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The Great Depression II

The Great Depression II Down and Dirty Charts -- Deregulation by Pluto Thu Jul 30, 2009 at 12:14:46 AM PDT

I sift through a lot of newsletters daily and look at a lot business and economics websites. I'm looking for consensus on global currency issues (I trade the Forex), but I also find some really interesting stuff that pertains to the US economy -- where it's going, and where it's been. Looking back is not very important in the global market, but it sure is enlightening in a national economy like the United States.

I love charts. I collect them. They present information to the brain in a unique way, bypassing analytical inhibitions that we all have and reaching a place of recognition and understanding. Only the best charts achieve the highest level of communication, but all charts have a graphic vocabulary.

I thought I would share some of the charts I collected (and improved in some cases) this week. The good. The bad. And the ugly but informative.

The charts below pertain to banking deregulation.

This first one shows a correlation between the amount of debt in society and the deregulation of the financial sector. That dip in the middle is when Reagan came into office and ushered in the Republican polities of tax cutting and "anything goes" corporate capitalism.

The black line shows surging profits in the financial sector. The chart spans from 1951 to 2005.

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The chart below is much simpler and takes a closer look at wages in the Financial Sector, compared to all other sectors. This chart goes all the way back from 1910 to 2005.

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What you're looking at is a wealth transfer. The second surge is the same one shown in the chart above. The first surge happened during the stock market crash of 1929, which set off the Great Depression. When that surge is high, a Wealth Gap forms, the rich get richer and the middle class is decimated.


This next chart overlays government policy and banking regulations across the period from 1910 to 2005. Here you can also see the long period of economic stability that stretched from 1950 to 1980. The middle class flourished, tax rates were at their highest, wages were fairly spread across society.

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When the Republicans gained control of the nation's economy, the middle class began a slow descent which would continue until the present. Things slowly began to change:  A family could no longer survive on one salary. Cheap fast-food restaurants became the soup kitchens of America. The Wealth Gap grew again, strangling the middle class.


Here's a closer look at what was happening to tax rates during this time. Again, Republican policy was to cut taxes for the wealthiest individuals, those who made the most money exploiting the resources and advantages that America gave them. They gave little back in return. They mainly took, and from their ownership positions, they forced middle class wages down even further.


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In the chart below, which I used in an earlier Diary, we combine all the information from the charts above. Here, we tell the story of The Wealth Gap in America, a terrible economic injustice that happened from 1900 to 1930 -- thirty years. This same injustice, thrity years in the making, has clearly happened again.

The Wealth Gap Chart ranges a century, from 1907 to 2007. The green graph measures the concentration of wealth in the hands of the few. The pink graph is the tax rate in the highest income bracket. When the top bracket tax rates are higher, the entire nation experiences periods of economic stability and prosperity. When the Wealth Gap is widened, generally through tax cuts and deregulation, investments are concentrated and become self-speculative, corrupting the markets. As a result, the nation's economy quickly contracts and is pulled toward collapse.

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Solutions are Easy. Identifying the Problem is the Hard Part

The problem in this nation isn't about stimulus or putting people back to work. It's not about paying for Social Security or Health Care. It's not about green shoots or growing your own food. The problem is DEBT. Unrelenting, crushing, unpayable debt. The people can't pay back their own debts because they don't have enough income. The US government will never pay back its debt. It's already spending 20 percent (this year) of its insufficient income to service the existing debt, while facing huge obligations to Social Security and Medicare.

Roosevelt had a similar problem when he took office. He decided there were two important things he could do to help the nation climb out of the Depression. First, he all but eliminated the debt by devaluing the Dollar. Next, he enacted strong regulation in the Financial Sector. That did the trick.

If you go back up to that first chart, and look at the red "Debt" line, you'll see it repeated in the chart below. This is the devaluation scenario:

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We need to grow up and face the fact that we can never work the national debt off. Neither can our children in their lifetimes. And, paying the interest on it is forcing us to borrow more and sinking us even deeper into debt. The America you want to live in will never happen with all this debt hanging over us. Cutting the value of the Dollar would allow us to pay it off immediately. It's radical. (And, of course, all our personal debts would be a lot more manageable, including mortgages.) Think about it.


Finally, this last chart gives you a clean and neat idea of how the government spends its yearly "income." (Not counting the "secret" spending and other off-budget corruptions.) Keep in mind that this level of spending requires an additional $1 trillion dollars (at least) of borrowed money. You'd have to get to net zero before there are any savings that come from cuts.

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As for Roosevelt's second solution -- regulating the American financial sector -- he knew he had to enact legislation right away or the greed would destroy the economy again. Not surprisingly, that's the very next thing that Obama is planning to do. Coming up after health care reform is a Bill to enact the The Consumer Financial Protection Agency. If you think health care reform was bad, wait 'till you see the pushback on this one. The banks don't want to be regulated and they're pulling out their big, threatening guns. Remember those earnings graphs in the first three charts? Can you blame them?


Strange Bedfellows and Sleeping with the Enemy

For the most part, when I research and read my subscribed newsletters, I separate the politics from the information. There are many sharp economists that I read daily who have right-wing views. I merely note that when I parse what they are saying. For me, truth can only be found the numbers, although people's opinions are of interest and can sometimes shape the world's economic future, as the "dumb but voting anyway" American people did in 2004.

One thing that all these economic writers agree on is that they want government to stay out of the markets. They resent any type of direct government intervention. I understand their frustration. It's impossible to trade when some central government is manipulating the markets.  Of course, Goldman Sachs is big and fast enough to do that, too.

Doug Casey is an example of one of these Strange Bedfellows. I read his newsletter, Casey Research, where he presents a view of the markets that broadens mine. Doug has the big picture and he's watched the reruns again and again. Right now he's at a conference in Vancouver, where he did a candid, ten minute interview today.

I present it here for anthropological purposes, only. It's merely a glimpse at the raw thinking inside investment economics -- as opposed to the thinking of polititions and pundits. It's world-weary, it's political, it's provocative. If you do watch it, tell me what you think. I'm curious.

Doug Casey: What's Next?