Now and then//1929, 2009//the coming Depression. Part IV

By , September 8, 2009 8:36 pm

Now and then//1929, 2009//the coming Depression. Part IVIn part three of this series I said that I wanted to share with you another element in our current economy that our nation has not seen on this scale since the “Great Depression”. That element is “deflation”; DEFLATION: BUYING POWER OF THE DOLLAR INCREASES. As good as that sounds the actual effect it has is chilling. One of the first things that happens with “deflation” is a drop in interest rates to near or zero, since I’m not a theorist maybe the lowering of interest rates created “deflation”, regardless (isn’t that where we are today), with interest rates at zero banks don’t lend money (the banks hold on to their cash) (isn’t that where we are today), when the credit markets freeze and there is no lending, business activity comes to a halt, then overall economic activity comes to a halt and profits drop/fail. When profits fall or come to a halt, businesses lay off people and people without wages don’t shop; unemployment reduces tax revenues to the treasury, no shopping reduces sales taxes to State and Federal treasury. Other businesses which depend on certain (failed) businesses now also fail and the cycle starts all over again. People that lose jobs don’t pay their mortgages and the first fall-off from that is a reduction in property taxes to local and county governments which now also have to lay off city employees and reduce services. Some of those services are police and firefighters. Why am I saying all this, anybody could have picked any “WORD” (I chose deflation) and applied that word to our current economic situation. Let me take you there with some available statistics. Except for the Carter years (which had double digit interest rates and inflation low of 12.52%/high of 14.73%) the last 6 decades managed to maintain inflation rates of between 1.59% and 5.09%; our economy survived  mild to mildly harsh recessions in the 70’s, 80’s and early 90’s. The last 16 years (8 years of Clinton and 8 years of Bush) were almost identical with Clinton having a couple of months at slightly over 5% and one month of over 6%, most of his 8 years were at 2.85% to 4.25% Bush’s 8 years were at 1.59% to 3.85%. Today as I write this we have the biggest drop in inflation rates since the 1950’s. Let’s backtrack to the “Roaring Twenties” before we compare January-August 2009. Inflation at the end of 1920 was at 15.90%, most of 1921 and 1922 had a mixed bag of low inflation and low deflation. 1923 to June 1926 had low inflation rates; that was probably the beginning of the end for the “Roaring Twenties”. Deflation ruled the “day” from July 1926 to May 1929 and the economy managed to bring back low inflation for about three months when the “Depression “began in October 1929. Big Government intervention to soften the depression provided a mixed bag of low inflation/deflation for most of 1930. Deflation devastated the economy for all of 1931-1933 and most of the country did not see the end of the “Depression until 1941. We have not seen any prolonged deflation since the “Great Depression” until now. Here are the deflation rates for January-August of this year: Jan-.03/Feb-.024/Mar-.038/Apr-.074/May-.0128/Jun-.143/Jul-2.20 and Aug-2.10. I’m a fair person, NO, I couldn’t possibly blame this President for the deflation of the last 8 months, but, I sure can blame him for failing to provide the right leadership to prevent the “soon coming” depression from lasting 10 years instead of 4. In part III of this series I stated some reasons why the government will not be able to stop this depression from occurring. I will be keeping an eye on the deflation/inflation rate and the unemployment rate over the next few months. I will probably make this series a six part series and discuss the “real” unemployment rate with you sometimes early next week. Part of that discussion will be bank failures.

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