Guest Post: Depression Within A Depression

Tyler Durden's picture

Submitted by Jim Quinn of the Burning Platform

Depression Within a Depression

In recent months, worshippers at the altar of Keynes have been
hyperventilating over the possibility Congress will run a deficit of
“only” $1.5 trillion in 2010. They have issued dire proclamations about a
replay of the 1937-1938 Depression within the Great Depression. White
House favorite and #1 Keynesian on the planet, Paul Krugman, declared
that not borrowing an additional $100 billion to hand out to the
unemployed for another 99 weeks would surely plunge the country into
recession again.

    “Suddenly, creating jobs is out, inflicting pain is in.
    Condemning deficits and refusing to help a still-struggling economy has
    become the new fashion everywhere, including the United States, where 52
    senators voted against extending aid to the unemployed despite the
    highest rate of long-term joblessness since the 1930s. Many economists,
    myself included, regard this turn to austerity as a huge mistake. It
    raises memories of 1937, when F.D.R.’s premature attempt to balance the
    budget helped plunge a recovering economy back into severe recession.”
    – Paul Krugman in NYT    
     So did Roosevelt’s attempt to balance the budget in 1937 cause the
    second major downturn in 1938? I’m a trusting soul, but I prefer to
    verify what is being peddled to me by any economist, especially Paul

Ghost of Keynes Past

Today’s Keynesian economists have convinced boobus Americanus
that the Great Depression was caused by the Federal Reserve being too
tight with monetary policy and the Hoover administration not providing
enough fiscal stimulus. Ben Bernanke and Barack Obama used this line of
reasoning to ram through an $850 billion pork-laden stimulus package, as
well as the purchase of $1.2 trillion of toxic mortgages by the Federal

The only trouble is that this storyline is a complete sham.

The fact that colossal stimulus spending, zero interest rates, the
purchase of over a trillion in toxic assets by the Fed, and the loosest
monetary policy in history have done absolutely nothing to revitalize
the economy, has proven that Keynesian policies have been a wretched
failure. This is not a surprise to Austrian school economists.

Keynesian policies failed during the Great Depression, and they are
failing today. An economic catastrophe caused by loose monetary
policies, crushing levels of debt, and appalling lending practices
cannot be solved by looser monetary policies, issuance of twice as much
debt, and government commanding banks (or, in the case of Fannie and
Freddie, “commandeering”)  to make more bad loans.

Ludwig von Mises described what happened in the 1920s and 1930s. His
explanation accurately illustrates the situation in America today.

“There is no means of avoiding the final collapse of a boom
brought on by credit and fiat monetary expansion. The only question is
whether the crisis should come sooner in the form of a recession or
later as a final and total catastrophe of depression as the currency
systems crumble.”

The Roaring Twenties

They don’t call the 1920s roaring because money wasn’t flowing freely
and consumers were practicing frugality. The newly created Federal
Reserve expanded credit by setting below-market interest rates and low
reserve requirements that favored the big Wall Street banks. The Federal
Reserve increased the money supply by 60% during the period following
the recession of 1921. By the latter part of the decade, “buying on
margin” entered the American vocabulary as more and more Americans
overextended themselves to speculate on the soaring stock market.

The 1920s marked the beginning of mass production and the emergence
of consumerism in America, with automobiles a prominent symbol of the
latter. In 1919, there were just 6.7 million cars on American roads. By
1929, the number had grown to more than 27 million cars, or nearly one
car for every household. During this period banks offered the country’s
first home mortgages and manufacturers of everything – from cars to
irons – allowed consumers to pay “on time.” Installment credit soared
during the 1920s. About 60% of all furniture and 75% of all radios were
purchased on installment plans. Thrift and saving were replaced in the
new consumer society by spending and borrowing.

Encouraging the spending, the three Republican administrations of the
1920s practiced laissez-faire economics, starting by cutting top tax
rates from 77% to 25% by 1925. Non-intervention into business and
banking became government policy. These policies led to overconfidence
on the part of investors and a classic credit-induced speculative boom.
Gambling in the markets by the wealthy increased. While the rich got
richer, millions of Americans lived below the household poverty line of
$2,000 per year. The days of wine and roses came to an abrupt end in
October 1929, with the Great Stock Market Crash.

