The Real Great Depression

With the blessings of the appropriate "Powers that Be," banks and other related institutions rushed to finance a wave of commercial and residential real estate mortgages by accepting only the most marginal assets as collateral on these loans. Everything was fine until someone realized that the amount of outstanding debt far exceeded the collateral pledged. When the banks began calling in these risky loans, the debtors defaulted in such numbers that the banks began to fail. These failures spilled over to the world's major stock exchanges, which caused them to collapse as well when investors began moving back to cash. Then, to add even more stress to the rapidly collapsing economy, cheap foreign imports caused an even greater decline in domestic prices. And so on and so on.

As Scott Reynolds Nelson points out in "The Real Great Depression," if that sounded familiar, it should. That was the European situation in 1870-1872, the years prior to the collapse of the European stock markets in 1873 and the beginning of the worldwide, 20-year, "Long Depression."

In that article, Nelson correctly notes that the situation in 2008 America is much closer to that of Europe almost a century and a half ago than it is to 1929 America when he writes:

"The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustable rate mortgages they could likely never pay off, even in the best of times. Real-estate speculators... overextended themselves, assuming that home prices would keep climbing... More than two million foreclosure filings - default notices, auction-sale notices, and bank repossessions - were reported in 2007... As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves."

Oh, and that part about "...cheap foreign imports...?" As Nelson explains:

"The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871... A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life."

To Nelson, the events of 1870-1873 led to profound changes in the international economic order:

"In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west - from Central Europe toward the United States. The current panic suggests a further shift - from the United States to China and India..."

Nelson's above conclusion may have seemed a bit premature to many Americans, but he wasn't alone in his assessment of the looming changes in the world's economy.

Less than a month later the National Intelligence Council, which consists of representatives from the Central Intelligence Agency as well from the nation's major "think tanks," issued the following prediction as a part of its report Global Trends 2025: A Transformed World:

"In terms of size, speed, and directional flow, the transfer of global wealth and economic powernow under way-roughly from West to East-is without precedent in modern history (emphasis added)."

Given the Central Intelligence Agency's less than stellar record when it comes to predicting the future, it will probably come as a shock to the rest of the world to learn that the Boys from Langley finally got one right.

Notes

National Intelligence Council. Global Trends 2025: A Transformed World. Washington: GPO, 2008.

Nelson, Scott Reynolds. "The Real Great Depression." Chronicle of Higher Education 55, no. 8, (2008), B98.