IS THIS 1937-38 ALL OVER AGAIN?

In June I asked an important question – are we bound for another depression like Paul Krugman and many commentators have been calling for? And more importantly, are we making the same mistakes that were made in the 30’s that could lead to a severe double dip recession?

For those who aren’t all that familiar, the story behind 1938 generally goes something like this – the US economy was suffering from a massive balance sheet recession and required substantial government aid to maintain economic growth as the private sector absorbed the excesses of the 1920’s.  When the government attempted to balance the budget in 1936 they sparked a second leg down.  The following chart from American Century Investments shows an excellent depiction of the financial landscape of the 30’s:

As of 1936 the US government was running a deficit that was equivalent to 5% of GDP.  Unemployment had fallen from 25% to 14% and GDP had grown at 12% for 4 straight years.  Then 1937-38 hit and the unemployment rate spiked to 19% while GDP contracted over 6%.  American Century believes there were several causes of the downturn:

  • Because some members of Roosevelt’s cabinet—notably Secretary of the Treasury Henry Morgenthau—were uncomfortable with the idea of running a long-term deficit, the administration moved to eliminate it. In 1937 the federal deficit fell to $2.5 billion (or 2.8% of GDP) from the previous year’s $5.5 billion (or 5.5% of GDP) as Roosevelt and Congress slashed spending by 18%. In 1938 spending dropped another 10% from 1937. The government effectively ran a balanced budget that year with a deficit of only $100 million or 0.5% of GDP.  (See the “Federal Budget Surplus/Deficit as a % of GDP” line in the chart above for 1938.)
  • The Fed began tightening the money supply in 1936. But instead of using open-market operations to gradually increase interest rates in order to contain any inflationary pressures, it chose instead to use its new power (granted by Congress the previous year) to set the banks’ reserve requirements—the percentage of deposits that banks must hold either in their vaults or at the Fed. The Fed engaged in three back-to-back increases in reserve requirements between August 1936 and May 1937 causing a substantial tightening of the money supply in a very short time.
  • Several taxes or tax increases were implemented in 1937. The first was a substantial increase in income tax rates for the wealthy due to the Revenue Act passed in June 1936. The top marginal rate was increased from 59% to 75%. Second, President Roosevelt implemented a tax on the undistributed earnings of companies which he argued were shielding income from taxation by refusing to increase dividends. Finally, the new Social Security program with 2% payroll deductions (half was paid by employees and employers) was instituted in January 1937.
  • Among many legislative and regulatory changes, one example is the National Labor Relations Act (or NLRA—also called the Wagner Act) which was passed in July 1935 and substantially increased the bargaining power of unions by forcing businesses to recognize and negotiate with them. After its passage, real wages increased substantially but so did the number of worker stoppages and strikes.

We can see right off the bat that the current landscape is quite different in terms of government response. We are running much larger deficits today, monetary policy is likely to remain accommodative and legislative and regulatory changes have done little to fix the world that caused this crisis in the first place. I have never believed the whole “second great depression” theory. We are in, what I believe is simply a prolonged recession – a sustained period of below trend growth that is caused primarily by household de-leveraging. This environment will leave us extremely vulnerable to exogenous risks (housing prices declines, sovereign debt crisis, China slow-down) so the potential for a technical double dip will remain high even though I believe this environment is likely to continue feeling like a recession for several more quarters if not years.

The biggest threat to the current environment is political gridlock and a belief that we need a balanced budget.  Thus far, these beliefs have been largely thwarted, however, there remains a shift more and more towards fiscal prudence.  The upcoming election is being hailed as a positive sign that the Republicans will add more balance to public policy.  I think this is quite possibly a misinterpretation of the realities that we confront.  A Republican win likely means a shift towards supply side economics and a move towards fiscal prudence.  More belt tightening if you will.  That is needed at the private sector level, but is not needed at the public sector level as inflation remains low and there is no risk of solvency for the US government.

The potential for gridlock and little government aid of any form is increasingly likely in this scenario. Monetary policy has proven to be of little use in this environment despite Mr. Bernanke’s continued efforts.  In terms of aiding the private sector fiscal policy remains the tool of choice.  The one positive of a Republican Congress is that it increases the likelihood of a large scale tax cut of some sort.  Warren Mosler has proposed a full payroll tax cut that he believes could be the equivalent of a $1T stimulus bill.  I would fully support any such move as I believe we are grossly overtaxed and that the government can certainly afford such a measure.  The government has proven itself thoroughly incapable of efficiently spending money so if we are going to consider passing a second form of stimulus it should go directly into the hands of the private sector via a tax cut.