Between 1929 and 1932, the market fell 89% from its high. The
Keynesian storyline is that Herbert Hoover’s administration did nothing
to try and revive the economy. It took Franklin Delano Roosevelt and his
New Deal Keynesian policies to save the country. It’s a nice story, but
completely false. Between 1929 and 1933, when Roosevelt came to power,
the Hoover administration increased real per-capita federal expenditures
by 88%, not exactly austere.

Excessive Consumer Spending

When examining the BEA chart of GDP from 1929 to 1939, some
fascinating similarities with today’s economy leap out. In 1929,
consumer expenditures accounted for 72.3% of GDP, confirming that the
much-commented-upon American consumerism is not a modern development. In
fact, consumer spending peaked at 81% of GDP in 1932 and remained above
70% during the entire depression.

By 1950 consumer expenditures had subsided to 64% of GDP. In 1960,
they had fallen to 63% and edged up to 64% by 1970, where they remained
until 1980. By 1990 they had ticked up to 66% and by 2000 had reached
68%. The modern-day climax appeared to many to have been reached in 2007
at 70% of GDP. But in a replay of the New Deal playbook, where much of
the consumerism was funded by make-work projects and federal transfer
payments, the federal government has thrown billions of dollars at
consumers to buy houses, cars, and appliances. Consumer expenditures as a
percentage of GDP actually rose to 71% in
2009. It should be readily apparent that until consumer expenditures are
narrowed to a level that leads to a sustainable balanced economy, the
current depression will continue indefinitely.

Bureau of Economic Analysis National Income and Product Accounts Table

Table 1.1.6A. Real Gross Domestic Product, Chained (1937) Dollars [Billions of chained (1937) dollars]
   1929   1930   1931   1932   1933   1934   1935   1936   1937   1938   1939 
Gross domestic product 87.3 79.8 74.6 64.9 64.0 71.0 77.3 87.4 91.9 88.7 95.9
Personal consumption expenditures 63.1 59.7 57.8 52.6 51.5 55.1 58.5 64.5 66.8 65.8 69.4
Gross private domestic investment 12.2 8.1 5.1 1.5 2.3 4.1 7.6 9.7 12.2 8.0 10.3
Net exports of goods and services 0.8 0.4 0.2 0.0 -0.1 0.2 -0.5 -0.3 0.1 0.9 1.0
Government consumption expenditures and gross investment 9.2 10.2 10.6 10.2 9.9 11.1 11.5 13.4 12.8 13.8 15.0

The Depression Within the Depression

The Great Depression lasted from 1929 until 1940. What is not well
known is that GDP was at the same level in 1936 as it had been in 1929.
In no small part because GDP soared by 37% between 1933 and 1936. The
unemployment rate in 1929 was 5%. In 1936, even after GDP had recovered
to pre-depression levels, the unemployment rate was still 15%. It spiked
back to 18% in 1938 and stayed above 15% until World War II. Tellingly,
in 1936, private domestic investment was 21% below the level of 1929.

By contrast, government expenditures surged by 46% between 1929 and
1936. With the government creating agencies and hiring people into
make-work projects, private industry was crowded out. The extensive
governmental economic planning and intervention that began during the
Hoover administration was expanded significantly under Roosevelt. The
bolstering of wage rates and prices, expansion of credit, propping up of
weak firms, and increased government spending on public works prolonged
the Great Depression.

The evidence strongly contradicts the notion promoted by Krugman and
other Keynesian worshippers that the supposed 1937-38 Depression within
the Great Depression was caused by Roosevelt becoming a believer in
austerity. In fact, GDP only dropped by 3.5% in 1938 and rebounded by
8.1% in 1939. What actually collapsed in 1938 was private investment,
which fell 34%. By contrast, government spending declined by only 4.5%
in 1938, confirming that Roosevelt did not slash spending. To the extent
that he eased up on the accelerator, it was by cutting back on jobs
programs like those provided by the Works Progress Administration and
the Public Works Administration.

