Tuesday, March 3, 2009

Interesting Times

It occurred to me yesterday that amidst all the doom and gloom about the economy, the recession, and the bleak prospects for the near-term future in America (most of which are accurate, if depressing), it's also important to keep an eye on the big picture, and realize that we're going to be living in (and hopefully through) some historically very significant times. It's been 70ish years since the Great Depression ended, and almost everyone still alive today either wasn't alive then, or was too young to remember living through it. The people living in America today will most likely be living through a similar, but probably even more severe, Depression in the next decade, and it's going to be a very interesting experience.

Now, I'm sure some people would object that the current situation is substantially different from the 30's, and I'd be forced to agree. Although the 30's saw a large credit bubble which inflated asset valuations to unsustainable levels, followed by a correction, followed by large government socialism programs nominally intended to "help" but really creating the decade-long depression, and all of those are happening in exactly the same way today, there are certainly some substantial differences. For example:

- In the 30's we had a gold-backed currency which (as a result) could not rapidly lose value of confidence; today we have a pure fiat currency. Whereas in the 30's hyper-inflation was not a concern, today it is very much a possibility.
- In the 30's we had a high level of personal savings among the population, so people who were prepared could survive a downturn. Today we have negative savings and are in huge crushing debt (personal and national).
- In the 30's we didn't have the FDIC, so when banks failed people lost their savings. Today we have the FDIC with $18 billion in remaining money backing over $5000 billion in savings at over 8000 banks, many of which are insolvent, and the deficit is backed by taxpayer money.
- In the 30's we had a large industrial base with competitive manufacturing and exports. Now we have an eroding manufacturing base which is almost extinct, a service-based economy largely dependent on discretionary consumer spending fueled by ever-increasing debt, and a $500+ billion annual trade deficit.
- In the 30's we had a comparatively low level of public debt (compared to GDP), and a young Fed still beholden to Congress. Today we have a huge national debt (around $11 Trillion and counting), and an independent Fed with little oversight printing money seemingly with impunity (over $2 Trillion in committed handouts already and over $10 Trillion total in guarantees).

Yes, this time may be different, but I think it's fair to assume that whatever the course we take this time, it's going to be at least as significant as the Great Depression, historically speaking. Which means that when we are old, we will be able to tell young people that we lived through the historical significant, tumultuous, and likely world-changing time we're entering right now.

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