This is a guest post by Philip of Weakonomics. Philip is a twenty-something that works for one of the largest banks in the United States. Weakonomics believes education is the most powerful tool to fix the economic problems we face. The educated consumer can avoid the bad financial services, thus making them unprofitable. The educated citizen can make informed decisions when selecting elected government officials. The educated consumer relies only on themselves for financial support. Be sure to visit Weakonomics and subscribe to the feed for more information.
If you are a representative of generation X, I might look at you as an old fart. As a generation Y fellow myself, I haven’t yet conceived of the notion it is possible to have a life passed the age of thirty.
Since you were around during the Great Depression, I thought you might understand something a Columbia Business School professor pointed out on NPR better than my generational peers.
In the years leading up to the Great Depression the American public was very “debt happy.” More people were buying homes and investing in the stock markets than ever before. They were using borrowed money to do it too.
But the entire economy of the 1920′s was built on borrowed money. Gross Domestic Product, the most common measurement of our economic health, was around $100 billion (in today’s money) in 1929. According to Columbia professor David Beim, the total amount of debt owed in the country was also $100 billion. That means the amount of money we owed in this country was the same amount as our GDP.
Flash forward to 2007. In 2007 our GDP was more like $13 trillion. What is our debt situation like? $13 trillion. Once again the ratio of GDP to total debt is 100%. Does that terrify you? It should. The only times this has ever occurred was in 1929 and again today.
Now don’t fret just yet senior citizens. Half of what caused the Great Depression was the economic policy and weak government action that followed the crash and bank runs of the late 20s and early 30s. The financially struggling government was forced to raise taxes to keep their programs alive. So far our government today has been smart enough to avoid that bad call. Here are some other preventative measures we took that were all lessons learned from the Great Depression:
FDIC: Deposit insurance didn’t exist back then. People ran to the banks to pull their money out.
With literally no money banks closed overnight, and the credit markets froze.
Federal Reserve: The Fed didn’t exist back then. The free market raised interest rates at first so no one could afford to borrow money. Our Fed has swiftly cut rates to nearly 0%, making borrowing easier (though still difficult).
Regulation: In short there was none at all back then. So when everyone lost faith in the markets, they crashed hard. With the SEC, FDIC, Fed, OTS, and other regulating bodies, many of us still have faith that the system works.
Granted, I’m not here to tell you we’re going to be fine and dandy for your retirement in five years. What I wanted to illustrate was first the gravity of this recession, and secondly show you exactly how far we have come. I didn’t expect you to learn from all of your mistakes from last time, but you did learn from some. Just like I’ll learn from some of your mistakes this time and not repeat so many of them in another few decades.
Now if I can just figure out a way to avoid paying social security to support you old timers I’ll be all set.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.