.S. during both the 1920s and 1930s. ).

The actual things that that each country did the same, and differently, during these periods; and what the conditions in both countries were at the start of these periods, is of great interest in understanding what happened in the 1930s, and what is likely to happen as this current crisis continues to unfold.

[Reality Check]

I believe I recall that both Great Britain, and the United States, tried to preserve their precious metal backed paper currency during the period of 1920 to 1940.

Both devalued their currency before 1940.

I do not recall if Great Britain actually abandoned the link, and adopted a Fiat currency before 1940.
The United States did not abandon a Gold linked currency until the 1970s, if my understanding is correct.

But I do recall that the U.S. and Great Britain were the last two Great Powers to keep the link in place.

Maybe that contributed to a capital flight from the rest of the world to both the U.S. and Britain during the 1930s.

[Reality Check]

Great Britain also still had a world wide empire during the 1930s.

Colonies in India, Africa, China, Singapore, Australia, the Caribbean, and the Middle East confirmed Great Britain as a vast trade empire,

with a near military super power reputation after the First World War.

Like the United States, Great Britain was separated from it's potential Great Power enemies by blue water Seas and Oceans.

This also may have been a reason capital fled to Great Britain during the 1930s.

[Reality Check]

Like the United States today, a declining British Empire in the 1930s was judged not against it's former self, but against all the alternatives out there in the 1930s.

If you had hundreds of thousands, or even a few million in the bank in ( any given country ) within continental Europe ( either today, or in the 1930s ), what countries other than the United States or England looked like good options ( in the 1930s ) for moving your assets to for safe keeping ? Same question today... Would the rule of law in China or India or Brazil beckon you ?

[Reality Check]

Might the United States look like a more attractive place for foreign assets, from a rule of law stand point, if Mitt Romney were to win ?

[Higgenbotham]

I try to look at all the historical comparisons, and the comparison to Britain in the 1930s has some merit in my opinion. But mostly I think the US is in a monster government debt bubble, where the real financial crisis has been held off with US government borrowing. The US has a higher government debt to GDP ratio now than it did until about 1942 (don't know the exact year but I should look it up to see where it is now because I haven't for awhile). During the last crisis the US did most of its borrowing for the war effort and this time there hasn't even been a war yet. I agree with Doug Noland when he says this is a huge bubble, sort of like 1929 in size, but it's a sovereign debt bubble is how I think he puts it. Seems to me that most of the corporate profits are due to the government borrowing money and basically handing it to corporations, either directly or indirectly. The deficit is about $1.2 trillion per year, while corporate profits are about $1.8 trillion per year.