If you read economic news you notice that the Great Depression of the 1930’s is often mentioned, for example, that the GFC (ie the Global Financial Crisis) is “the greatest financial crisis since the Great Depression”. What if what we are heading towards is not just the greatest crisis since that time, but a greater crisis than that? What caused this crisis and what causes economic catastrophes like this?
One says it was the sub-prime mortgage meltdown. Others point to other reasons. I think very few sources really get the right idea. If I was to give a concise definition of the underlying reason for all depressions I would state this:
Economic depressions are caused by GREED running amok, unchecked, when governments remove the regulations that control it, and even assist in its wild ride.
I doubt you find this definition anywhere, this is purely mine, so if you quote it anywhere, don’t forget to refer to this site 🙂
You see, greed is always present, this is one of the worst human sins, but it is usually regulated. It cannot always do what it desires, so its harmful effect is limited. It causes pain, but not on a large scale, such as to bring down the whole world economy.
Let me explain in a bit more detail. We have the big banks and corporations with a lot of financial muscles. So in the 80’s they lobbied governments to deregulate them. Deregulations supposedly increase competition which is good for the whole economy. They should bring better prices for goods and services to consumers.
Governments deregulate, and then what happens? The banks, instead of truly competing with each other, come to agreement with each other, and governments and banks together launch an attack on the common people.
Have you heard of price fixing? Price fixing occurs between companies that compete for the same market. They agree to set similar prices and divide up the market between themselves and thus they make super profits. Price fixing is the end of competition.
Now banks did something similar. In agreement with each other they broke up their banking operations to small segments and each of them had to be profitable. While previously ATM withdrawals were free, now there is a fee attached withdrawals. While in the past you could deposit money into your account and leave it there for the decades to snowball into a large sum by accumulating interest, now banks charge account keeping fees and governments tax your savings to ensure it doesn’t happen. Inflation, tax and bank charges eat up not only the interest earned, but the purchasing value of the deposit itself.
Do you know what this is? Robbery. Legalised robbery.
So it makes no sense to save, and because of the Keynesian economic model followed religiously, governments don’t want you to save, they want you to spend. Supposedly that helps the economy. Maybe not.
What is good for businesses, must be good for everyone, right? Trickle down economy – have you heard this term? It means if you give the rich lots of money through tax cuts and other incentives, and the wealth will eventually trickle down to the lowest levels and employees will be better off as well. Unfortunately, this is a lie.
The extra wealth accumulates in the hands of the wealthy, and the more money they have the more they speculate with it. It doesn’t trickle down because governments at the same time attempt to destroy trade unions and thus shatter the strength of the poor. Now due to new laws unions cannot simply organise protests, they first need to obtain a permit to do so, and the judge may refuse it for whatever reason, for example, that the service is vital, therefore work cannot stop. If they still go ahead, and people march on the streets, the union is fined with such a ridiculously high sum that it can send them to the wall. So governments destroy the power of unions. Once their influence diminishes who will fight for the worker? Since individually they have no bargaining power, they are totally vulnerable. Their income shrinks year after year to such a low level that they can no longer live on it, and because the wealthy engage in speculation that increases of the cost of living (see rents, home prices, rice, petrol, etc), they find life tough without running up debt on their credit cards.
Have you heard of enterprise bargaining? In Australia in the past John Howard brought in a law whereby every single employee had to come to agreement with his/her employer regarding pays and employment conditions. But you don’t have bargaining power when there is an oversupply of labour. If you don’t accept what is being offered, someone else will. There has also been an attack on the unemployed. Their right to refuse a job offer that was not suitable was taken away. The disabled were forced into the job queue. The unprecedented level of migration and the “big stick” on the unemployed ensured businesses were never short of people knocking on their doors for work, and they could offer lower and lower wages. Take it or leave it.
Let me briefly restate what I said:
- Deregulations and tax cuts for the wealthy lead to excess money in their hands that they use for speculation driving up prices
- Attack on union movement, on the disabled and unemployed, and increased immigrant intake boosts job queues and lowers wages
These two dramatically increase wealth disparity and destroys the market so much that it collapses under its own weight. But before it is destroyed the economy is booming due to unprecedented level of borrowing. People borrow to maintain their lifestyle or just to keep their heads above the water. Businesses also borrow heavily to meet the artificially high demand created by debt. Banks lend to feed the real estate bubble and to these businesses. However, the crunch comes when people can no longer borrow. There comes a cut-off point. Suddenly there is a sharp drop in consumer demand. Businesses suddenly start going bankrupt because they cannot repay debt, and banks lose a lot of money.
Governments spent trillions to save the banking sector and a few larger corporations that were “too big to fail”, but failed to save the economy. They could have saved it though, all they had to do was to reduce wealth disparity to the healthy level. Take money from the rich that has been robbing the lower and the middle class for years and give it to them. Oh, of course, nobody wanted to do this. Didn’t the rich work hard for what they have, goes the argument? But may I ask, didn’t the work of lower and middle class deserve the same income with purchasing power they had a decade or two earlier? It was OK for the rich to legally rob them, but it is not OK now to take what never belonged to them and redistribute it to those they robbed?
If wealth disparity returned to the healthy level (1% of the population owning 10% of wealth), this economic crisis would disappear forever. People would have money to pay off their debt and to purchase goods and services again, and businesses would make enough profit to repay their debt to banks. And nobody would need to save the banks. However, governments saved the banks instead, but did nothing to save businesses and the lower and middle class. Furthermore, wealth disparity worsened during the crisis. Therefore, the economy will collapse and we will have Great Depression II.
There cannot be a recovery until 1% owns 10% wealth again. The great depression will bring this to pass as it did in the 30’s. Governments can only avoid this by robbing and depressing the poor even more. If they do so they will be running the risk of revolutions world-wide. Unless, of course, they go ultra right and adopt the totalitarian fascism.
More in another post…