E A Great Depression Lesson For Our Time

Everyone interested in the workings of the economy, as well as economists and central bankers, must take a lesson from the Great Depression in order to understand fully the issues causing the worst economic crisis in the nation’s history. The lesson that must be learned is that there was plenty of supply of goods but that those goods became too expensive due to Fed actions. The problem is, the goods could not be sold. Since consumers and also businesses who invest their money for growth, could not buy the goods, unemployment skyrocketed to 25 percent in 1933.

It turns out that the Fed pursued a policy of tight money, trying to take the wind out of the sails of the stock market. The crash occurred in 1929. And it turns out that the Fed also stopped capital formation in its tracks. Once capital formation slowed massively, the Great Depression was on. Be careful what bubble you pop and how you do it, and what you liquidate as a central bank.

If we were to look at today, we have do not have declining investment in the USA, so things are not as bad as the Great Depression, yet growth in capital formation has slowed greatly from the end of the last century. World capital formation as a percentage of GDP is measured differently from the chart below. The world bank says world capital formation as a percentage of GDP has slowed while US capital formation as a percent of GDP has risen. The world is facing deflationary pressures.

Organization for Economic Co-operation and Development, Gross Fixed Capital Formation in United States© [USAGFCFQDSNAQ], retrieved from FRED, Federal Reserve Bank of St. Louis;

Capital formation is a great indicator of potential issues in the world. Since so few nations are really growing, one wonders why the United States government would want to pop the growth of China and increase world deflationary pressure. I thought the government wanted to increase exports. In the Great Depression, exports were crushed.