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Our new president faces an economic crisis far worse than that of Mr. Roosevelt and with far fewer tools to work with.
1) FDR was able to go into debt for the Keynesian methods used to fight the Great Depression, Part 1. That is impossible given our current levels of debt.
- Today?s national debt is nearly 15 times what it was in 1932. When FDR was sworn in to office in 1932 the national debt was $19 BILLION. That means retiring the debt would have cost each person in the US $156. Today the debt is $10 TRILLION, which works out to $34,800 per person. Adjusting for inflation, if we owed today what we owed in 1932 each one of us would need to pay $2347.68. In 1932, the GDP was three times the size of the national debt. Today, they are nearly even.
2) FDR had a huge untapped manufacturing capacity that was able to meet increases in demand brought about mostly by World War II. That doesn?t exist in the US now.
- By 1932, at least two years into the Depression (depending on who is counting), the nation had an enormous number of idled factories. Manufacturing capacity was just 54% of what it had been in 1929. In the last six months, manufacturing capacity has averaged 73%. Only slightly less than the 79.7% average we had from 1972-2007. That is 73% of a base that has been continually shrinking. It can be argued we are not yet at the point in this Depression that the nation was at in 1932. So it is likely we will have more idle capacity in two years than we do now. It will still be significantly less than what was present in 1932.
3) FDR did not have to deal with two wars draining the national treasury.
- The George Bush Desert Classics (East and West) differ from World War II in many ways. Not the least of these is that they cannot spur growth in the economy. The vaunted US Military-Industrial Complex has been operating at full-capacity for years. It is questionable as to whether or not it could ever produce enough weapons and material to keep up with the demands of any large scale conflict. It is barely able to do so for these two ?low-intensity? conflicts.
The only real solution is so politically difficult that no elected official will ever suggest it: Take the hit. We have an enormous amount of bad debt in the system. Until that debt is resolved ? i.e., until we know the difference between what was loaned out and the value of the assets loaned against ? no recovery is possible. (For example, Bank of America is still discovering how much bad debt it got stuck with taking over Merrill Lynch.) Borrowing money to help companies cover bad debts is like trying to drain a swamp with a teaspoon. It will merely delay and worsen the needed and inevitable reckoning. Any such monies (TARP, etc) should be directed to social spending to provide palliative care (unemployment, health care, housing, etc) for people to help them weather this Depression.
We got into this mess by lying and pretending, more lying and pretending will solve nothing.
Constantine von Hoffman is a long-time business journalist and author of the blog, CollateralDamage.biz — a satirical look at marketing and business.
Last 3 posts by Constantine von Hoffman
- Housing prices sink as underwater number rises - August 11th, 2009
- The home price increase that isn’t - July 28th, 2009
- Why the increase in housing starts means trouble - July 21st, 2009
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