A Great Depression Again?

I was born in 1931 at the start of the Great Depression. My family survived the depression better than most. My father had begun his dental practice five years earlier and, although it required some bartering for services to get along, he was able to care for his family reasonably well.

If the crash of 1929 had been like previous ones, the subsequent hard times might have ended in a year or two. But instead, uprecedented economic meddling prolonged the misery for 12 long years.

How bad was the Great Depression? Many felt despair as trade stopped, unemployment spiraled, banks collapsed and hunger spread across the nation. During the four years after the 1929 stock market crash, the nation regressed like at no other time in its history. 42% of America’s banks folded. Production at the nation’s factories, mines and utilities fell by more than half. People’s real disposable incomes collapsed 28%. Stock prices cascaded to one tenth of their pre-crash height. Unemployment rose from 1.6 million in 1929 to a whopping 12.8 million by 1933 – leaving one out of every four workers jobless. People lost their savings, their homes, their health and their hope.

But what made the 1929 stock market crash turn so much more deadly than the previous short-lived crashes of 1920 and earlier? According to many economists, the 1929 crash was unique because just months later, the first shots of a trade war that quickly engulfed the world were fired.

Industrial America erupted into protectionist fervor. In a reversal of conditions today, back then it was inexpensive European imports, especially agricultural products, due to cheap labor and falling European currencies that began to undercut American producers.

Riding a populist wave, U.S. politicians imposed the Smoot-Hawley Tariff Act – one of the most severe protectionist policies in America’s history. Designed to protect American farmers and manufacturers from cheap-labor low-cost European imports, Smoot-Hawley instead unintentionally triggered an economic arms race that helped plunge America – and the rest of the world – into a decade of depression and despair.

The rest of the world saw the Act as a virtual declaration of economic war on them. Foreign nations were outraged. Within two years, 25 countries had retaliated; U.S. and foreign trade took massive losses. America exported $5.24 billion in goods in 1929; by 1932 the total had fallen to just $1.6 billion. Overall, world trade declined some 66% by 1934.

What does this all have to do with 2008 America? It seems the first shots of global trade war are about to be fired – only this time, America’s falling dollar could be the trigger.

The dollar has fallen by 40% against the world’s major currencies over the past seven years. 16% of that loss has come in the past year alone. Against gold, the dollar has fared even worse, losing 19% in 2007 and falling more against gold in 2008.

The rapid fall in the dollar’s value is drastically changing global trade dynamics. The immediate impacts are being felt most dramatically in Europe.

The drop may benefit America in the short run, even though in the long run there could be stinging political and economic consequences.

In Europe, however, things are quite the opposite. The falling dollar is hammering European industry.

The weak dollar means that European products have become more expensive in America, and consequently Europe is selling fewer goods to, and buying more goods from, the U.S. Thus, Europe is sending more money to America through trade, and America is sending less back to Europe.

But Europe is actually getting hit doubly hard because China loosely links its currency to the dollar. As the dollar has fallen, so has the Chinese yuan – and European exports have become more expensive in China too, and Chinese goods have become cheaper in Europe – the result being that Europeans are selling fewer goods to, but purchasing more from China, which means Europe is now losing billions in trade with China. During just the first eight months of 2007, the EU’s trade deficit with China ballooned 25%.

But it doesn’t stop there. Saudi Arabia and 21 other nations officially link their currencies to the dollar. And 12 nations actually use the U.S. dollar as currency. For these reasons, America’s dollar problem is the world’s dollar problem, and especially Europe’s problem. No wonder Europe is getting fed up with the dollar’s slide.

The upshot of this trend is that the nightmare scenario is coming closer to reality. Trade war alarm bells are ringing.

As European businesses suffer, pressure on politicians to take legislative action to protect trade is intensifying. Airbus boss Tom Enders said the dollar’s fall is a “life-threatening” event for the company.

Ironically, at the same time the falling greenback, while stimulating U.S. exports, is also increasing calls for trade protectionism from within America.

Foreigners are now beginning to take full advantage of the markdown sale in America – not just of toys and trinkets, but of strategic assets as well. During 2006, foreigners spent $147.8 billion snapping up U.S. businesses, up 77% from 2005. Europeans, Chinese and Arabs are grabbing U.S. infrastructure at a rapid pace. Stuffed to the brim with depreciating dollars, many investors are seeking to spend them before they become worth even less. U.S. water companies, electric companies, and other utilities are being increasingly controlled by foreigners.

This election year, demands to legislate protections for American assets and trade are sure to increase. Calls to levy tariffs, duties, quotas, subsidies, and even to outright prohibit foreign ownership, are almost sure to abound.

How much strategic infrastructure does America want to be foreign owned? When times are good and everyone is at peace, foreign ownership of strategic industry may pose little immediate threat. But given the rising global tide of anti-Americanism, is it wise for America to allow foreign nations to have unrestricted access to American assets?

You may be asking the question, “What is all this economic stuff doing on a website titled “Christian Stuff”? The answer is that fear and panic should not be in the lifestyle of a Christian. But it can be seen everywhere in the world as a non-Christian lifestyle. And panic is a “trigger”.

Trade protectionism in America or Europe could easily escalate by panic into an economic arms race where nations turn inward and erect barriers to benefit local businesses and prevent foreign entities from competing. In such a scenario, global trade would immediately begin to regress, taking stock markets with it.

What if the rich foreign investors who now own so much of America panic and quickly try to save what they have by selling off their interests in American assets for what they can get out of them – again taking the stock markets with it?

Leaders in America and Europe say they don’t want a trade war. Most economists and business leaders don’t want trade war, and the average worker certainly doesn’t want trade war – after all, nobody likes to be reduced to begging for clothes or to being unemployed. With trade wars, everybody loses. The question just becomes who loses the most. And anti-Americanism around the world thinks that America would lose the most! And they are probably right!

We Christians know not to fear or panic:
“Have no anxiety for anything [don’t panic], but for everything pray with thanksgiving, let your requests be made known to God. And the peace of God [don’t fear] which passes all understanding, shall keep your hearts and minds through Jesus Christ.
(Philippians 4:6-7)

[Back to Home]