A reader took exception to my recent article where I said the Great Depression of 1929 could not happen again. He noted that the government has allowed the stage to be set for another depression, and that it may not be able to stop it once it starts.
According to Federal Reserve Chairman Ben Bernanke, the stock market crash of 1929 was actually caused by contractionary monetary policies of the Federal Reserve, which tightened the money supply while the country was going through a recession in the summer of 1929. The Fed continued to raise the Fed Funds rate throughout the ensuing economic decline, trying to defend the value of the dollar. Banks collapsed, and finally people took their remaining dollars and stuffed them under the mattress.
The Depression was only cured by the advent of World War II, which employed people again in defense-related jobs.
Could it happen again? Bernanke says no, since today's Fed has a better understanding of the importance of expansionary monetary policy in stimulating the economy. However, there are many indications that the U.S. economy is, quite literally, living on borrowed time. The $800 billion current account deficit, the $8 trillion Federal Debt, and the looming Social Security crisis are all unprecedented imbalances that could very easily cause a recession that could lead to another Great Depression.
What It Means to You
Read these articles to find out what it would mean to you, and tell us what you think.
- The Current Account Deficit -- Threat or Way of Life?
- The U.S. Debt and How It Got So Large
- U.S. Federal Budget FY 2008 - Mandatory Spending