The Great Depression and now.

[Zooey72]

I don’t know how many of you follow the stock market, but it has been stagnant the last year and has dropped a ton in the last week.  Most of the reason for that is because of an overestimation of the Chinese economy.  The first day of the New Year their stock market dropped 7 percent, and the government shut it down for the day to stop the fall.  The market does this kind of thing from time to time, but while I was watching the fall I was flipping back and forth with the History channel and I saw a similarity between than and now.

Before I state this, I really don’t want to talk politics.  And I do respect the people here for their knowledge of WW2, and in that please don’t be one of those jackasses that says “Hillary Clinton is Hitler”, or “Trump is Hitler”.  Where ever you stand politically if you have any WW2 knowledge you should know statements like that are usually made by idiots on either side who have no knowledge of the Nazis or Hitler.  That being said…

I know most of you know the reason for the Great Depression, but I would like to focus on how it hit Germany.  The Nazis gained no traction during the 20’s because the economy was doing well.  That was largely due to loans given out from the U.S. that were not secure.  Hitler ran on that, saying that if these loans went bad Germany was screwed.  I believe they got 2 percent of the vote because people just did not care.  However, once the American economy collapsed and the debts were called in Germany really was hit hard.

Fast forward to now.  We have the largest economy in the world, but we are severely in debt to China.  If the Chinese economy goes bad, and they call in that debt we will have “The Greatest Depression” IMO.  The way we spend right now we can’t even stop borrowing much less pay down the princable.  When that first Chinese domino falls on us, we let loose with the rest of the chain reaction that causes the rest of the world’s economy to collapse.

Scary stuff.  I am hoping smarter people than me in China would see that and not try to call in the debt all at once, but in the 30’s we were not that smart and made our situation worse by killing our customer’s economy (the rest of the world’s economy) which only compounded a bad situation.

Lastly, to emphasize again this is not to be political.  People on the right have talked about our debt for quite a while, that does not make them Nazis.  Hitler happened to be right on a single issue (don’t take out unsecured debt), but that did not lead to WW2, much less the Holocaust.  Even a broken watch is right twice a day.

[CWO Marc]

Since I’m not particularly interested in economics, and since I don’t have any expertise in the matter, I didn’t study your post in great detail and therefore so I may be misunderstanding your basic argument…but I’ll just mention a couple of points that baffled me.  Regarding the situation in interwar Germany, this is the first time I’ve ever heard the theory that the rise of Nazism in Germany was the result of U.S. bank loans to Germany.  Germany’s interwar financial problems were to a large part due to the massive reparation payments that the victorious allies (and particularly France) were extracting from Germany, either in cash or, when required, by seizing natural resources such as coal.  Regarding current U.S. debt, it’s probably an oversimplification to blame everything on China.  For one thing, that would be the equivalent of blaming credit card debt on the credit card companies who hold the debt rather than on the consumers who create that debt for themselves by buying stuff on credit.  Furthermore, the global financial woes that have existed for the past decade – the so-called “Great Recession” – were to a large extent created by financial crises in 2008 like the sub-prime mortgage crash and the Lehmann Brothers bankruptcy…crises that were domestic US creations, not creations of China.  So I’m not sure that the parallel between the two observations holds up, given that the two observations themselves are debatable.

[Zhukov44]

I have to imagine that if I was a German in the 1920s, I would have resented the Allies forcing Germany to make reparations payments, especially when the only way the Weimar government could make these payments was by taking out loans at interest from American creditors.  These creditors are effectively profiting from a situation unilaterally imposed by state force without having to labor for their profits.  But then again, arguably all “usury” is based on this premise of a people without recourse having no choice but to take out loans at interest to meet daily obligations.

It might have been justifiable for the Allies to expropriate some of the German industrialists, bankers, or nobility that played a role in starting and perpetuating WWI, but it was not justifiable (or wise) to force an entire nation to accept a debt-based reparations scheme or face hostile occupation.  The failure of the Weimar government to renegotiate these loans (until 1930 I believe) played a role in legitimizing Nazi rhetoric that the Weimar government and the Social Democratic party was a pawn of foreign bankster influence and that only the Nazis would be able to bring prosperity and economic independence.  Yet international capital seems to have played a major role and earned huge profits as Hitler built up a fearsome industrial war machine in the 30s.

I don’t know enough about China to say whether they are being exploited (by Western creditors and Western corporations using cheap labor and fixed (closed market) contracts….resulting in rapid growth but apparently also ecological disaster) or whether the Chinese are in the driver’s seat (by rapidly developing their economic base via use of this foreign credit w/o surrendering their sovereignty and by building up capital off of US bonds that are stabilized by investments of the US people in the military-industrial complex).  I’m guessing it’s both…China has accumulated enough capital to become an economic superpower in its own right but the West has amassed even more capital via exploiting Asian markets…but if China has maintained its sovereignity, it might be in an advantageous position (as an imperial power) if the US economy tanks down the line.

[Gargantua]

Zhukov,

I honestly don’t think the Chinese can call the loans.

Their entire economy is based off of manufacturing products they sell to us.  If they call the loans, it mean we don’t have money to buy their products, which means they have half a billion people out of work…

Great conversation to have though!

