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05/19/2007 Archived Entry: "A Greater Depression coming?"

Silver here, but those words are by Morgan Stanley Managing Director and Chief Economist Stephen S. Roach. His brief essay Denial on Protectionism is a must-read if you have any investments in stocks or bonds. Mr. Roach reports that "The US Congress is moving full steam ahead on anti-China protectionism, and no one seems to care."

This is eerily reminiscent of the Smoot–Hawley Tariff, enacted in 1929. "The stock market broke sharply on the day that Hoover agreed to sign the Smoot–Hawley Bill."

In 1929, the bill was supposed to "help" farmers. Rothbard reports that "It was at a precarious time of depression that the Hoover administration chose to hobble international trade, injure the American consumer, and cripple the American farmers' export markets by raising tariffs higher than their already high levels." Today congress plans to "help" the American consumer by hobbling international trade, raising the price of imported Chinese consumer goods, and crippling what little manufacturing export trade remains in America.

There is no reason to think the outcome will be any better this time, and plenty of reasons to fear it will be much worse. We have been in a recession since the collapse of the fed-fueled dot-com bubble. According to Shadow Government Statistics, consumer price inflation is above 10% while GDP growth is -2%. All the while, the fed creates new money at a pace unmatched in history, with growth of the money supply hitting 12.8%. Our current account balance of minus $862 billion is not only the largest in the world and in history, it is almost twice as large as that of all other debtor nations combined. In 1929 the US was an economic power, today we are bankrupt. In 1929 we were at peace, today we are bleeding trillions of dollars and hundreds of thousands of casualties into a pointless war. In 1929 people had savings accounts with gold and silver coins, today they have electronic bits on computer hard drives telling how much debt they owe.

"Are we headed for another Great Depression" has an interesting analogy by Elaine Meinel Supkis. It is worth reading if you want to understand why all this is happening. Speaking of currency reserves and national solvency, she states that

It may sound trite but thinking about great banking matters as if it is one's own bank account no matter how small, works. Namely, it is dangerous for anyone to live life where everything is juggled and there isn't a penny to spare. Then something bad happens and boom. You go bankrupt. This is why savings accounts matter and why inflation is so deadly.
if we think of these funds (national currency reserves) as boats, then China has Noah's Ark, Japan has an aircraft carrier, Europe has a holiday cruise liner, Russia has a very fancy yacht and the USA has a rowboat made out of an old bathtub. That is leaking.

We are in a recession, and congress is doing all it can to repeat the mistakes that led to the crash of 1929. Inflation is eating middle-class and poor Americans literally out of house and home, so congress plans to raise prices with new tariffs and lower wages by legalizing a flood of new immigrants. The fed is creating money at rates that have led to hyperinflations. Any one of 4 or more countries could sink our boat by selling their hordes of dollars. So we threaten to make war on yet another country that has done nothing to harm us, but unlike Iraq has the means to fight back.

This insanity, and it won't end well.

Posted by Silver @ 08:35 AM CST

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