In sum, I see a continued environment of low growth that is consistent with a private sector that is paying down debts and absorbing past excesses.  Although the recession is technically over it will likely feel like a recession for several more quarters if not years.  This weak economic growth does not mean we are certain to double dip, but it does leave us particularly vulnerable to exogenous risks (housing prices declines, sovereign debt crisis, China slow-down).  I do not believe we are in a depression or that we are repeating the mistakes of 1937 (at least not yet), however, there remain substantial headwinds in the current environment and I believe policymakers and investors should continue to err on the side of caution.  The risks to the downside remain substantial, but they are not dire given the current landscape.

Source: American Century Investments

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. TPC

    The only thing I would add is the deleveraging of the Big Bank balance sheets, as cited in an earlier Chris Whalen video you recommended. Not only is the consumer deleveraging, but the banks have too much on their balance sheets, that needs to go away. Both will prevent credit expansion until addressed.

    In addition, the one aspect of 1929 that usually is not addressed (although Whalen did in his AEI Video), is that balance sheets went to zero during that time period. So, everyone was starting from scratch. In our current scenario, 75% of the debt / risk is still on the books, with no sustainable uptick in the economy to support the risk. So, banks and consumers are not going to take out credit, until this bad debt situation is addressed; and really the only way to do it is write it off. So, we need to go down in economic activity before we go up.

  2. I don’t mean to imply that the banks are entirely healthy, but that is not the cause of this crisis in my opinion. The cause was the collapse in the household balance sheet. The banking crisis was simply a symptom of that. So yes, you’re absolutely correct that the banks are not fully healed and are certainly one of my “exogenous risks”. A 10% decline in real estate values would likely trigger the need for more intervention in the banking sector as Whalen suggests, but I am skeptical that the banks are going to collapse in 2011 as Whalen suggests without some sort of catalyst that ruins their capital position.

  3. one side makes some dumb mistakes ….then the other….we will muddle thru because thats what a group of humans do.

    years working out of this balance sheet Decession

  4. I believe we all agree that the major problem is too much debt. But let’s be clear what we really mean is too much bad debt. If we were overleveraged with productive debt (debt that produce profit and could be constructively paid off) then “too much debt” would not be a severe problem. Government spending financed by debt is bad debt. Therefore it should be reduced dramatically. In my opinion there is no excuse for piling on bad nonproductive debt. Government spending must be cut dramatically because it is almost totally wasteful. Consumer deleveraging of bad debt needs to be assisted by reducing taxes which will accelerate debt paid down. It needs to be offset by reductions in wasteful government spending. To increase cash flow the government needs programs (for example) to open up government lands for oil exploration and development which would increase government revenue and reduce balance of payment deficit. We waste one quarter of $1 trillion a year by importing foreign oil. Imagine if we developed the oil shale and tar sands of the Dakotas etc. keeping that money in the United States would be tremendous stimulus.

  5. There are some significant differences. Everyone points out the tightening as a policy mistake, but consider that GDP grew at 8 to 10% rate from 1934-1937. If we had that kind of growth, you would probably see higher rates.

    More likely with Repubs winning back House, we get Keynesian monetary stimulus via QE and no tax cuts resulting in higher deficits and inflation in commodities, but no growth and high unemployment. Can anyone spell stagflation. A return to the 1970s will be worse than 1937-38.

  6. It’s not that we have too much debt. We just can’t pay it off. If Republicans can’t cut spending and won’t raise taxes, debt will go higher. What we need is more growth. But that probably isn’t going to happen any time soon. So the debt bubble will keep growing until someone blinks. The bond holders, or the people who are counting on all the benefits that they believe they are entitled to.

  7. Thought I’d pass along TPC’s latest twitter message since he’s made some great market calls lately:

    “I’m short equities for the first time since April….Hope to build a nice big position over the next two weeks….”

    Calling the top at 1180?

  8. The contrarian of contrarian calls. Long dollar, short equities. I’d like to see a nice big run into Apple’s earnings and then watch it all roll over.

    Good bye tall grass….Consider me in full sprint. If you’re long, you’re running from me….

  9. Bold call being short here. Still think it’s too early. You’re smarter than me TPC, but we’ve got to make a run to the old highs before this tapers. Volatility still too high for a market top. Though maybe you are content with the minimal 3% ish upside left that you have to sit through.

