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Toward a More Complex and Difficult (Great) Depression [View All]

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marmar Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Aug-16-07 01:17 PM
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Toward a More Complex and Difficult (Great) Depression
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by Richard Thomas at HuffPost:

Toward a More Complex and Difficult Depression
Posted August 16, 2007 | 01:41 PM (EST)



The current liquidity crisis can be paralleled to events leading up to the Great Depression. Specifically, the departure from fundamental valuation principles and extension of credit in the subprime market is consistent with mistakes made by speculators in the late 1920s.

After World War I, the U.S. economy experienced a brief recession from 1920 until 1921 and then experienced robust growth until 1926. The economy grew because new retail markets and credit instruments were introduced to the public. Consumers were bombarded with notions of "buying now and paying later" from retail stores like Macy's (who recently posted a loss in profits). For the first time people could have things they really wanted without having to wait until they saved enough money to pay for it. This included the purchase of securities , and bank loans leveraged on them. Thus, the volume of credit transactions increased the volume of sales and loans, i.e. demand for goods and services. In short, people borrowed and spent like crazy not worrying about the debt they were incurring.

In response to the spending frenzy, firms increased investment to meet the demand for new goods and services. The markets that boomed most were new homes and automobile sales. However, these spending habits and increased production levels could not be sustained forever. The accumulating debt had to catch up with consumers at some point. That time came at the end of 1926, where gross investment peaked and market saturation took toll. Households fell into an unfavorable liquidity positions because of debt burdens and, therefore, demanded fewer goods. In effect, producer inventories increased and gross investment declined from 1927 until 1935.

Does this sound familiar? ......(more)

The complete piece is at: http://www.huffingtonpost.com/richard-thomas/toward-a-m...



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