The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It


Not infrequently, governments ‘shoot themselves in the foot.’ But in the current event, they have brought out the biggest cannon in history. We look on with amusement as they blow their fool heads off.

Readers are reminded of our Daily Reckoning Law: ‘The force of a correction is equal and opposite to the deception that preceded it.’ Today, we offer a corollary: ‘The greatness of a depression is commensurate to the government’s efforts to prevent it.’

Since these iron laws seem to contradict almost everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head:

“The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable,” explains Germany’s chancellor. She went on to suggest that maybe we shouldn’t repeat the errors of the past.

As a proxy for ‘deception’ in our handy dictum, substitute ‘money.’ And now consider it in its two misleading forms – credit and deficit spending. “Credit not backed by real savings is a fraud,” the great economist, Kurt Richebächer, used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy. Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid.

During the entire last half a century leading Western economists imagined a world that couldn’t exist for one minute – where consuming wealth makes people wealthier…and where simply making more credit available can stimulate consumption. Each time the economy slowed down, the authorities induced people to buy more of what they didn’t need with more money they didn’t have. This produced ‘growth.’ But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear.

In the first four U.S. recessions after the Great Depression, from the mid-’30s through the mid-’50s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds – witless, as usual – often increased them or left them alone. But deficit spending went up an average of 2.2% of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending.

As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new ‘growth’ the feds were after, but all the accumulated debt and mistakes from previous stimulus programs.

In the recession of 1973, Brookings Institution economist George Perry told Congress that “we should be pulling out all the stops” to fix it. The resulting fiscal and monetary stimulus program cost the U.S. 4% of GDP, according to an estimate by Jim Grant. Future generations of Fed governors and Treasury secretaries found more stops…and of course, pulled them out too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2% of GDP, according to Grant.

The deceptions of the Bubble Epoque, 2001-2007, were enormous. The correction has been enormous too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion – at least, here at The Daily Reckoning. The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded. France’s deficit is running at 8% of GDP. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged…an amount equivalent to a full year’s annual output of the United States of America. This response is 3 times more (adjusted to today’s dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.

It is, we will guess, what makes a great depression even greater.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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  1. Dear Old Hatters,
    Salty herring is best served with a sour dressing! Thanks for the relief that your corporate wit has provided over the past 2 years that I have followed this post, the truth has been made a little more palatable, and I believe that I have been getting the right “food to digest” by reading your material. In the midst of the correction, we wait for banks of the world to stop propping up their bottom lines by hoarding easy cash. While they choke off the economies and denude the wealth of western nations, the Chinese nation converts its surplus cash into metals stockpiles and bargain basement investments in water, metals, fibre, energy, real estate and food production (the only real assets). The tragedy is that this investment is found to be greatest where it creates the best value for China, in the nations worst served by the greedy and foolish banks. Capitalism, or perhaps economic imperialism really has moved to China!

    Sid Saxby
    May 5, 2009
  2. This one may make you smile………during the 20th century Australia suffered the labour party 5 times…… Tney bankrupted us each time.. .. Guess who’s in power right now ?… Cheers….Geo

  3. There were eight Labor governments in the twenty century according to Wikipedia.

    Two of those Labor governments have immediate relevancy for Australia today.

    The Scullin Labor party came to power an the end of the post-WW1 war boom. The nominal high in the Dow Jones peaked six weeks before Labor took office in 1929.

    The Whitlam Labor party came to power at the end of the post-WW2 war boom. The nominal high in the Dow peaked four weeks after Labor took office in 1972.

    The Rudd government came to power just as the post-Cold War boom, arguably, came to an end. The nominal high in the Dow Jones peaked eight weeks before Labor took office in 2007.

    “In sum, the Fed thought it had learned the lessons of the 1930s, but it had not learned the lesson of the 1920s, that allowing asset prices to soar to absurdly leveraged heights could lead to a financial collapse as the need to repay loans forced sales that drove prices lower, resulting in the need to repay more loans, and so on and so on” (Floyd Norris, Failing Upward at the Fed,, February 27, 2009).

    In the three instances above, the Australian Labor party came to power as the asset-bubbles that ballooned during the previous conservative governments that were to aggravate the recessions.

    The two quotes below put it into perspective:

    “Scullin had tried to grapple with the financial and social problems thrown up by the Depression but he failed. The Australian electorate was unable to associate Labor with financial expertise – a quality more readily seen in their opponents. Furthermore, the Labor Party had not been in power since 1917, and it came to the Treasury benches precisely when the profligate spending in the 1920s had begun to reap its fruit… Nonetheless, the inability of the Federal Government under Scullin to present to the electorate a carefully thought-out plan for economic recovery, even if it were defective, was a major cause of its downfall” (John Molony, History of Australia, (Ringwood: Viking, 1987), p.264).