    Otherwise, this is a great post.

  10. Same old crap.
    Government is evil, inefficient, keeps growing etc.
    Which part of the budget is wasteful? What is the right size of the government? Why did the government grow under Bush and shrunk under Obama and yet everyone keeps repeating lies?
    The authors opinion is presented as facts. Before you start chanting “Government is bad. Government keeps growing.” look up the facts.
    Here is the dilemma between tax cuts and stimulus. The tax cuts benefit the rich and stimulus benefits the poor(entitlement programs), or everyone(investments in the future: education, infrastructure, etc). So it is all about more money in my pocket(tax cut) or food and shelter for someone else. For any decent human being the right choice is obvious.

  11. I would not mind seeing a 3-5% move higher. These swings are incredible. 6 weeks ago it was all doom and gloom. Now no one believes stocks will ever go down again. It’s amazing.

  12. You fail to address the real cause of the recession which is loss of jobs due to trade policies. Now that we have decimated many of our industries and the supporting jobs that went with them, where are the new jobs going to come from? Without jobs, we cannot recover.
    Your assertion that inflation remains low is debatable. The government’s use of substitution and hedonic adjustments distorts the statistics and allows the government to claim much lower inflation rates than are reality.
    This inflation seems to be escalating as the government continues to pile on debt that erodes confidence in the dollar. The increase in the debt also carries with it the promise of higher future taxes in order to service the debt.
    Lastly we have done nothing to address the fundamental problems in the economy. The banks are not writing down their bad assets, and the derivative financial vehicles are still out there waiting for the right circumstances to cause another panic.
    We have solved nothing; we have postponed catastrophe for another day.

  13. These comments are frighteningly foolish. There is no way to print your way out of this crisis. We need honest to God wealth recreation, not borrowed/created money. The private sector is deleveraging. They don’t want to borrow more and they have debts to paid down. Therefore the economy will contract in real terms, period. Now, the money manipulators can monkey with the books, and flush trillions into the economy. After all government spending is a component of GDP, but it is very unlikely that this action will “jump start” the economy anytime soon.

    In the meantime we are bidding up the price of commodities which will cripple our recovery if would begins to occur. We are stealing purchasing power of everyone’s savings account, and creating a debt we can never hope to repay. Imagine what will happen if interest rates increase on government debt. The Japanese spend 60% of their national budget on debt service (interest). Does that sound like an acceptable outcome from our current course? personally, I’d like to avoid that.

  14. If I recall Krugman’s depression claims, he believes that a depression would more closely resemble the Long Depression than the Great Depression, meaning an extended period of low rates of deflation that result in the economy skidding along a bottom.

    I don’t buy that, as I think that it is a matter of time that credit levels are increased, as lenders revert to more aggressive profit models and private-label securitization returns. As part of that process, lenders will find ways to rationalize and cope with current levels of debt, so that the new loans can be underwritten.

    Krugman also likes to make direct comparisons with Japan, but I’ve stated many times here why Japan isn’t comparable to the US on many levels. We will use the trade deficit to feed consumption that will grow our way out of this, something that Japan would never try to do.

  15. Sales decline cause the drop off in jobs. People seem to forget that the employment picture was pretty rosy just a few years ago….

    Even the people who think the CPI is a fraud cannot deny that it is low by historical standards.

    Yes, we have done nothing to resolve the structural causes of the crisis. I have never said otherwise. But that doesn’t mean doom is on the horizon. It just means we’ll continue to have booms and busts.

  16. Where did I ever say govt was going to solve the problems?

    And where are your supposed bond vigilantes? Do you actually understand how our monetary system functions? It is foolish to say that govt should manage its balance sheet like a household does.

  17. I hadn’t even graduated high school in 1998 but I have to think this is exactly how 1998-2000 felt.

    It is amazing.

    I feel like, and I’m going to make sure to journal this very thought, I’m watching in real-time the fomentation of a major global, liquidity driven asset bubble – almost in suspended animation.

    I’m wondering if that bubble is being created in conjunction with the beginning of the end of the Fed’s independence??

  18. This market is simply unstoppable. You gotta think 1220 will be revisited before long. That would be a 17% move from the lows in the equity markets!

