Are We in a Depression?

Are we in a depression? Do the people at the helm of our economy even know? I’ll be the first to admit that I don’t fully understand everything that our elected leaders are doing to combat the current financial “situation.” You might share my frustration.

At first, I thought the reason I didn’t understand their actions was because I’m not an economist. I know that there are people who are much smarter than I am in Washington. But I couldn’t reconcile what I saw the people in government talking about (both parties, thank you very much) with the facts on the ground. It was driving me nuts.

And then the answer came to me. We aren’t the idiots — they are. (Of course I say this with all due respect.)

From everything I’ve read and observed, the people in government are trying to fix the wrong problem. Let me explain.

To understand what is going on today, we really have to go back to the Great Depression. Everyone thinks it was caused by the stock market crash, but it wasn’t. The Depression was caused by a massive money freeze. No money. No business. No jobs. No nothing. You could have the greatest entrepreneurial idea since sliced bread and with no money to implement it, you’d be broke.

Stocks, bonds, banks and the economy froze. (Remind you of anything?)

Many economists are convinced that the Great Depression could have been a milder, gentler depression had the government taken steps to increase the flow of money sooner. But they didn’t do so in a timely manner and, as a result, what could have been a baby depression turned into a great big grandpappy depression. Ouch. The government constricted money supply and choked the economy to death.

But that’s not happening now. The government has created an ample supply of money. The problem is that the distribution of money — the institutions we use to get money moving — is broken.

I read an article in Investor’s Business Daily last Thursday that uses water as an analogy. Let me share that analogy with you now.

Water by itself isn’t much use. But if you channel it and harness it, it becomes extremely useful. In 1929, the “water” supply (money) was gone. We went through a drought and nobody did anything to create a new supply. The result was that nothing came out of the faucet when you turned it on.

Now, we have plenty of “water” (money). The problem is that the pipes are broken. Of course the end result is the same — nothing is going to come out of the faucet. Simply adding more money isn’t going to help anyone, yet that is what the government is doing.

Even with these mistakes, I believe we’ll emerge from this crisis. I have no doubt. I just think that we could solve the problem much sooner if we simply apply our resources to the real problem rather than to one that existed 80 years ago.