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Repeating Mistakes From the Great Depression?

great depressionRepublican Herbert Hoover and Democrat Franklin D. Roosevelt would both feel right at home in today’s Washington.

In an article in the London Telegraph, economists Charles Rowley of George Mason University and Nathanael Smith of the Locke Institute suggest there are “troubling similarities” between the current administration’s actions and those which in the 1930s sent the U.S. and much of the world spiraling into the Great Depression.

Hoover and Roosevelt made four big mistakes:

1. Increasing government spending, running huge deficits, with the hope that the increased spending would give jobs to the unemployed.
2. Raising income taxes on the rich with the hope that tax revenues would increase to fund the huge deficits.
3. Raising tariffs on foreign goods coming into the country, with the misguided notion that doing so would protect American jobs.
4. Allowing the banks to fail and raising interest rates.

Obama and Congress have made varying degrees of three of those same mistakes.

“The prognosis is catastrophic if projected government policies are not cut back,” say Rowley and Smith. According to President Obama, in 2009 the federal budget deficit (our national overspending rate) will be $1.6 trillion. This accounts for 11.2% of the overall economy, and it’s all borrowed money. It’s the highest overspending rate by our government since WWII.

As a result of our deficit spending, our national debt has doubled from $5 trillion to over $10 trillion in just a few years. The current administration wants to add even more debt with national health care, cap and trade taxes on carbon emissions, and possibly a third stimulus bill. If these proposals pass, the national debt will double again by 2019 and will represent 76.5% of the overall economy.

Our debt was similar to countries like England, Switzerland, and the Netherlands, which have national debts 40% to 50% of their overall economy. Our new debt level will be similar to those of Greece, Italy, and Jordan. Rowley and Smith say such a high national debt will guarantee “the international reserve status of the US dollar will not survive.”

As other countries  react to our deteriorating financial stability, they will begin to pull their investments out of the US. This will result in the dollar continuing to weaken and interest rates rising, which will leave Congress no choice but to either increase taxes or slash spending. In my mind there is no question that the current President and Congress will raise taxes. “In such circumstances, the US economy will teeter on the edge of a black hole,” say Rowley and Smith.

This brings us to the second “big mistake” that helped to create the Depression—higher taxes. One of the largest tax increases in our history is scheduled to happen in 2011. Many experts predict the taxes for small businesses will increase around 33%. This will mean people and businesses have less to spend, exacerbating our economic problems, stagnating the economy, and guaranteeing the jobless rate remains high.

Hoover tried to protect U.S. jobs by raising tariffs (taxes) on imported goods. Obama, while promising world leaders not to become protectionistic, has gradually raised tariffs on an array of imports, including a 35% tariff on tires imported from China.

The fourth mistake has been avoided, probably due to Federal Reserve Chairman Bernanke doing everything in his power to not replicate the mistakes made in the Great Depression.

No one can predict whether or when we may face another downturn in the economy and stock market. What this investment advisor is sure of is that, without a change in our economic policies, our economy will flounder for many years to come.

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One Response to Repeating Mistakes From the Great Depression?

  1. Bob Nusbaum October 20, 2009 at 10:18 am #

    There is a great documentary called I.O.U.S.A that explores the problems with what it calls the “four deficits”: Budget, Trade, Savings and Leadership. As a fellow fee-only planner, I have highly recommended it to my clients. Is is available as an instant selection on Netflix and there is a free 30-minute mini version of it available at http://www.PGPF.org.

    I have also encouraged clients to learn more about the FairTax (www.Fairtax.org). It is an amazing proposal to replace all federal tax systems with one simple, fair and transparent national retail sales tax on new goods and services. Our tax code would go from about 65,000 pages to just hundreds and compliance costs would decrease over 90% (from an estimated $300-$500 billion.) It would also spur the creation of millions of jobs.