  19. You’ve been very bullish about the economy and wrong. What makes you think things are improving so much?

  20. You’ve been very bullish about the economy and wrong.

    Er, on this forum., I’ve been talking about a square root recovery and the the market being in a fair trading range for over a year. Sure enough, the market has been in a trading range — the collapse predicted by the permabears didn’t happen — and we had some quarters of strong growth (that also weren’t supposed to happen), which have now tapered off.

    So you really don’t know what you’re talking about. Perhaps you have me confused with someone else, but you need to calm down a bit on these threads.

  21. Tax cuts benefit the rich only? Hmm, that’s news to me. Are you saying that lower middle class taxes won’t help people pay off their debts and improve their balance sheets? Or are you towing some political party line about how taxes aren’t as effective as govt intervention? We need to put money in people’s pockets to help them pay off their debts. Lower taxes is a good way to do that. Do you not agree?

  22. CA said he saw a post of your on Twitter? You have a Twitter feed?

    Now that you’re out of the weeds, (tall grass, whatever), it’s going to get mighty interesting around here for the next few weeks/months.

  23. Unfortunately, a lot of folks are stuck in a rigid black-and-white/ bull-bear dichotomy, unable to see any shades of gray.

    It’s quite possible to be somewhere in the spectrum between an angry bear and a raging bull, but not everyone seems to get that. My position is slightly more bullish than yours and we sometimes get to where we’re going via different paths, but we’re generally not that far apart on where we ultimately land.

  24. Don’t you recognize a political ax grinding when you read it? Posts like Dimms make me double take to make sure I’m not on Huff post.

  25. Agreed. You’ve been right far more than you’ve been wrong. I was more bearish in 2009 than you were and that was simply a fantastic call.

  26. There is nothing but good news. Eventually, that drives all the cattle into the same trade. Just look at how everyone who hated the market in August now loves it.

    It’s silly. Psychology never changes.

  27. Hi TPC,
    I most certainly agree with you that
    “This whole recession remains a problem of end demand.”
    So the question is what is more effective to boost end demand: tax cuts or stimulus? Jobs will be the best, but the businesses are not hiring and hiring buy the government are obviously out of question.
    Stimulus will ensure all the money are spent. Yes the government will decide how to spend them. Yes it might be inefficient, foolish, or long term focused, but all of it will all be spent. I would say it will be 100% efficient in terms of the goal it has to accomplish.
    Now the tax cuts. The government will give people some money back. They can spend them or save them or pay back loans. Those that live paycheck to paycheck and have nothing (at least 40% of the population) will probably spend them. The middle and upper middle class (lets say 40%) might be somewhat cash constrained and might spend them, save them or pay down some debt. Those in the upper 20%
    will just save them.
    Now since the cut is about the same across the board (about 3%) most of it will go to those in the upper middle and upper class. Here is why:
    Buffett will get 3% cut and the guy that serves him lunch will get the same 3%.
    Since the problem is at the end demand, it is obvious (to me at least) that tax cuts are very inefficient way to boost the end demand.
    The other problem is that raising taxes is never good political strategy, although sometimes is absolutely the best policy. The Bush cuts were unaffordable then and now. They added trillions to the debt, yet everyone wants a balanced budget and permanent tax cuts.
    At some point math and common sense should prevail right?

  28. It’s hard to imagine any income leveling tax changes if Republicans make significant gains in the election. Certainly not like Reich wants to see. Upper-end earners will demand and get their cut to support the cut for the rest, but the net result will be the continuation of less spending for the majority middle and poor, more cash reserve for the minority rich, and no long-term help for the economy in general.

  29. Dimm,

    I am trying to be realistic. Where is the political will for more stimulus, more infrastructure, more spending? It’s not there.

    But for some reason the Republicans seem to believe that tax cuts are different in some way so they’re okay with that. I would advise Mr. Obama to play into their ignorance and pass the largest middle class tax cut ever.

    It’s the only tool left in the fiscal policy toolkit. There is simply no will remaining for more spending. At least that’s my gauge of the situation.

  30. This market is now one wound-up, highly correlated, algo-fueled whoop ass machine looking for a brawl.

    And as TPC noted, these computers are temperamental. They have short memories.

    Everyone’s got some version of the same trade on now (risk on/risk off) (dollar/non-dollar) whether they like it or not.

    Reports of the dollar’s demise will probably prove to be greatly exaggerated. But Ben isn’t helping the matter.

    As always- you pays your money and you takes your chances..

  31. ok, looks like I haven’t been reading as long as you have, but you strike me as dismissive of everyone else’s opinions. Meanwhile, you haven’t exactly been right about everything.

