Yes, while many say we're nowhere near as bad as The Great Depression, it depends on who you ask. More than a few fixed income, homeless & bankrupt families would tell you differently. I know, some are relatives of mine...
The second stark reality is we're nowhere near the bottom yet. We may be limping along for short spells, but the path remains downhill. As long as we continue in our sin and spiritual depravity, the course WILL NOT change, but worsen.
I steadfastly contend that America will not stand as we know her. Our realignment with Europe is a harsh & likely probability within the next 30 years. It is no great leap to understand that we are no longer a democratic republic, but a socialist oligarchy. Pray, pray without ceasing...
____________NEWS_______________
The Reckoning
Dollar Shift: Chinese Pockets Filled as Americans’ Emptied
By MARK LANDLER, Published: December 25, 2008, NYTimes
Gilles Sabrie for The New York Times: American trade and budget deficits have grown worse and Treasury Secretary Henry Paulson Jr., with President Hu Jintao of China, has not been able to allay the problem.
“Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.” — Niall Ferguson
Left, Pool photo by Elizabeth Dalziel; Right, Gilles Sabrie for The New York Times Federal Reserve Board Chairman Ben S. Bernanke, left, and Yu Yongding, right, a leading Chinese economic adviser, said that the American trade and budget deficits were growing more serious.
WASHINGTON — In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.
This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”
Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.
In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.
China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.
“This was a blinking red light,” said Kenneth S. Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. “We should have reacted to it.”
In hindsight, many economists say, the United States should have recognized that borrowing from abroad for consumption and deficit spending at home was not a formula for economic success. Even as that weakness is becoming more widely recognized, however, the United States is likely to be more addicted than ever to foreign creditors to finance record government spending to revive the broken economy.
To be sure, there were few ready remedies. Some critics argue that the United States could have pushed Beijing harder to abandon its policy of keeping the value of its currency weak — a policy that made its exports less expensive and helped turn it into the world’s leading manufacturing power. If China had allowed its currency to float according to market demand in the past decade, its export growth probably would have moderated. And it would not have acquired the same vast hoard of dollars to invest abroad.
Others say the Federal Reserve and the Treasury Department should have seen the Chinese lending for what it was: a giant stimulus to the American economy, not unlike interest rate cuts by the Fed. These critics say the Fed under Alan Greenspan contributed to the creation of the housing bubble by leaving interest rates too low for too long, even as Chinese investment further stoked an easy-money economy. The Fed should have cut interest rates less in the middle of this decade, they say, and started raising them sooner, to help reduce speculation in real estate.
Today, with the wreckage around him, Mr. Bernanke said he regretted that more was not done to regulate financial institutions and mortgage providers, which might have prevented the flood of investment, including that from China, from being so badly used. But the Fed’s role in regulation is limited to banks. And stricter regulation by itself would not have been enough, he insisted.
“Achieving a better balance of international capital flows early on could have significantly reduced the risks to the financial system,” Mr. Bernanke said in an interview in his office overlooking the Washington Mall.
“However,” he continued, “this could only have been done through international cooperation, not by the United States alone. The problem was recognized, but sufficient international cooperation was not forthcoming.”
The inaction was because of a range of factors, political and economic. By the yardsticks that appeared to matter most — prosperity and growth — the relationship between China and the United States also seemed to be paying off for both countries. Neither had a strong incentive to break an addiction: China to strong export growth and financial stability; the United States to cheap imports and low-cost foreign loans.
In Washington, China was treated as a threat by some people, but mostly because it lured away manufacturing jobs. Others argued that China’s heavy lending to this country was risky because Chinese leaders could decide to withdraw money at a moment’s notice, creating a panicky run on the dollar.
Mr. Bernanke viewed such international investment flows through a different lens. He argued that Chinese invested savings abroad because consumers in China did not have enough confidence to spend. Changing that situation would take years, and did not amount to a pressing problem for the Americans.
“The global savings glut story did us a collective disservice,” said Edwin M. Truman, a former Fed and Treasury official. “It created the idea that the world was doing it to us and we couldn’t do anything about it.”
But Mr. Bernanke’s theory fit the prevailing hands-off, pro-market ideology of recent years. Mr. Greenspan and the Bush administration treated the record American trade deficit and heavy foreign borrowing as an abstract threat, not an urgent problem.
Mr. Bernanke, after he took charge of the Fed, warned that the imbalances between the countries were growing more serious. By then, however, it was too late to do much about them. And the White House still regarded imbalances as an arcane subject best left to economists.
By itself, money from China is not a bad thing. As American officials like to note, it speaks to the attractiveness of the United States as a destination for foreign investment. In the 19th century, the United States built its railroads with capital borrowed from the British.
In the past decade, China arguably enabled an American boom. Low-cost Chinese goods helped keep a lid on inflation, while the flood of Chinese investment helped the government finance mortgages and a public debt of close to $11 trillion.
But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.
“Nobody wanted to get off this drug,” said Senator Lindsey Graham, the South Carolina Republican who pushed legislation to punish China by imposing stiff tariffs. “Their drug was an endless line of customers for made-in-China products. Our drug was the Chinese products and cash.”
