Unlike the 1930s, the debt burden today is astronomical, with total commitments running many times more than actual productivity and little prospect of repayment. Figures are bandied about these days to the point of being meaningless, but it's widely recognized that we face hundreds of trillions of dollars of global debt vs. a productive global economy of less than $50 trillion. It just doesn't add up.
Government's share of GDP in 1929 was in the single digits, leaving plenty of room to run Keynesian deficits. By contrast, government's share of GDP today is approaching fifty percent. Corporations are similarly maxed out in debt, compared to the 1930s, with hundred of trillions of dollars in derivatives hanging over them. And households are far more in debt than they were then, with many more mortgages outstanding, not to mention credit card debt, education loans, auto loans, etc.
Someone should tell Obama that borrowing our way out of bankruptcy is no longer an option, if historical measures have any meaning. It will only delay and intensify the day of reckoning. Obama may be the American Gorbachev: a decent, intelligent man trying to do the impossible. The progressive-liberal approach of the Obama adminstration is as unlikely to succeed as the attempt by Gorbachev in the 1980s to save the Soviet system by peristroika.
The immediate problem is far too much debt; there is no way most creditors are going to be repaid according to their expectations. At some point mass bankruptcies and liquidations seem inevitable, possibly including a breakdown at least in part of the production and distribution system, with mass unemployment, etc. We-- especially the mainstream media--are still in denial about this.
Compounding this immediate credit problem is an underlying ecological problem. We have maxed-out our resources globally, especially the most crucial of them (oil) with too many people on the planet now making demands which exceed its carrying capacity. Further, we now we have to deal with climate change. Here too is a major difference from the 1930s, where energy and other resources remained in relative abundance, and the climate was globally (if not always locally) stable.
If all this is so, we face a major crisis on the scale of the Great Depression, perhaps even worse. Dmitry Orlov's five stages of collapse -- financial collapse, economic collapse, political collapse, social collapse, and cultural sollapse -- provide a rough map of what could happen. The Soviet Union got as far as stage three, political collapse, before recovering. Our situation might be worse, as he suggests.
One outcome might yet be a reestablishment of the Wall Street system, with some modifications, which was the outcome of the last Depression. Once liquidation takes place, and the debt burden is largely reduced, lending at interest might eventually resume, if there are enough new borrowers, if the crash isn't too extreme, and if the financial and political system hasn't been overturned.
A return to business as usual would be depressing enough, since it would mean another replay of the cycle, but the other possibilities are even more unpalatable: some kind of authoritarian centralized state power (fascist or socialist) on the one hand, or anarchy--real and total collapse--on the other.
Can we avoid these unattractive alternatives? Perhaps not, since our inability to think outside the box seems so deeply entrenched. What is needed, if we can do it, is some kind of genuinely coherent, promising, and viable alternative. It just so happens that such an alternative exists, but we have to go back to nineteenth century American history to find it.
The populist tradition in the nineteenth century, based on Jeffersonian visions of decentralized political and economic power, was a staunch opponent of finance capitalism, the the Wall Street system which has been in the cat-bird seat since the Civil War. The essence of that system is a privatized monetary ponzi scheme in which the banking system is allowed to create money and charge usurious rates of interest for doing so. Debt builds up, can't be repaid, leading to a crash, and then things start up again: boom and bust.
The populists were on to this, and resisted it as best they could. The most comprehensive populist response to usurious private capital is found in the work of an early populist, Edward Kellogg (1790-1858), a businessman who turned his attention to the business cycle after suffering losses in the crash of 1837. In A NEW MONETARY SYSTEM and other works, Kellogg challenged the privatized, usurious money system and sketched out an intriguing alternative perhaps more relevant than ever today.
In brief, Kellogg advocated establishing a nationally regulated but locally run public credit system through which citizens could obtain nominal interest loans on good collateral, such loans constituting the basis of a new currency. He insisted that usurious interest rates be banned, and that all money lent be fixed by law at a nominal rate of about one percent.
Usury might be defined as an interest rate in excess of the replacement value of the principal over some normal period of use. It takes 72 years at one percent interest for the interest to equal the principle. It we take 72 years as a rough measure of a human lifetime, the interest on money borrowed at one percent over a lifetime will be exactly equal to the replacement value of the resources consumed in the course of that lifetime with the use of the original loan. What could be fairer?
Kellogg's nominal interest public credit currency is designed not to force unsustainable growth and subsequent crashes, as usurious rates do, but rather to replace resources as they wear out. This makes possible something we desperately need: a steady-state economy. Not least, his system gives ordinary citizens the opportunity to access capital for their own improvement as a rate they can sustain; it allows them, not private creditors, to retain most of the value of the money they borrow and put to work. In this system the public truly borrows from itself.
By making capital widely available at nominal interest, Kellogg's system strikes at the heart of the system of privatized usury, which concentrates wealth in few hands. It offers a way to naturally distribute capital without directly taking from the rich and suffering the consequences of their resentment. The rich will no longer be able to live off the interest on their capital, however, but must spend it or invest it productively. Here is the answer, in a nutshell, to the age-old problem of the distribution of wealth.
Finally, by making it possible for ordinary individuals and households to gain economic control over their lives and to obtain and enjoy private property, Kellogg's monetary system lays the foundation for responsible citizenship and true democracy, which are impossible in our corrupt system of rich and poor. Only private property widely distributed can support a genuine democracy.
Kellogg's monetary system is an idea worth taking seriously. I explore it and other populist principles in more detail in my recent book, FIXING THE SYSTEM: A HISTORY OF POPULISM, ANCIENT & MODERN.