Aug

10

The period from the decline and failure of the Second Bank of the United States [1833 to 1841] to the discovery of gold in California [1848] is usually written about as a magnificent process of Westward expansion.  The reality was homesteading beyond the Ohio country slowed to a trickle.  Only the most desperate people, like Lincoln's parents, kept moving West; and only the most desperate people from abroad – the Irish from their famine, the German and other political refugees from continental Europe after the failures of the revolts in 1832 — came to the United States during that period.  Unlike the Great Depression that began in 1930 the slump of the 1840s was largely limited to the United States.  Its cause was the collapse of the states and cities' international credit-worthiness after the Panic of 1837 and the shriveling up of domestic credit. The inability to borrow or get actual money explains the extraordinary fever that surrounded every "discovery" of gold during the period and the sense of almost divine intervention that greeted the realization that the California discovery was the greatest in history and – thanks to the Mexican War and the Bear Flag Revolt — it was all ours. The discovery at Sutter's Mill literally allowed the U.S. to get out of hock.

G_d may look after fools, drunks and the United States of America, but He may be busy with other things these days.  In 1929 in the U.S. the ratio of debt to GDP was 190%; in 2000 it was 275%; in Japan in 1989 it was 270%. The pattern has been for the ratio to increase when the credit/speculative bubble bursts and economic growth declines. In the nine years after the height of their bubble, the Japanese saw the debt-to-GDP ratio increase to 350%. In the U.S., since 2000, the ratio has increased to 375%. The question isnot whether the U.S. will now share the Japanese experience of weak income growth.  That seems certain.  What one has to ask is whether the next decade of bust will have the productive result of lowering the overall level of debt to national income.  The current debt to GDP ratio in Japan is 110%. The Japanese have been persistently criticized for not resolving their problems by allowing failures to be liquidated: but I wonder how likely it will be ten years from now that we supposedly hard-nosed Americans have done more to write down assets to their market values than the Japanese have done in the last decade.  Where will we Americans find the pot of gold at the end of the debt rainbow this time?

Gregory Rehmke explains:

It depends what debt is used for. High-yield bonds funding an array of innovative companies in the U.S. might reasonably be purchased by folks overseas looking outside their stagnant economies. Garage start-ups funded with family loans and credit cards increase debt, but shouldn't be mixed up with consumption-debt used for boat-loans, car-loans and loans for vacations. And given that Congress has made it nearly impossible to fund new companies with IPOs, financial markets search for ways to fund start-ups with debt instruments. Of course the easiest place to throw debt was at home and commercial mortgages. As that disaster continues to unfold, will debt now fund new firms that boost productivity by inventing better technologies and products?

George Parkanyi responds:

If it were up to the west-coast Indians, one ripping potlatch would sort it all out. "OK everybody — fresh start tomorrow at sunrise. One loincloth each!"


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