  32. For what it’s worth, I like reading MBA’s stuff too. He provides some good counter points, and with enough of an edge to the comments to explain why “Angry” is part of his call sign.

  33. Everyone is in the same trades. It’s very similar to this spring when everyone was in the same bullish trades and everything was going up. When the music stops everyone jolts for the door.

  34. Exactly. This is all one highly correlated orchestration controlled by Ben Bernanke. We either go up in a straight line forever or Ben loses control of the band and it spirals out of control.

  35. Galbraith – The Great Crash of 1929
    investors were described as “having vision for the future and boundless hope and optimism” and not “hampered by the heavy armour of tradition”

    Eventually, market meets economic reality – rock meets hard place

  36. Here are some solid data points…

    On a weekly close basis the market, should it close at ~1180, will have increased by 11% from its 8/23 close of 1064.

    Throughout history’s bear markets there have been only four other cases where the market has put in a counter-trend rally of greater size….

    1) into 11/81 a 12% rally after which the market declined 18% into its ultimate bottom

    2) into 8/00 a 12% rally after which the market declined 25%

    3) into 5/01 a 15% rally after which the market declined 25%

    4) into 12/01 a 21% rally after which the market declined 32% into its ultimate bottom in Oct 02.

    We are getting into dangerous territory here based on history. I would add the caveat though that a rally into new 1220 highs would invalidate all of this as it would mean we were not in a bear market (that being defined by a new high).

  37. Would love to follow you on Twitter but couldn’t find you and don’t see a link on your site – what’s your twitter handle?

  38. In a world where the Internet/technology are arbing away the need for human capital, office space, etc. — what is the trigger for economically moving forward beyond paying down credit card bills, restocking shelves, etc.?

    There is no trigger on the horizon.

    Make the plane ride from NYC to Tokyo 2 hours and extend life by 25%. Those would be big winners. The next iPhone/smart phone/video game player? Come on.

    Musical chairs might be best description of current state of affairs.

  39. My point is not what is politically plausible, but what is economically sound.
    Party politics can not and will not solve the crisis. Sound economic decisions will.

  40. while i agree i add this time around things could easily go to more extremes……and will go down more than your cases.

  41. while i agree on the musical chairs…..i’m holding out for economical splitting of H2O someday

  42. the coming Eur currency unravel assures us a trip to 37-38′ and i am with whalen on the banks–all the empty houses they own will come to light.

    while i don’t see soup kitchens, we have not seen the bottom yet….its been papered over.

  43. Looks like a bit of volume in TBT—thats not a Long Dollar trade–probably picking up some grease till the “Friday” news–but some pain for you none the less.

  44. “Expect the best. Prepare for the worst. Capitalize on what come.” – Zig Ziglar

    That’s my story…and I’m sticking to it.

  45. “Party politics can not and will not solve the crisis”

    But Dimm, this is what we have, nothing more, and nothing less. I don’t really like it either, but I don’t see a likely alternative.

  46. Thanks for clearing up your position in the market (short equities, long USD, right?). I’m not quite ready to follow you, but I have an aisle seat near the exit! Can you elaborate on how you execute those positions? I’m thinking of getting back in the EUO (shorting the euro vs the dollar) trade soon. It made me some decent money when I sold this summer.

    I like the idea of the payroll tax holiday, but I have a few concerns.

    1. Most folks don’t really know it IS a tax, and the gov’t doesn’t really want to tell them different. How many times have you heard this meme on Fox “Nearly half of all Americans don’t pay any taxes”? That might be true if you only applied it to the federal income tax, and excluded the payroll tax, which is nearly 15% of income under $100K/yr, if you account for the employer’s share.

    2. While the money will mostly be spent right away, won’t most of the resultant money go to buy Chinese goods? That won’t help a whole lot of American jobs (Best Buy salespeople, some shipping). How can we get that money directed to buying American products, and produce American jobs?

    3. What HAS happened to the stimulus in infrastucture spending? Other than the occassional accelerated(unnecessary) repaving or road widening, I haven’t seen much activity that would result in long term benefits (new industries, R&D, etc).

    As far as the Bush tax cuts only benefitting the rich…hmmm, I don’t know, I certainly don’t think I am rich, and the tax cuts were real enough to me. Trying to project what I’ll owe, and realized I don’t really know what tax rates and credits we’ll have to work with this year. The current ones expire, and while it’s likely that they will be extended, with the MAD policies of the DEMS and REPS, it’s a bit hard to say for sure what we’ll see after November.

