Reply #46: Storm Clouds to the East? [View All]

[54anickel]

http://www.321gold.com/editorials/tanashian/tanashian090506.html

I was browsing around the Resources page of the Biiwii.com website recently, checking links I hadn't visited for a while to make sure they are alive and well. In the section entitled The Inflation/Deflation Debate I found myself reading from The Great Depression, which is actually part of a website on poetry from the University of Illinois at Urbana-Champaign that presents a vivid picture (literally) of the depression. I took particular note of the following passage from a section called About the Great Depression:

"The Great Depression began in the United States but quickly turned into a worldwide economic slump owing to the special and intimate relationships that had been forged between the United States and European economies after World War I. The United States had emerged from the war as the major creditor and financier of postwar Europe, whose national economies had been greatly weakened by the war itself, by war debts, and, in the case of Germany and other defeated nations, by the need to pay war reparations. So once the American economy slumped and the flow of American investment credits to Europe dried up, prosperity tended to collapse there as well. The Depression hit hardest those nations that were most deeply indebted to the United States, i.e., Germany and Great Britain. In Germany, unemployment rose sharply beginning in late 1929, and by early 1932 it had reached 6 million workers, or 25 percent of the work force. Britain was less severely affected, but its industrial and export sectors remained seriously depressed until World War II."

"Uhhgg!" said I. That first response, if articulated more clearly would have come out as "Wait a minute, I hear a lot of chatter out there, including some of my own, about the debt-ridden USA being in danger of an economic implosion that could set off a global depression, at least in so far as creditor nations need the vast debt-for-consumption engine the US has become to fuel their economies". But let's think about this for a moment. The US can, does and most likely will continue to inflate its money supply as needed to keep its debt situation from lighting the fuse to a bomb of epic proportions. But what happens if the fuse is lit elsewhere? What about China, a country with a murky (at best) banking system and a debt-for-growth (the yin to our debt-for-consumption yang) economic system? A growth story running well-publicized surpluses with the US, year after year. Lazy, greedy bulls think this can go on forever. Conventional doomsters bearish on the US buy commodities and hop aboard a global train that is passing the United States by. I am not currently long the "China Story" nor, by extension, the general commodity story. Yes, China is in the process of industrializing (like the US of the early 20th century) and they are recycling USD reserves into "resources" (read: necessary commodities for infrastructure and gold for an alternative to the US debt note), but none of this makes them immune to a deflationary hiccup along the way to a big picture of ascendancy, especially given that saving is ingrained in the culture.

I will leave it to global economists to sort out the extent to which China is propped on an unsound financial and economic foundation, but it seems to me that a real economic Armageddon, if it is to happen in the US, could start with our creditors who, led by the likes of China and Japan are major players in the US Dollar via the US Treasury markets. Until crisis strikes at home, and our creditors begin to sell off assets for liquidity, we may not enter a terminal stage of this great economic experiment. When will that be? What will the trigger be?

more....

Some interesting links in that article. The pictures from the depression are quiet powerful. Could it happen that way again?

A Photo Essay on the Great Depression
http://www.english.uiuc.edu/maps/depression/photoessay.htm