Greater Depression Looming?

by TOM MCLAUGHLIN June 9, 2012

Baby boomers like me grew up hearing endless stories of the Great Depression. My father's family was poorest, lacking food and fuel, both of which my father said he had to scavenge. I'd listen to them and ask questions like, "What caused it?" Now I realize that few if any of them knew themselves, but wouldn't admit it because they figured they should know. Their attempts to answer only added to my confusion.

My own research indicated that, aside from Dust Bowl droughts in the midwest, infrastructure remained intact. Yet economic activity slowed down or stopped, putting many out of work and into breadlines. That's what baffled me. Why couldn't it just crank back up and relieve everyone's misery.

It was around that time that Uncle Joe became a professor of business and economics so I asked him. He offered a long answer about stock market bubbles, margin calls and runs on banks that produced a general lack of confidence. I pictured a car in the driveway that was undamaged, but had a dead battery and needed a jump start.

My uncle was a Keynesian and believed strongly in Franklin Roosevelt's attempts to jumpstart American's economy through deficit spending. He had no doubt about the prevailing myth that FDR "got us out of the Depression" with New Deal spending. I bought it too - then.

Now I'm persuaded that FDR only prolonged it. Worse, the social programs he introduced which were expanded under Lyndon Johnson, George W. Bush and Barack Obama have created a huge entitlement bubble which is about to burst. The effects of that bursting will be worse than the Great Depression stories with which I grew up.

Unemployment - worst since the Great Depression - dominates American consciousness. It's even worse than May's 8.2% figure because another 88 million Americans of working age are not working and not looking for a job either. How do they survive? Entitlement checks and other government assistance, mostly, and working in the underground economy too - the statistics for which are difficult to determine by nature.

So what do they do? Watch daytime TV? Go on Facebook? Eat Chitos and fatten up? What happens when the checks stop? And they will stop or be cut back hard, one way or another. They have to. We're borrowing 40% of the money to back them up now, so what happens when our credit dries up? Print more dollars? How long will that go on before the dollars people get when they cash the checks are worthless? It's a scenario I don't like to imagine, but I know it's on the horizon.

What will it look like? We're about to get a preview in Greece. As one pundit put it, Greeks expect Germans to work until they're 67 so they can retire at 50. Germans expect Greeks to grow up and pay their own way. Greeks borrowed so much to finance their welfare state that their credit is drying up. They'll go into default in weeks, and lately they're electing governments who blame "the rich" for their problems, not their own laziness and profligate spending. Soon they'll have to trade in their Euros for drachmas, but what will the exchange rate be? How many drachmas will the leftist government print after that? What happens when Greeks spend them and discover they're worthless?

Just suggesting small cutbacks on their entitlements caused Greeks to riot in the streets of Athens, throwing Molotov cocktails at police and setting buildings on fire. What will happen when they're actually cut off? Civil War? Some are predicting it. Will Greece survive as a nation-state? If not, who will move into the breach?

When conservative Governor Scott Walker wanted teachers and other public employees in Wisconsin to pay just 12% of their health insurance and just 5% of the cost of their pensions, they stormed the state capitol and trashed it. Union thugs from all over the country poured into Wisconsin demanding that Walker be removed. California, Illinois and New York are on the verge of bankruptcy too.

Greeks lived as though the gravy train would go on forever, but crunch time in the form of default is only weeks away for them. Americans are living much the same way. Most cannot imagine their government entitlements being cut back or eliminated. Very few politicians besides Ron Paul want to tell them either for fear of losing reelection, but the problem doesn't go away just because we're ignoring it. Some of us know crunch time is pretty close for us as well.

This time, the causes are pretty clear. Obama's resurrection of Keynesian economics has not only failed, it has made things worse by accelerating American decline as measured by an out-of-control debt that rivals Greece's. That Governor Walker staved off the government unions in Tuesday's recall election is a sign that maybe Americans are waking up to the fiscal crisis we're in, especially given that Wisconsin is a left-wing state. Maybe there's hope that America will step back from the precipice in November and avoid another Great Depression.