    Really, TPC, one of your best posts. Great comments as well, good to see you give a gracious nod to Angry MBA.

  47. Solid article, TPC

    The effects of a tax cut will only be significant if they are accompanied by a decrease in government spending.

    We could maintain a budget deficit for the purposes you’ve stated, but expanding it will have obvious effects on the price level that could cause further distortion.

    Your thoughts on matching tax cuts with spending cuts to keep the current ratio? Maybe start with defense spending?

  48. TPC,

    There is a standard definition for a depression that can be found in almost every basic econonmics textbook; as defined a depression occurs when a given economy’s GDP declines by 10% or more. There are a lot of other goodies that follow from that decline: high unemployment ( usually ay least 10% or greater), and other structural problems. We are definitely in a depression because without the government making up for that 10% drop in GDP by their excessive spending our GDP would have dropped by 10% in both of the last 2 years.

    Now as far as thinking there will be no double dip, all I can say to that is no way. You do not seriously believe that we can go another 6 months without one of the PIIGS defaulting or restructuring do you? And of couse that alone will bring about a double dip. No sir, there is no way that we will get through this without another major leg down ( imo).

  49. The American balance sheet recession is not the same as the Japanese balance sheet recession. In Japan the private companies were overleveraged. When the real estate prices sunk, the companies were left holding tons of toxic assets and bad debt but they also had many productive assets and strong demand for their products from the outside world. Thus they were able to produce strong cash flows and over the years they were able to deleverage. In the meantime the Japanese government ran deficits to compensate for the decreased private loan demand. In the US it is the the consumer who is overleveraged. Unlike the overleveraged Japanese companies with strong cash flows and a helpful goverhment, the US consumer is unemployed or with stagnant wages, and competing for work with hungrier and willing to accept much lower pay highly educated workers from all over the world. Unemployment benefits and other government transfers that account for most of the increase in income lately won’t solve the problem here. We need bold movements such as devaluation of the dollar that will restore the American economy through increased exports and import substitution. This may generate the cash flows that will help the American consumer deleverage and end the American balance sheet recession.

  50. We you long during the September rally to any meaningful extent? Just wondering…

  51. The long dollar trade makes sense, given how sold down it is.

    Were you long during the September rally to any meaningful extent? Just wondering; it has been a nice ride…

  52. You’re too kind. Last year, I don’t recall us being that different, actually.

    If memory serves, during the rally out of the S&P 666 bottom, you went from bullish to neutral at about 1000, while I went neutral at about 1050. It kept going a bit after that before fading out, but I would give both of us equal credit for switching hats at about the right point of the trading range. (The difference between 1000 and 1050 isn’t enough to matter, in my opinion.)

    One of our main differences is that you seem more inclined to predict a double dip, while I think that it is less likely. But we both are hedging for disinflation risk, so again, we’re not that far apart. Again, I’m more bullish, but we’re defending against the same risks.

  53. If Republicans win, there will be no tax cuts at all. The Great Obama will allow the Bush cuts to expire, and he will veto any renewed tax cuts at all unless compensated for by a national VAT. Obama is no Clinton. He will not compromise with Republicans. He will play maximum hardball. And he will blame the Republicans for any bad economy.

  54. You are forgetting theat we import most of our oil. If we devalue the dollar by 3x – the level necessary to restore manufacturing, the price of gas goes to $10/gallon. And with Peak Oil biting, it could easily go a lot higher. There is simply no way to avoid a long term reduction in the US standard of living.

  55. I feel as if you have glossed over the real rate of unemployment, near 22%, as well as the ability of a baby boomer retiring mentality to conserve money. Consumption in this country will not recover, it may rise but no where near enough to allow the consumer to spend us out of this recession/depression. The demographics are not there, and neither are the jobs.

    Those jobs that are available are paying less than before (excluding Wall Street of course), and way too much money has found it’s way to a very small portion of the population, leaving much less for the population as a whole to spend. In addition, as the States lose their portion of the Stimulous more jobs will be lost in tyhe states, cities, and towns. This will be aggrevated even more by the loss of tax dollars available from property and sales taxes.

    These are just a few of the issues I don’t believe you have factored in to your deliberations, and will certainly have a very negative effect on any potential recovery. In short, we are in a depression and things will get worse.