Mr. Graham said he understood the addiction: he was speaking by phone from a Wal-Mart store in Anderson, S.C., where he was Christmas shopping in aisles lined with items from China.
A New Economic Dance
The United States has been here before. In the 1980s, it ran heavy trade deficits with Japan, which recycled some of its trading profits into American government bonds.
At that time, the deficits were viewed as a grave threat to America’s economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world’s major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.
The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan’s rapid growth. The lesson of the Plaza Accord was not lost on China, which at that time was just emerging as an export power.
China tied itself even more tightly to the United States than did Japan. In 1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to the dollar, a level that remained fixed for a decade.
During the Asian financial crisis of 1997-98, China clung firmly to its currency policy, earning praise from the Clinton administration for helping check the spiral of devaluation sweeping Asia. Its low wages attracted hundreds of billions of dollars in foreign investment.
By the early part of this decade, the United States was importing huge amounts of Chinese-made goods — toys, shoes, flat-screen televisions and auto parts — while selling much less to China in return.
“For consumers, this was a net benefit because of the availability of cheaper goods,” said Laurence H. Meyer, a former Fed governor. “There’s no question that China put downward pressure on inflation rates.”
But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.
It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency — primarily dollars — that they earned from foreign trade and investment.
As foreign trade surged, this hoard of dollars became enormous. In 2000, the reserves were less than $200 billion; today they are about $2 trillion.
Chinese leaders chose to park the bulk of that in safe securities backed by the American government, including Treasury bonds and the debt of Fannie Mae and Freddie Mac, which had implicit government backing.
This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise have been. For years, China’s government was eager to buy American debt at yields many in the private sector felt were too low.
This financial and trade embrace between the United States and China grew so tight that Niall Ferguson, a financial historian, has dubbed the two countries Chimerica.
‘Tiptoeing’ Around a Partner
Being attached at the hip was not entirely comfortable for either side, though for widely differing reasons.
In the United States, more people worried about cheap Chinese goods than cheap Chinese loans. By 2003, China’s trade surplus with the United States was ballooning, and lawmakers in Congress were restive. Senator Graham and Senator Charles E. Schumer, Democrat of New York, introduced a bill threatening to impose a 27 percent duty on Chinese goods.
“We had a moment where we caught everyone’s attention: the White House and China,” Mr. Graham recalled.
At the People’s Bank of China, the central bank, a consensus was also emerging in late 2004: China should break its tight link to the dollar, which would make its exports more expensive. Yu Yongding, a leading economic adviser, pressed the case. The American trade and budget deficits were not sustainable, he warned. China was wrong to keep its currency artificially depressed and depend too much on selling cheap goods.
Proponents of revaluation in China argued that the country’s currency policies denied the fruits of prosperity to Chinese consumers. Beijing was investing their savings in low-yielding American government securities. And with a weak currency, they said, Chinese could not afford many imported goods.
The central bank’s English-speaking governor, Zhou Xiaochuan, was among those who favored a sizable revaluation.
But when Beijing acted to amend its currency policy in 2005, under heavy pressure from Congress and the White House, it moved cautiously. The renminbi was allowed to climb only 2 percent. The Communist Party opted for only incremental adjustments to its economic model after a decade of fast growth. Little changed: China’s exports kept soaring and investment poured into steel mills and garment factories.
But American officials eased the pressure. They decided to put more emphasis on urging Chinese consumers to spend more of their savings, which they hoped would eventually bring the two economies into better balance. On a tour of China, John W. Snow, the Treasury secretary at the time, even urged the Chinese to start using credit cards.
China kicked off its own campaign to encourage domestic consumption, which it hoped would provide a new source. But Chinese save with the same zeal that, until recently, Americans spent. Shorn of the social safety net of the old Communist state, they squirrel away money to pay for hospital visits, housing or retirement. This accounts for the savings glut identified by Mr. Bernanke.
Privately, Chinese officials confided to visiting Americans that the effort was not achieving much.
“It is sometimes hard to change successful models,” said Robert B. Zoellick, who negotiated with the Chinese as a deputy secretary of state. “It is prototypically American to say, ‘This worked well, but now you’ve got to change it.’ ”
In Washington, some critics say too little was done. A former Treasury official, Timothy D. Adams, tried to get the I.M.F. to act as a watchdog for currency manipulation by China, which would have subjected Beijing to more global pressure.
Yet when Mr. Snow was succeeded as Treasury secretary by Henry M. Paulson Jr. in 2006, the I.M.F. was sidelined, according to several officials, and Mr. Paulson took command of China policy.
He was not shy about his credentials. As an investment banker with Goldman Sachs, Mr. Paulson made 70 trips to China. In his office hangs a watercolor depicting the hometown of Zhu Rongji, a forceful former prime minister.
“I pushed very hard on currency because I believed it was important for China to get to a market-determined currency,” Mr. Paulson said in an interview. But he conceded he did not get what he wanted.
In late 2006, Mr. Paulson invited Mr. Bernanke to accompany him to Beijing. Mr. Bernanke used the occasion to deliver a blunt speech to the Chinese Academy of Social Sciences, in which he advised the Chinese to reorient their economy and revalue their currency.
