Economical History

This article by Scott Reynolds Nelson, a history professor at William & Mary, compares the economic crisis of today with the crisis of the Long Depression, which began in 1873 and lasted 7 years. He attributes the cause of the depression to lax mortgage lending in Europe which resulted in inflated real estate prices plus easy credit offered to the various industries involved in building the transcontinental railroad in the US. He also says that the Industrial Age had its roots in this depression by allowing those with capital (Rockefeller, Carnegie et al) to buy their competitors at rock bottom prices.

"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."

The Wikipedia article about the Long Depression attributes the cause to inept politics in the US and abroad. Both sources are probably somewhat correct.

So, what's the crystal ball show for us hard working Americans here in the US of A? Probably several years of lackluster economic growth, if not economic decline. In a capitalistic system, markets continually seek to minimize cost for commodity functions. This ultimately results in asymmetric distribution of wealth. As we see more job functions outsourced to lower cost locations, there will be fewer high paying jobs in the US until the market creates the need for new job functions. In the meantime, the global market will begin to force to live within our means by restricting the amount of investment in the US. We won't be able to continue to spend at the same pace. As our consumption wanes, less developed countries will also cut back because they will sell less to us.

What will break this model? Siphoning off non performing assets (ie over valued mortgages and the related derivatives) so that our financial intermediaries can resume normal operations. The current environment proves that we don't study history as we seem to endlessly repeat it.

Let's hope that those in Washington remain distracted with corporate bonuses to the extent that they let the free market fix this problem. Maybe we will then survive to witness the next round of Extraordinary Popular Delusions and the Madness Of Crowds.