The reason private investment collapsed in 1938 was Roosevelt’s
anti-business crusade. He denounced big business as the cause of the
depression. In March 1938, FDR appointed Yale University law professor
Thurman Arnold to head the antitrust division of the Justice Department.
Arnold soon hired some 300 lawyers to file antitrust lawsuits against
businesses. Arnold launched cases against entire industries, with
lawsuits against the milk, oil, tobacco, shoe machinery, tires,
fertilizer, railroad, pharmaceuticals, school supplies, billboards, fire
insurance, liquor, typewriter, and movie industries.

The Greater Depression and Excessive Debt

Some Conclusions

The mainstream media’s popular narrative about the causes and cure
for the Great Depression invariably start with the storyline that the
stock market crash caused the Great Depression. Herbert Hoover
purportedly refused to spend government money in an effort to
reinvigorate the economy. Franklin Delano Roosevelt’s New Deal
government spending programs allegedly saved America.

This storyline is a big lie.

The Great Depression was caused by Federal Reserve expansion of the
money supply in the 1920s that led to an unsustainable credit-driven
boom. When the Federal Reserve belatedly tightened in 1928, it was too
late to avoid financial collapse. According to Murray Rothbard, in his
book America’s Great Depression, the artificial interference in
the economy was a disaster prior to the depression, and government
efforts to prop up the economy after the crash of 1929 only made things
worse. Government intervention delayed the market’s adjustment and made
the road to complete recovery more difficult.

The parallels with today are uncanny. Alan Greenspan expanded the
money supply after the dot-com bust, dropped interest rates to 1%,
encouraged a credit-driven boom, and created a gigantic housing bubble.
By the time the Fed realized they had created a bubble, it was too late.
The government response to the 2008 financial collapse has been to
expand the money supply, reduce interest rates to 0%, borrow and spend
$850 billion on useless make-work pork projects, encourage spending by
consumers on cars and appliances, and artificially prop up housing
through tax credits and anti-foreclosure programs. The National Debt has
been driven higher by $2.7 trillion in the last 18 months.

The government has sustained insolvent Wall Street banks with $700
billion of taxpayer funds and continues to waste taxpayer money on
dreadfully run companies like Fannie Mae, Freddie Mac, General Motors,
and Chrysler. The government is prolonging the agony by not allowing the
real economy to bottom and begin a sound recovery based on savings,
investment, and sustainable fiscal policies. President Obama continues
to scorn business by creating more burdensome healthcare, financial, and
energy regulations.

Today’s politicians and monetary authorities have learned the wrong
lessons from the Great Depression. The result will be a second, Greater
Depression and more pain for the middle class. The investment
implications of government stimulus programs are further debasement of
the currency and ultimately inflation and surging interest rates. Owning
precious metals and mining stocks, and shorting U.S. Treasuries will
pay off over the next few years. 

Regular Casey Report contributor James Quinn is the head of
strategic planning for one of the world’s most prestigious business
schools and the host of blog.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
trip nixon's picture

I don't know how to submit tips to Tyler, but I made a startling discovery this weekend. I cropped and pasted the rallies from March to mid-April (the second leg up on the rally) to the most recent rally from Sept to mid-Oct. What I discovered were two charts that were almost visually identical, and also the same height.

My question for Tyler and his experts is: What are the odds of this happening in nature?

My website looks at historical comparisons to look for trading edges:

Implicit simplicit's picture


Keeping my cash insurance for a couple of years. I think the old saying of "buy the rumor , sell the news" will apply to QE2. Frontrun QE2-sell the news.

treemagnet's picture

I agree, except I already voted bearish until I found ZH and discovered I was competing with Ben's POMO bullshit.  But, it ain't over - I'm just early.

Shocker's picture

We are the closest thing to a depression.




Winston Smith 2009's picture

Could this have something to do with the fact that 70% of the trades are now from HFT? In other words, computer algorithms gradually producing the same approximate curve in both cases?

SteveNYC's picture

I believe you've nailed it. Anything "organic" would have, and has, sold this market a long time ago. It is merely a scalping mechanism now for HFT and established Wall St. chop-shops.....until it is not. 

How many times will the Earth appear to "normally" rotate the sun until something disrupts its (and therefore the entire solar systems) orbit (removal of a condition)? How many times can HFT run the market up in what appears to be a "normal" fashion, before one condition is removed and the whole thing comes down? What will this "condition" be?

Even the hedge funds are starting to drop out of the charade as they simply can not justify their existence anymore, in many cases.

