See if you can find em all!
Comparing the Present Day Economy to the 1920s
Despite what you hear in the 'news', and from the politicians, the US Economy is in deep trouble, at the beginning -- not the end, of a prolonged, severe recession/depression. The folks in Washington are nervous, why else would the Federal Reserve cut interest rates 12 consecutive times, and President Bush recommend new massive tax cuts ? Your retirement savings could be at great risk if they are not invested properly, and you could miss out on the chance to benefit from this special time in history (as investments can be selected that benefit during periods of economic decline.) This newsletter will compare the economy of the 1920s with that of the present, showing the extreme conditions that presently exist. The imbalances today are far worse... and there are fewer options for dealing with it... because financial markets have changed dramatically.
1. In the twenties, the US was the world's leading creditor. Currently the US is the world's largest debtor, with a national debt of approximately $6.5 TRILLION !!
The national debt was reduced by more than 33 percent during the 20s. It increased by 342 percent during the eighties alone !
In the twenties, the debt was mostly of long maturity. In the eighties, the average maturity of the marketable debt was just six years, and most of it was in short-term instruments that had to be rolled over frequently. The Federal Reserve announced in 2001 that it was suspending sales of 30 year Treasury Bonds in favor of shorter maturity bonds. This will come back to haunt when rates turn sharply higher.
The interest on the Federal Government Debt for 2002 was $332,536,958,599.42 . With just the interest, the US could build thousands of new schools, bridges, hospitals each year.
2. The fed govt. had a budget surplus each year from 1920 through 1930. From 1980 through present, the US has ran massive deficits. President Bush's 10-year, $674 billion economic 'growth' package -- coupled with a war with Iraq -- will push the federal budget deficit well into record territory this year, and possibly as high as $350 billion, private-sector budget forecasters said yesterday.
In sheer dollar terms, the deficit would easily eclipse the $290 billion record set in 1992.
State governments also face the worst financial landscape since at least World War II.
The extent of the fiscal problems is staggering, with the collective shortfall for the current year estimated at $45 billion and a projected gap next year of $60 billion to $85 billion deficits of 5, 12, even 20 percent of the budget or more in some states. The latest fiscal survey of the National Governors Association is laced with scary adjectives: astonishing, staggering, massive, spectacular.
Since most states emptied rainy-day funds and other one-time sources like the tobacco settlement to balance last year's budgets, the new governors have spent their transitions surveying ugly options: layoffs, tax increases, new fees, program cuts. On Friday, January 10th, Gov. Gray Davis of California, a Democrat, proposed plugging a $36 billion gap with $8.3 billion in new taxes and drastic cuts in spending.
Though the limping economy and its attendant decline in sales- and income-tax revenue have created the rapid rise in deficit projections, state officials and other experts say the root of the problem is on the spending side. Health care costs, 30 percent of a typical state's budget, have been growing by 13 percent a year even when programs add no benefits or beneficiaries. The problem is exacerbated by unfinanced federal mandates, for programs like education and Medicaid, and an out-of-date revenue model.
3. In the 20s, the US was on the gold standard. The US had the lion's share of the world's gold reserves. Currently, the dollar is a pure fiat currency, and American monetary reserves have dwindled to less than 9 percent of the world total, down from 50 percent in 1952.
4. In the 20s, the US govt. had almost no un-funded liabilities outside of meager veterans' benefits and pensions. Today, un-funded liabilities, off-budget borrowing, loan and deposit guarantees, govt. pensions, and un-funded Social Security obligations are estimated to be $14 TRILLION DOLLARS (and climbing.) The Social Security Trust Fund is expected to be insolvent by 2014, maybe sooner, depending on the how much is spent to pay other government expenditures. It is a little known fact that the Federal Government is currently spending Social Security tax revenues to pay non-social security related expenses caused by outrageous federal spending in other areas. This process actually distorts the true amount of the Federal Budget Deficit (i.e. it is MUCH higher than is being reported.)
There is an unavoidable mathematic consequence to the government's actions. This money is not going to appear out of thin air: taxes WILL BE RAISED or benefits WILL BE CUT. There is no way around this conclusion, no matter what politicians tell you. An unfortunate side-effect of this situation is inter-generational strife.
Social Security and Medicare Part A - Cumulative Cash Deficits (2001 thru 2075)
5. In the 20s, the US ran a significant trade surplus, today, it runs the largest trade deficit of any trading nation in the history of the world. The current-account deficit -- the broadest measure of the U.S. foreign-trade gap -- is estimated to reach an astounding $475 billion in 2002, or 5% of the nation's gross domestic product. The mid-range forecast from the poll of economists predicts a $500 billion trade deficit in 2003. Economists expect the deficit to grow to over $525 billion in 2004. Morgan Stanley predicts that next year it could reach 6% of GDP, which is the total value of goods and services produced in a nation. This monstrous growing trade deficit, increasing at astronomical rates, severely limits the ability for the U.S. economy to grow.
IMF Chief Economist Kenneth Rogoff said history suggests 'that when countries run sustained current-account deficits up in the range of 4% and 5% of GDP, they eventually reverse, and the consequences, particularly in terms of the real exchange rate, can be quite significant.' Since its 2002 peak in February, the dollar has lost 16 percent of its value on a trade-weighted basis.
The most recent warning has come from the International Monetary Fund. In a recent report, it says that 'the widening of the U.S. current account deficit could shake investors faith in the economy triggering a withdrawal of investment that could endanger global markets... Financial shocks can propagate across institutions and markets in new and surprising ways.'
