The Great Recession and the Great Depression are the fallout of the exact same economic phenomenon and are only different in a few (minor) respects. Each period is marked by a massive run up in asset prices followed by a tremendous deflationary pressure that has sent both debt and equity markets into turmoil. The Great Depression saw the Federal Reserve do little to ‘save’ the economy because their policy actions were limited by a currency backed by precious metal. In the face of deflation, the 1930s Fed knew it needed to expand the money supply by lowering reserve requirements at banks. In fact, the Fed’s board of governors did actually reduce the reserve requirement, but not enough to have a sizable impact. And so, the country was stricken to a decade of deflation, high unemployment, and slow growth. The Great Recession is very similar in origin, but the policy response was different from the Fed. Most modern day central banks have fiat currencies as opposed to currencies backed by precious metals (Gold, silver, animal pelt, etc.). And so, in times of crisis the Fed can ‘create’ money by artificially increasing member banks’ deposits at the Federal Reserve, funds from which those banks can lend to the public. The Fed did $2.1 trillion worth of money printing in order to save financial intermediaries that were in dire need of assistance and in order to finance fiscal efforts to rejuvenate the economy. I think it is pretty clear that we are in a very precarious economic situation that is highly similar to the Great Depression. Getting out of this economic situation is going to be very hard. It will take a lot of national pain as our economy transitions from a consumption based, high-debt, low-growth debtor nation into a manufacturing and exporting nation once again.
- In the film Every Child is Special