[Zooey72]

I was not trying to assign blame during interwar Germany, just stating what had happened.  Germany was in a shambles after WW1, and demanding reparations that Germany could not pay made things very much worse.  It caused hyperinflation and the stories you have probably read about people using buckets full of money to buy a loaf of bread.  That wiped out the average German’s savings and was a catastrophe for the economy in general (imagine if all of your money suddenly had the value of a Peso).  During that time Hitler attempted his coup which failed.  American loans is what stabilized the German economy in the mid to later part of the 20’s, and is why the Nazis did so badly at the polls.  Those loans got called in, the German’s couldn’t pay… and than we had the Great Depression (Germany was in debt up to it’s eyeballs not just from our loans, but from old war loans and the reparations you mentioned).

The situation right now is a bit different in that out of our 20 or so trillion in debt, only 1 trillion is to the Chinese.  Since the world economy is based off the dollar we have pretty much been writing IOU’s to ourselves for the rest of it.  However for the last several years we have been running over a trillion dollar deficit each year.  We pay off the interest of our debt using more debt that we pay an even higher interest on.  Proportionally our debt to the Chinese is not as high as the German debt was to us, but we can afford it even less than what the Germans could if those loans are called in.  On our current course the math is inevitable, we will default and the whole thing will fall apart.  My point is that instead of this taking decades for us to commit suicide, this could happen in years if the Chinese economy collapses.  Unless we change things for the long term our fate is sealed.  If the Chinese call in our debt in the next few years we are just dead men walking because any kind of ‘reform’ would not have had enough time to be effective.

And to the point of “The Chinese would not call it in, because it would wreck their economy too”.  That is true to an extent, but we also knew that in 1929 but we still called in the debt owed us because of the panic.

[KurtGodel7]

Good topic, Zooey.

Traditionally the German economy has been structured as follows:

Germany imports food –> foreign currency flows out of Germany
Germany imports raw materials for its factories --> foreign currency flows out of Germany
Germany exports manufactured goods --> foreign currency flows into Germany

Note that without the third item on the list, it would be impossible for Germany to pay for the first two items. Paying for those first two items became considerably more difficult due to the massive reparations payments required by the Versailles Treaty. The burden of that treaty was (temporarily) eased by large loans from the American government. On the other hand, most of the reparations payments went to Britain and France, which meant that the combination of U.S. + Germany was helping fund France’s + Britain’s appetite for money.

In the late ‘20s, the U.S. government was able to convince Britain and France to cease requiring further reparations payments from Germany. In exchange, Britain and France demanded (and received) American forgiveness of those nations’ remaining debts from WWI. But by this point, Germany owed vast sums of money to the American government. Interest payments alone were a very difficult burden for it to bear.

During the '20s, Britain and France closed themselves and their empires to German imports. The United States later followed suit, with the Smoot-Hawley Tariff Act. With much of the world refusing to accept German imports, Germany could not export enough manufactured goods to even out its balance of payments. The result was an economic collapse which began in Germany, and which quickly spread throughout the Western world. The politically moderate Weimar government lost credibility because it was no longer able to feed the German people. (They didn’t have the currency necessary to pay for food imports.)

Hitler inherited an economic disaster, and immediately began taking ruthless measures to improve the situation. He stated that if any nation refused to accept German imports, Germany would default on 100% of its debt to that nation. In particular, Germany defaulted on all its debt to the United States. On the other hand, if a particular nation agreed to accept German imports, Germany would repay a large percentage of the money owed to that nation. A number of nations which had formerly refused German imports began accepting them.

These measures were ugly, and many Western politicians found them offensive. They also worked. By 1937, Germany’s economy was booming. The unemployment rate had plummeted, real wages had significantly increased, working conditions improved, the work week had been reduced to 40 hours, and workers had been given extensive vacation time. Improved clean air and clean water standards were enacted. Profits for German companies rose considerably.

I think there are at least two lessons to be learned from all this. 1) A nation should not accept narcissistic, one-sided economic/trade arrangements from other nations. The Weimar Republic allowed itself to be economically exploited by the Allies (especially Britain and France). Ending that economic exploitation was an absolutely essential part of Germany’s subsequent economic boom. In the modern world, China is engaged in currency manipulation. That currency manipulation makes it too easy for Chinese firms to export their products inexpensively; too difficult for other countries to import into China. Ending that currency manipulation would significantly improve the economies of the United States and of China’s other trading partners.

2. If a large, modern government commits itself to achieving a particular economic objective, and if that government knows what it’s doing, that objective can often be achieved. But at least in the United States, running for office is very expensive. Politicians must therefore accept large sums of money from large corporations, public sector unions, wealthy individuals, and other lobbyists and special interest groups. It is necessary for these politicians to act in the best interests of those who fund their campaigns. That goal is often incompatible with the objective of growing the economy as a whole. American politicians are far more likely to be former lawyers than former economists; which means that most of them probably don’t understand the economic damage their policies create. Even if they did understand it, they might not have any choice but to inflict it anyway. There is a tendency for politicians who aren’t willing to “play the game” to get weeded out. Large media corporations have a very, very strong vested interest in preserving the importance of money in politics. If any politician attempts to reform the existing system, the media will either a) kill him with silence, or b) give him only negative press coverage.