At the last minute, however, Mr. Bernanke deleted a reference to the exchange rate being an “effective subsidy” for Chinese exports, out of fear that it could be used as a pretext for a trade lawsuit against China.
Critics detected a pattern. They noted that in its twice-yearly reports to Congress about trading partners, the Treasury Department had never branded China a currency manipulator.
“We’re tiptoeing around, desperately trying not to irritate or offend the Chinese,” said Thea M. Lee, public policy director of the A.F.L.-C.I.O. “But to get concrete results, you have to be confrontational.”
An Embrace That Won’t Let Go
For China, too, this crisis has been a time of reckoning. Americans are buying fewer Chinese DVD players and microwave ovens. Trade is collapsing, and thousands of workers are losing their jobs. Chinese leaders are terrified of social unrest.
Having allowed the renminbi to rise a little after 2005, the Chinese government is now under intense pressure domestically to reverse course and depreciate it. China’s fortunes remain tethered to those of the United States. And the reverse is equally true.
In a glassed-in room in a nondescript office building in Washington, the Treasury conducts nearly daily auctions of billions of dollars’ worth of government bonds. An old Army helmet sits on a shelf: as a lark, Treasury officials have been known to strap it on while they monitor incoming bids.
For the past five years, China has been one of the most prolific bidders. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America’s public debt.
The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration’s stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American habit.
Even so, Mr. Paulson said he viewed the debate over global imbalances as hopelessly academic. He expressed doubt that Mr. Bernanke or anyone else could have solved the problem as it was germinating.
“One lesson that I have clearly learned,” said Mr. Paulson, sitting beneath his Chinese watercolor. “You don’t get dramatic change, or reform, or action unless there is a crisis.”
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Economists, survivors say Depression can’t compare
By Don Mecoy, Published: December 25, 2008, News-OklahomaIn the Great Depression, many Americans lined up for food and soup. In the current economic crisis, many Americans line up to shop for bargains.
Although political and economic leaders have told us the current recession is America’s greatest economic crisis since the Great Depression, the two events are not comparable. And the differences are particularly acute at Christmas time.
Lloyd Mitchell, 90, of Oklahoma City said he felt fortunate to get some fruit in his stocking when he was growing up as the son of a tenant farmer in far southwest Oklahoma. Mitchell’s father grew cotton on hardscrabble land in an era of drought and record low prices.
"If you got an apple, orange and maybe a banana, you really liked that,” Mitchell said. "You didn’t eat them all at one time.”
Larkin Warner, economics professor emeritus of Oklahoma State University, said the current situation bears little resemblance to the devastation of the Great Depression.
"At this stage, to compare where we are today with the Great Depression seems to me to be kind of scare tactics,” Warner said. "For one thing, our standard of living is vastly higher than it was in those days. As a society, we’re vastly wealthier than we were in 1932.”
Consumer-driven economy
One reflection of that societal wealth is the fact that about 70 percent of the current U.S. economy is being driven by consumer spending.
While consumer spending has been contracting in recent months, the average holiday shopper plans to spend about $120 on themselves this Christmas, according to a recent survey by the National Retail Federation.
That simply wasn’t the case during the depths of the Depression.
"Everybody got one present,” said Bob Eve, a 77-year-old Nowata retiree. "A basketball would be a good example — we had a goal out on the garage where you shoot baskets — or a baseball glove. It was not bad.”
Shoppers this year on Black Friday, the frenzied day of consumerism taking place after Thanksgiving, spent an average of $372.57, the National Retail Federation reported.
More than half of respondents to a recent poll said they feel an obligation to shop to help boost the economy, and one in five said they are dipping into savings to pay for holiday gifts, according to a survey of 1,762 adults.
Warm memories
Despite the hardships, Mitchell said he has fond memories of Christmas in his youth.
"Mother would cook what she could cook on the old cookstove,” Mitchell said.
"It was Christmas and despite the very few things we had, we did enjoy it and had fun. We looked forward to it with great anticipation.”
Oklahomans struggling to provide for their families had few outside resources, such as food banks, to turn to, Mitchell said.
"A fellow raising his family was pretty much on his own,” he said.
"Money was so scarce; it was just so hard to get a hold of. I think unemployment ran around 25 percent.”
Eve also has tender memories of growing up in a tough economy.
On Saturdays, Eve’s father would give him a quarter, which would pay for a movie, some popcorn, a comic book and a 10-cent savings stamp.
"We ate good and wore good clothes and walked a mile to school through mud and snow,” Eve said. "Things weren’t that tough for us.”
Larkin, who has studied the Great Depression, said it’s important to remember that most Oklahomans lived in rural areas and many had no electricity or running water.
The current recession, as dramatic as it appears to be, is no Great Depression, Larkin said.
"I’m really quite uncomfortable with those kinds of comparisons. What it does is conjures up an image of the Joad family in their jalopy heading for California,” he said, referring to John Steinbeck’s Depression-theme novel, "The Grapes of Wrath.”
A 77-year-old Nowata retiree
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