The U.S. imports more than it exports, and in order to cover the difference it borrows money overseas. Foreign investors -- Japanese insurers, European manufacturers and the like -- put their money into American stocks, bonds, property and companies. But at some point, the argument goes, investors wonder whether they will get their money back and grow wary of lending ever-increasing amounts to the U.S. In the 1990s, huge demand for U.S. assets such as stocks and bonds helped fill the gap left by outflows of dollars for goods and services. But with the stock market trading sluggishly, foreign investors have been less eager to fund the huge trade deficit.
The US needs $2 BILLION of additional foreign investment PER DAY in order to sustain its current trade deficit. How long can this be sustained ?
6. The 20s were a decade of high savings and high gross domestic investment in the American economy. The last decade has seen RECORD low savings and low investment. The average credit-card balance is $8,562, up from an average of $2,985 in 1990, according to the National Foundation for Credit Counseling.
Personal credit (short and intermediate term loans and revolving credit) has swollen to over $1.7 TRILLION (33% higher than in 1997.) Credit card debt levels have increased at least 5 percent for each of the past five years, and total mortgage debt in the U.S. has jumped 50 percent in the last four years. Total U.S. household borrowing has surpassed $8 trillion and is rising at the fastest rate in almost 13 years.
Consumer debt also increased at a breathtaking pace in the 1920s. The consumer debt levels today are largely the blame of invention of the credit card and lax bank lending standards, which also have contributed to an overall negative savings rate, the lowest seen since the government began tracking.
Personal bankruptcies are at an all-time high (over 1.7 million in 2002) and mortgage foreclosures have reached a 30-year peak.
There is a direct connection between massive levels of mortgage-relate debt and the rise in personal bankruptcies, according to Harvard Bankruptcy Law professor Elizabeth Warren. And, she says, we're only seeing the front end of this wave. She calls this trend an unmitigated disaster.
``There's a limit to how much money people can borrow before financial problems emerge,'' said Doug Greenig, head of agency mortgage trading at RBS Greenwich Capital in Greenwich, Connecticut. ``When consumers are already in so much in debt, the margin of error is reduced.
U.S. private company bankruptcies set another record in 2002, with over 40,000 filings. Public companies also shattered their bankruptcy record for a second straight year as accounting fraud and the last decade's debt spree brought down corporate giants, and experts are bracing for more such woes. All told, 186 public companies with a staggering $368 billion in debt filed for bankruptcy in 2002, according to tracking service BankruptcyData.com. That is the largest asset total ever, sweeping past last year's record $259 billion.
The wreckage included five of the 10 largest bankruptcies ever, led by phone company WorldCom Inc., with $104 billion in assets. Filings by Conseco Inc., Global Crossing Ltd., Adelphia Communications Corp. and UAL Corp. also were among the top 10. Accounting scandals figured in the failure of all of those but UAL.
7. In 1929, the unemployment rate in the US was 3.2 percent. Present day the unemployment rate is over 6% (this number appears to be very understated based on the method of its calculation, and the severe state of the job market.)During the Great Depression, the unemployment rate was recorded as 18% (was questioned to be much higher, estimated to be between 25-40%). At just this rate (18% x 285 Million), that means an unemployed work force of approximately 51 MILLION PEOPLE. I believe this figure will actually be much higher. Currently, unemployment rates are over 10% in all major European countries.
8. Only 51 percent of the American population lived in communities of more than twenty-five hundred persons in 1920. Almost 22% of the work force was on the farm. By 1980, the US was overwhelmingly urban, and only 2.6% of the workforce was employed in agriculture. There is therefore far fewer people who are likely to be self sufficient in food.
9. Govt. spent just 3.2% of the GNP in 1929. Less than 10% of the civilian work force was employed by governments at all levels. The only non-employees receiving checks from the Fed Government were military pensioners and a few retirees. Total federal payments were just $700 million. There was no Social Security. There was no dole for the unemployed. There was no aid to families with dependant children nor were there food stamps. Total public welfare expenditures in the US in 1927, a recession year, were just $151 million in a population of 121.9 million. In the 80s, by contrast, the government employed 21.2% of the workforce, and many millions were dependent on government transfer programs. In 1989, these totaled $539.5 BILLION.
10. In the 20s, total fed, state, and local tax collections equaled only 13% of personal income. By 1989, tax collections had swollen to 36.8% of personal income. This figure is higher for most Americans today.
11. In spite of Prohibition, the US was largely a law-abiding nation in the 20s. Today, there is an unprecedented wave of crime. Bottom line, The US position is much worse today than it was in 1929 despite the great growth of the economy. Spending was modest. Taxes were low. The powder was dry. The political authorities had room to maneuver because they promised little. The public in 1929 had a greater capacity to withstand an economic shock than the public today. People were less dependent, more family oriented, and more used to taking care of themselves. The federal govt. entered the 90s spending $600 million a day out of an empty pocket. Its credit was in hock. Outstanding promises and contingent obligations are vast, and trillions of them could be conceivably triggered almost simultaneously by depression conditions.
In summary, the conditions are present for the economy to worsen dramatically in the coming years. You can protect your retirement savings and profit handsomely during tough economic times, provided you understand the risks, and you choose your investments wisely.
I'm off for today(Business to do) But I'll give you three hints
1. Whats wrong with Comparing 1920 to 2000 the way they did it?
2. Whats wrong with the Graphs they caculated?
3. Whats wrong with the idea of "Budget Surplus"?
Right I'm off, Good luck to you all
