The Great Depression was the result of a series of events that came together at the same time and thrust America into what would become an economic nightmare. Can this happen again? Let’s look at some of the major factors and see if those factors are present in today’s economy.
A sudden loss of economic faith. In the 1920’s, that day occurred on October 29, 1929. Known as Black Tuesday, a sudden collapse of the stock market created a wave of panic selling. Suddenly, many Americans found themselves financially wiped out. In 2008, a sudden unexpected collapse of the stock market caused the same crises. Suddenly, many financially secure families found themselves in a vastly different financial situation as their 401k’s, E-Trade Accounts, and their DRIP plans suddenly tanked.
A rapid loss of spending. You cannot spend money that you do not have. As the Great Depression enveloped the United States within its tentacles, the Federal Reserve began to tighten credit by raising interest rates in an effort to stave off inflation. As the Federal Reserve tightened interest rates, people simply began to stop spending. In 2008 what happened? The Federal Reserve loosened credit so as not to have a replay of the Great Depression, however, banks stopped lending money except to those with great credit. For those of us with some credit issues, what happened? Banks tightened lending. For example, my credit card interest rates were raised to 29.95%. All of my spare money goes to paying down my credit cards. Again, without access to credit, Americans cannot spend money.
Natural calamity struck. In 1930, a change in weather patterns unleashed a biblical drought and series of dust storms in the Midwest. Families, business and towns were wiped out and a massive exodus from the Midwest began to occur. In 2011, a series of biblical floods and tornadoes began to wipe out families, farms and businesses, in the Midwest. The effects of these floods have been mitigated by liberal government programs that were designed in the wake of previous massive disasters; however, there still is a massive economic upheaval in the Midwest. Let’s hope for a quiet hurricane season and no big earthquakes occur.
Weak government spending. In the 1930’s, Government did not want to spend money to help stimulate the economy. That changed with Franklin D. Roosevelt and his New Deal in 1933. FDR was committed to spending the United States out of the recession and he moved the United States into liberal spending policies. In 2011, the Congress and the President are threatening to remove trillions of money out of the economy in order to balance the budget. Without government spending, massive layoffs will begin to occur as programs are curtailed or spending cut. Just look at the US Space Shuttle program and what is happening with that program.
Will lawmakers shut down the government? Look at the State of Minnesota. Lawmakers unable to resolve their financial issues forced the state of Minnesota to shut down. The State of Minnesota has now been shut down for two weeks. All because lawmakers could not agree to a budget. I originally thought that there was no way Washington lawmakers would let the government default on our finances, now, I am not so sure.
What if the US defaults on our debt? Financial calamity will occur, gold prices will rise to unheard of rates and inflation will run wild. Unemployment will skyrocket, and life as we know it will end for the foreseeable future. As states hemorrhage funds, massive layoffs will occur, benefits will be cut and protests will occur. Business will cease to hire. And the second Great Depression will be officially underway.