Just sit on the sidelines and watch, in my opinion I believe that, in our lifetimes, we are guaranteed to see a phenomenal event concerning "markets".

Rasna's picture

I agree...

The initial "model" produced a result with a positive outcome... Having proved the hypothesis and confirmed the "facts" (Can the market be manipulated to produce a desired outcome - higher and higher prices that are decoupled from economic reality and fundamentals?)

  Yes, by massive injections of liquidity... Can this process be repeated?  Let's try by resetting the model and the initial conditions.  Ergo, the latest ramp that looks identical to the first.

If you think about chaos theory, and the uncertainty associated with large inherently unstable systems, with many degrees of freedom, relying on the model to repeat the results indefinitely (or even a 3rd time) is like playing Russian roulette... Eventially a round will be chambered, and the player (Fed) will blow their brains out.

jeff montanye's picture

and i agree.  three times won't be the charm.  two will be pushing it but i'm shooting for lower treasury yields, gold and stocks by the new year.  more muted than '08 but worth trading.  we shall see.  what diversifies (complements) a gold and silver portfolio best over the next five years?  besides lead (brass, ammo, guns) and spam (etc.).  thanks.

greyghost's picture name is IGNORATI BOOBUS AMERICANUS....i have drunk from the poisoned well.....i need help...that is why i am here

ZackLo's picture

Murray N. Rothbard was brilliant, I wish I could have met the man before he died.

If you guys are interested heres some of his lectures on the 20th century....

his voice is a little repetitive because of the audio at first but you get used to the quality after listening to a couple, Definitly a scholar with analyzation of history thats impeccable.

Sean7k's picture

Very well constructed argument. Could have delved into the creation of cartels, protection of unions and other government snafu's during the depression, but overall- right on the money. Thanks!

B9K9's picture

Hey Sean, I liked the comment you made on a previous thread where you noted that governments exist primarily for the benefit of the governors. Once one has this proper orientation, it becomes much easier to analyze and synthesize the various programs initiated under the rubic of 'common good'.

Keynes is an excellent example. Rather than have any meaningful effect, its purpose is solely devoted to protecting & advancing the control mechanisms already in place to further enrich the controllers. Any residual effect serves only to calm the herd to forestall potential rebellion.

It's a mistake to get caught debating angels on a pinhead. That is, actually question the merits of Keynes - it's merely a diversion. To paraphrase Voltaire, if Keynes didn't exist, the power-elite would have had to invent him. IOW, some/any mechanism had to be advanced (and blessed with academic respect) that promoted the policies we see today to ensure the PTB maintain their control.

Our only possible way out is if they have finally miscalculated. It's a rare event, but it happens periodically throughout history. Here's hoping for our generation.

Sean7k's picture

Thanks. It is the result of studying Rothbard and anarcho-capitalism, but it makes sense to me. 

I agree about Keynes, in fact, I would argue the elites did use Smith, Ricardo and Mills to great effect. Always using the useful part of their theory and discarding or downplaying the part that was in conflict. 

I think our only way out is to realize that these are incredibly intelligent and resourceful people. To know thy enemy as you know thyself. To realize their move will not be predictable or expected, but will work very well and be prepared. 

I have been studying up on operation blue beam as of late and that is one interesting segue to global control. A little tinfoilish, but then, I'm a tinfoil kind of guy.

By the way, I always enjoy your posts, very informative.

sgt_doom's picture

You, sir, sound like a true scholar.....

Red Neck Repugnicant's picture

I disagree.

Not only is it factually incorrect, it's poorly written.


Sean7k's picture

Well. perhaps you can clarify as to how and why? or are you such an esteemed scholar it is not necessary.

traderjoe's picture

RNR is the Andy Kaufman of ZH. He is a performance artist. Popping in simply to rile people up and watch the fireworks. Pay him no heed. 

jeff montanye's picture

but it is mill (john stuart) not mills.  keynes is also very imperfectly explicated on this website (my favorite).  he is confused with his bastardization, obfuscation, manipulation and actual inversion by the "power elite", the "politicians", the "government".  he said the government should save in an expansion so as to dissave in a contraction.  that's not what they did.  they dissaved in an expansion and now seek to save in a contraction.  it's not keynes' fault.  he, in a way like jesus and others, found a truth that was true but very hard to follow.

p.s. good kings have done this, in a less rigorously described way, since the invention of agriculture.

