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The Third Depression
A. Scott Piraino © 2002 1023 Words

As of this writing the Dow Jones average has stabilized after plummeting below 8000 points, wiping out the bull market of the last five years. Over seven trillion dollars in investors wealth has disappeared since the market's all time high in spring of 2000.

Unfortunately, there are historical precedents for our trembling stock markets, and if history repeats itself we could be in serious trouble.

In the Gilded Age of the 1890's, and the roaring 1920's, improvements in technology and industry fueled rapid economic expansion. Capitalism was revered as the new engine of progress, government regulation was seen as an impediment to growth. These were the days of unscrupulous robber barons like J.P Morgan and the Rockefellers.

Sound familiar? Many investors believed these economic booms would last forever, but speculative bubbles formed as exuberance bid up share prices.
Inevitably the day came when prices fell, and the markets collapsed.
The Gilded Age ended with a monetary crisis in the first decade of the twentieth century. Incoming President Teddy Roosevelt was forced to borrow money from wealthy elites to finance the government. The Roaring Twenties ended in in a more spectacular fashion, a stock market crash in 1929 ushered in the Great Depression.

After the economic crises following the Gilded Age and Roaring Twenties, there was a backlash against the excesses of capitalism. Teddy Roosevelt reined in monopolies and passed the first income tax into law.

During the Great Depression, Franklin D. Roosevelt raised taxes on the wealthy to finance his New Deal legislation. The 1990s followed the same pattern as earlier booms in US history, and the end result has been the same.

First investor's over-confidence inflated stock prices, now a stubborn recession and a slew of accounting scandals has deflated financial markets.

Unfortunately, now that the boom has become a bust, we don't have a Roosevelt in office to champion the majority against business interests.
President Bush offers no real reform. True, his administration has passed legislation to curb corporate fraud, but only as a slap on the wrist to
those who paid him to run for office. The President supports more tax cuts for our wealthiest citizens, and more free trade agreements. The same policies that have created huge budget and trade deficits over the
last twenty years.

Debt is the fundamental difference between this stock bubble and the market collapses of the past. Our national debt has climbed to six trillion dollars, US households are in hawk for another eight trillion. In addition we must export over 300 billion dollars a year to finance our trade deficits.

Interest rates on our national debt are low because bondholders are still confident in our ability to make payments. The US dollar has not collapsed only because foreign nations believe we can afford our appetite for
imported wares. If our economy falters and our deficits continue to rise, the market could lose faith in our ability to finance our deficits, causing a wave of selling.

In past crises, investors and savers rushed to withdraw assets from financial institutions, creating a panic. Borrowers defaulted on their debts, and creditors lost their shirts. For the managers of today's global economy, this is unthinkable.

The solution is to guarantee the financial system with public money. Bailing out capitalism costs less than the bank runs and depressions of the past, but it forces taxpayers to cover the losses of speculators.

Since 1990 we have bailed out our own Savings and Loans, the Mexican peso, Pacific Rim banks, Russia's bond market, and most recently a 30 billion dollar bailout package for Brazil.

The seven trillion dollar hole in our financial system has already wiped out mutual funds, pensions, and millions of investor's savings. So far banking and other key economic sectors have weathered the stock market meltdown, but it could get even worse. In the event of a financial panic our economic house of cards could collapse very quickly.

We enjoyed the longest economic expansion in our nation's history during the 1990's, yet our country has precious little real wealth to show for it. Per Capita income continues to climb only because a handful of top executives have made obscene profits.

As for manufacturing, that is done in nations where our corporations don't have to pay American wages, (see the trade deficits above). At least the capitalists of the Gilded Age and Roaring Twenties built factories and infrastructure in this country. Today's oligarchs have not concerned themselves with creating or distributing wealth, but in siphoning that wealth to themselves.

The collapse of Enron has heralded a wave of bankruptcies and accounting scandals that have roiled financial markets worldwide. The billions of dollars these companies were supposed to be worth simply vanished, because it never really existed in the first place.

Depressions are created when money disappears. People suddenly become poorer, and they spend less money. With less demand for goods and services, prices fall and production declines. This causes a downward spiral of unemployment and falling incomes.

Our country has endured deflationary periods after numerous boom and bust cycles, especially during the Great Depression. Japan has been experiencing these economic conditions for the last ten years, after their stock market collapsed in the early 1990's. Many economists fear that the US will soon be suffering from deflation if our economy remains moribund.

Alan Greenspan has expended his last bullet, cutting interest rates for the twelfth time in an attempt to stimulate the US economy. The Fed Funds rate now stands at 1.25 percent, the lowest in 41 years, yet our economy remains mired in recession. Mr. Greenspan tried to sound optimistic while addressing congress, but he admitted that, "What we do have is a very large degree of uncertainty".

Of course the US doesn't face an economic collapse or a depression, at least not yet. However, whether this stock market bubble deflates or bursts, will not escape the effects of seven trillion dollars simply vanishing into thin air. We have a right to be angry about the economic consequences, but no right to be surprised. It's happened before.