Eighty years ago this Thursday, the Great Depression began. While the great stock-market crash of 1929 actually began on Oct. 24, it was the fourth day of the crash, Oct. 29, 1929, now known as Black Tuesday, that confirmed the severity of the four-day decline and alerted the world to the fact that not all was well with the U.S. economy. Those who appreciate historical rhythm will probably be aware that the most intense part of the subsequent depression was the four years from 1930 through 1933 that Milton Friedman described as the Great Contraction.
Although 1929 marked the beginning of the Great Depression, it is important to understand that very few people, let alone politicians or economists, recognized at the time that what they were experiencing was the Great Depression. People did not greet friends in the street and ask how they were surviving the Great Depression. In fact, it was not until 1931 that people gradually began to become aware that what was taking place was a larger-scale economic event than the Panic of 1921 or other previous depressions. As late as December 1930, Herbert Hoover was insisting that "the fundamental strength of the economy is unimpaired," a quote that should strike fear into the hearts of everyone who remembers John McCain declaring "the fundamentals of the American economy are strong" before the 2008 election. It was not until 1934, when Lionel Robbins wrote a book titled "The Great Depression," that what was clearly a worldwide economic depression began to transform into the Great Depression.
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When one browses the excellent News from 1930 blog, it is striking to see some of the same baseless optimism that presently pervades the financial media. Consider the similarities in these three pairs of statements each separated by 79 years:
Reserve bank areas forecast new year. Leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
– Jan. 1, 1930
Bernanke sees U.S. recovery beginning in 2010. Bernanke told the U.S. Congress in January that the Fed believes there is a reasonable prospect the recession that took hold in December 2007 will end this year and that 2010 will be a year of recovery.
– March 16, 2009
Col. L. Ayres of Cleveland Trust sees almost certain economic improvement from July to August and September; based on historical patterns and comparisons to earlier depressions (1907-08, 1920-21). However, recovery does "not promise to be emphatic" …
– Aug. 15, 1930
A panel of 45 U.S. economists expects a "modest" economic rebound to begin in the second half of 2009, picking up steam in 2010.
– May 27, 2009
The worst is over without a doubt.
– June 1930, James J. Davis, secretary of labor
Treasury Secretary Timothy Geithner said signs of economic recovery are "stronger" and have appeared "sooner" than expected …
– October 2009
I believe that just as the political and financial authorities were incorrect about the imminent end of the depression in 1930, their successors are incorrect about the imminent end of the depression today. Last Friday, British economists were shocked when the GDP numbers from the Office of National Statistics indicated further economic contraction instead of the growth that had been uniformly forecast, and I expect this to be the first of many such surprises to the downside. Mainstream economists did not see the economic crisis coming, they still fail to understand why it happened and they do not realize that, because the politicians and central banks have stubbornly refused to make any serious changes to the global financial system, the crisis is far from over.
It is not over. It has only begun. That is the central thesis of my book, "The Return of the Great Depression," which will be published this Thursday, Oct. 29, by WND Books. Longtime readers of this column will recall that I correctly warned of the housing bubble and the threat it posed to the global financial system back in 2002. I even warned that the crisis was fast approaching in 2008, only six months before the crisis began. And now that virtually every mainstream economist and financial news reporter is declaring the crisis to be solved, the recession to be over and the recovery to be upon us, I am asserting that they are every bit as incorrect now as they were back when they were certain that the economy was strong and real estate was a safe investment.
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I have compiled my reasons for believing the politicians, the media and the economists to be wrong again in "The Return of the Great Depression," reasons based on my analysis of various economic theories as well as the economic history of the United States, Europe and Japan. I do not pretend to be a prophet or to have all the answers. I merely have the benefit of utilizing one of the only economic theories that accounts for what increasingly appears to be the most relevant factor in the economic equation, debt. I will readily admit the possibility that I am wrong; perhaps we are just months away from entering a golden era of unprecedented wealth and prosperity. But I don't think so. I really don't think so. I do think, however, that there is a strong case to be made for the idea that we are entering into a difficult period of history which promises to alter the fundamental character of the nation in much the same way that the Great Depression did 80 years ago. As the author of the book, I must leave it up to you to decide if "The Return of the Great Depression" is that case and if it is a convincing one. Unfortunately, only time can tell if it is a correct one.