Sean7k's picture

Still, he believed in government intervention. This is problematic. I will agree the monetarists are at the root of the problem, but as fabian socialist, Keynes believed in the idea of a superior intelligence guiding common people for their benefit. A superior intelligence residing in a select elite. He believed in government above free markets and here he is a failure.

pan-the-ist's picture

You sir, are but dirt on the toe of a worm that Keynes stepped on.

tmosley's picture

You're a moron.

There weren't any facts presented in that post, only opinions based on the works of others (which is fine).  To wave off the post as factually incorrect only demonstrates that you failed to read/understand what he was saying.

Why don't you go back to the Obama forums, and leave the adults in peace?  If you just like to be a troll, go to 4chan.  I'm sure you'll get more of a reaction there.

New_Meat's picture

Love it: facts wrong and grammar police at the same time!

I'd bet your neck isn't really red.

- Ned

StychoKiller's picture

So, does "Tan in a Can" come in other colors besides orange, then? :>D

New_Meat's picture

comes with a racist tax ;-)

MisesFTW's picture

Nice post, sans anarcho-capitalism. IMO, It's garbage. I've been to the Mises Institute and was not impressed by Murphy's defense, or Walter Bloch's for that matter. I also found that indirectly, and sometimes directly, connecting Austrian economics to libertarianism / movement, if you will, very unsettling.

Austrian economics looks great on paper; as did Keynesian economics. Keynesian economics was implemented, i'm sure we all know why. Austrian economics will NEVER be implemented. Human reaction toward greed, fear, competition, etc is not conducive to Austrian economic policies. I postulate this using human history as my source.

Bob's picture

Agreed.  The Great Keynes v. Mises Debate is just another blue team-red team spectacle wrt the real world, though I expect that "Austrian economics" will be unleashed once "Keynesianism" has run its useful course for TPTB, rolled out to great fanfare and enthusiastic applause from the other end of the stadium. 

Reminds me of dogs chasing cars. 


New_Meat's picture

Bob, I like your line of thinking.  Are there enough non-Keynsians (let alone Austrians) to fill all of the slots?

Great debate ;-)

- Ned

Bob's picture

Love that video.  Ya gotta love Austrian theory, too, but what about that human wildcard?  Seem to me that "austrian" is more meaningfully contrasted with socialism than with keynsianism, given the profound social restructuring that such a elegantly simple and apparently perfect system would require. 

It's a beautiful idea.  The same could be said for socialism.  Good luck with either form of idealism. 

The human animal always gets in the way. 

Cathartes Aura's picture

nice to see someone post a recognition that "these are incredibly intelligent and resourceful people" - rather than the usual "oh man, they are sooo stoopid!!!" - I liked your post Sean 7k. . . it's good to research circles around their actions, rather than just follow up from behind them.

with regards operation blue beam - don't know if you caught the press on sept. 27th (I don't "do" news much, though I often follow links from some of the smarter ones here at ZH), but this is a good link to the variants:

quite the wild ride should these possibles be "unveiled", eh? hehe.

DavidPierre's picture
Astronauts, generals, top officials reveal major UFO cover-up in this UFO video (90 min)


{Yeah... I know... they all are nuts and you know better... this is just "tin-foil-hat" stuff.  Watch it first then you make up your already closed mind.}

New_Meat's picture

Gotta ask Art Bell.

- Ned

Cathartes Aura's picture

not sure if your end comment was directed at me? DavidPierre. . .

my mind is "open" to probabilities, and my beliefs are that even if I don't actually have direct experience of some thing, that does not preclude an other human having that experience. . . nor does it mean that I might not have that experience at some point in "the future". . .