    “This recession, the end of one era in the international economy and the beginning of another, was fully global in scope. No Australian government could have withstood the shock of 1973-75. Accordingly, one cannot agree with those who argue that sources of the economic difficulty facing the Whitlam government after mid-1974 were fundamentally domestic or that if a coalition government had held office at this time the difficulties faced might have been avoided. Yet more here needs to be said. It was Whitlam’s great misfortune that he came to power at the moment when the postwar capitalist Golden Age came to an end. It was his great weakness that he lacked the political skills to prevent this misfortune from turning the last eighteen months of his government into a period of high constitutional crisis and low political farce” (The Australian Century, Edited and Introduced by Robert Manne, (Melbourne, Text Publishing Company, 1999, p.204).

    Rudd finds himself in a similar boat as Scullin and Whitlam before him.

    The reason that we are in such a precarious situation is that there is no financial infrastructure to regularly pay off short- and long term debt.

    A third bubble, that is a government debt bubble, is required to bring the global economic/financial system to the point of overindebtedness that when the next crisis occurs governments and central banks will not be in a position to resist, for too long, the economic, technological and hegemonic restructuring that the markets will impose.

    “Our federal government has set a course to issue Trillions of Treasury securities and guarantee multi-Trillions more of private-sector debt. The Federal Reserve has set its own course to balloon its liabilities as it acquires Trillions of securities. After witnessing the disastrous financial and economic distortions wrought from Trillions of Wall Street Credit inflation (securities issuance)… the critical issue is whether the Treasury and Federal Reserve have set a mutual course that will destroy their creditworthiness – just as Wall Street finance destroyed theirs” (Doug Noland, Mistakes Beget Greater Mistakes,, March 20, 2009).

    Following the pattern of the 1930s and 1970s – Contraction, Expansion and Contraction – the first contraction for Today is nearly over and an inflationary ending expansion is about to begin, to be followed by a debt-deflation contraction – the Next Great Depression.

    “Despite today’s histrionic fixation on ‘deflation,’ current dynamics have some similarities to the post-tech Bubble period. Granted, the collapse of Wall Street finance is of much greater scope and consequence than the bursting of the tech Bubble. Yet I would counter that The Burgeoning Bubble in Government Finance is poised to make the Mortgage Finance Bubble appear tiny in comparison…

    “The Government Finance Bubble is enormous and powerful – and should be anything but underestimated. Akin to the previous Bubble in Wall Street finance, the epicenter of this Bubble is here in the U.S. But I would argue that this unfolding Bubble dynamic has greater potential to engulf the entire world than even U.S.-style mortgages and derivatives did starting back around 2002. Welcome to the new world of synchronized stimulus, deficits, and reflationary policymaking. I don’t believe true systemic deflation (as opposed to collapsing asset Bubbles) is a high probability scenarios as long as the Government Finance Bubble is rapidly inflating. All bets are off, however, if confidence in government debt falters. The worst case scenario – that should be avoided at all costs – is a massive inflation of government claims that sets the stage for a devastating bust.

    “It is imperative for policymakers to ensure that the Government Finance Bubble does not follow in the footsteps of the runaway excess associated with Wall Street/mortgage finance. Yet it’s clear that policymaking (monetary and fiscal) is setting a course to guarantee just such an outcome. And, as has been the case for some time now, markets are keen to fall in love with – and aggressively accommodate – whatever might be the Bubble of the Day. The Wall Street/Mortgage Finance Bubble ran to such incredible extremes that its subsequent implosion has created the near ideal backdrop for the explosion of Government Finance (as the tech implosion did for mortgage finance)…” (Doug Noland, The Government Finance Bubble,, February 6, 2009).

    A January post to this forum stated that “History suggests that the Dow Jones Industrial Average is on the cusp of a 70%+ rally over the next couple of years. It may even pass the 2007 high.”

    That rally appears to have began on March 9 and hopefully the Coppock Guide will turn up at the end of the month confirming the bull market:

    “Its historical value lies in signaling or confirming the best, low-risk buying opportunities in history – and it is one of the few technical tools that would have kept anxious investors from stepping prematurely into the middle of the record 1929-32 debacle or the 1973-74 bear market” (James Stack, Subscription Newsletter, May 8, 2009 –

  4. Touche’ Watcher!

    I didn’t know that about the Labour gov’s. Poor things. I really do feel for them, getting the rotten end of the economic stick as soon as they are in power.

    Not to suggest in any way that Rudd is doing a good job. Because he’s not. But what would Howard, Costello, or Turnbull be doing? Its easy for them to say they’d be doing great by comparing the last decades growth figures. The reality is that any Australian Gov. would have gone along for the ride on that bull market.

  5. It’s time that we all got a copy of a CD that’s currently going the rounds called ZEITGEIST….. WATCH THAT AND THEN TELL ME THAT ANY GOVERNMENT IS TRUSTWORTHY……..Geo


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