I've had a lot of "experiences" that others would discount - and fair enough, they are mine, after all. . . *grins*

my post above this regarding the "press releases" was merely pointing to a path-to-storyline that may possibly unfold in the future, and I certainly wouldn't put anything past those who write the world's script(s). . . the "masses" are being gifted with HUGE screen TVs, HiDef, 3D, quad surround system sound, lol - how hard will it be to create a mass hallucination, really? the cables have been laid. . .

tip e. canoe's picture

agree w/ aura once again.   the question is not whether or not aliens/UFOs/ETs exist amongst us but why all of a sudden after years and years of ex-military/NASA/astronauts etc etc etc going public does this testimony start getting coverage by reuters, MSNBC, ABC etc etc etc?

the medium IS the message.  
coming soon to a sky near you.

goldbugs better hope they don't come calling themselves the Annunaki ;~)

DavidPierre's picture

C A:

That was a generalized "You" not aimed at you.

Sorry for the confussion.  It was very late last night.

That end comment was for the fast draw junkers.

Pants McPants's picture

Excellent comment, especially paraphrasing Voltaire.  It has been a six year journey for me, from lefty (grew up in MN) to righty (military) to Ron Paul to anarcho-capitalism.  With the exception of now, every previous philosophy didn't sit right.  There were contraditions.  There were shysters.

I think it was Frank Shostak of the Mises Institute who said it, but he said something to the effect of government need for Keynesian policies preceeded Keynesian economics.

Despite the gloomy nature of my response, I believe in (most) of our generation.  Unfortunately it's going to take a long time to wake up most people.....and I need to work on my patience - especially with my ignorant friends!

nuinut's picture

IMO, Edward Bernays' contribution was probably on a par with Keynes, he has just remained under a lot more radars. But that's really just another angel to fit on that pinhead. 

Bob's picture

The best solution is always the one that's never been tried and  beacons from that wondrous land just over the horizon. 

ebworthen's picture

Besides being economic fellatio that will produce no children, the bailouts and sanctioning of privatized gains and socialized losses of the hedonic oligarchy reinforced the laxity of the indolent and lust for mammon of the corrupt to the shame and detriment of the responsible wishing to live free.

tsx500's picture

 . . . . you had me at fellatio ........

Paul E. Math's picture

I'm thinking the bailouts were more like another sexual act that would also be unlikely to produce any children.  Except, perhaps, those kids that you 'drop off at the pool'.

traderjoe's picture

Wow, a fantastic turn of the phrase...

sushi's picture

Great article!! Too bad they couldn't blame the Chinese for the 1929 crash and subsequent depression.

Also, why is no one reporting on the contribution of American industry? Walmart is responsible for 10% of US imports from China, each of the Fortune 500 has major operations in China and all of them benefited by exporting jobs and capital and re-importing finished product.

11b40's picture

Yes, Sushi, and you are touching on another major point. 

In the 30's & 40's, we still made things in this country but unemployment still remained in the 15% range until WW2.  How do we expect to add jobs in today's environment?  Low demand = Low investment = Few new jobs = Lower demand = Lower investment = Even fewer jobs = .......

sushi's picture

I think the issue in the '30s and '40s is that there was a major agricultural failure and the population was driven off the land. This collapsed demand and there was no way to reabsorb those who had left the farm. Did not matter what the Fed did, it was not able to reignite the economy.

The irony today is that a lot of the Fed's liquidity is being moved overseas and invested in  EM, increasing thier productive capactiy and employment levels. My hunch is that we see the ROW pick up and undergo expansion, ROW demand will boost commodities demand (oil) and this will feed through into the advanced economies which will still not see job growth but will see higher input costs, decreasing margins and cost of living increases as consumers absorb the higher prices resulting from a yuan revaluation.

I doubt war would offer a solution. You no longer need that many boots on the ground, or expensive airfleets. Just a couple of tomahawks and ROVs being flown out of Nevada.

BurningFuld's picture


"Walmart is responsible for 10% of US imports from China, each of the Fortune 500 has major operations in China and all of them benefited by exporting jobs and capital and re-importing finished product" that Americans had to borrow money to purchase.

Now the loop is complete.

tmosley's picture

There have been plenty of agricultural failures prior to that, and it never caused a 15 year depression before.

That is not what caused the depression.  It was 100% caused by government meddling in the economy.  Look at the differences in the initial economic shock and length of the GD and the Depression of 1920, then compare the reactions of the government.

Fred Hayek's picture

Amen.  Besides Rothbard's book about the depression, Liaquat Ahamed's book, The Lords of Finance, does a great job explaining how the central banks, especially the Fed, caused the great depression and worsened things when there was still time to head off the depths of it.