By David Willden.
The financial crisis of 2007 - 2008 was the worst crisis since the Great Depression. Large financial institutions collapsed. Banks were bailed out in desperate moves by governments. The stock market dropped drastically. Large numbers of people lost their homes and their employment.
The "Great Recession" was a result of massive increase in consumer mortgage loans - 98 percent growth in six years. The ratio of private debt to GDP was over 150 percent. There was only one other time when this ratio was this high. It was the time leading to the Great Depression. From 1920 to 1930 there was a 40 percent growth in private debt to GDP.
The root cause of the problem of the Great Recession was tied to a system of speculation, over leverage, dishonesty and greed. The crisis was ignited by inadequate capital holdings, inadequate monitoring by regulators, high risk and overly complex financial products, policies that made getting loans too easy, overvaluation of sub-prime mortgages, poor trading practices, short-term oriented compensation incentives.
According to the Congressional Budget Office the average U.S. household lost nearly $5,800 in income from September 2008 through the end of 2009. The U.S. government spent $73 billion dollars, which averages around $2,050 per U.S. household. Home values dropped $3.4 trillion, or approximately $30,300 on average. Around $7.4 trillion, or around $66,200 per household, was lost in stock values. More than 8.8 million jobs were lost.
The very country that should have been the example of goodness, instead brought pain upon the world. There was a 2% reduction in the 2009 world's total production of goods and services. Incomes fell everywhere. Between 50 - 88 million additional people lost their jobs.
As we look at economic trends it is helpful to start by looking at relevant historical insights.
The saying was "The sun never set on the British Empire." Britain was the
superpower of the world. It had the largest economy in the world. It was the
birthplace of modern democracy, the Industrial Revolution, and many of the
financial markets . The British Empire was the most extensive empire in world
history. By 1922, it held sway of over 458 million people or 20% of the world's
population. The empire covered almost 25% of the world's land mass.
Britain led the Industrial Revolution. It was the key innovator in textile equipment, tool-making and steam related technologies. It invented the railway system and built much of the railway equipment used by throughout the world. It was also a leader in international banking and trade. It had global distribution system. Its commerce ships were protected by the royal navy. It could transport people, capital and other resources around the world. The profits Britain made were substantive. All of this contributed to Britain becoming the world's superpower.
Conflicts with America and then Germany eroded Great Britain's economic strength. World War I took a heavy toll - although Britain was victorious. Britain spent between 15-25% of it's accumulated wealth fighting the war. It had to borrow heavily, especially from the United States, and ended up encumbered with massive debts.
During the Great Depression Britain's world trade fell in half. The registered unemployed numbered 3.5 million, and many had only part-time employment. The industrial and mining areas in the north of England, Ireland, Scotland and Wales were hit hardest. Unemployment reached 70% in some of these areas. Many homes relied entirely on money from the government.
When Britain declared war on Nazi Germany at the outset of World War II, its vast territories contributed resources to the war. However, Britain found it impossible to defend itself against simultaneous attacks by the Germany, Japan, and Italy. Britain asked United States for support in the war. Britain ultimately emerged victorious, however, the costs of the war high. After World War II, the Britain decided to grant independence to most of its territories.
What can we learn from Britain's experiences?
Innovation, industry, distribution channels, democracy, and military strength were keys to Britain's success. Other nations were determined to replace Britain as the world's superpower. Ultimately, the strain was too much.
"In that land the great experiment was to be made, by civilized man, of the
attempt to construct society upon a new basis; and it was there, for the first
time, that theories hitherto unknown, or deemed impracticable, were to exhibit a
spectacle for which the world had not been prepared by the history of the past."
- Alexis de Tocqueville. Democracy in America - Volume 1
U.S. economic history has its roots in European economic history. In the late 16th century, England, France, Spain and the Netherlands had major colonies along the Atlantic side of North America. In 1776, The United States of America declared that it was independent. In 1783, Great Britain signed the treaty of Paris. At this point the United States was formally acknowledged as a free, sovereign and independent nation.
The United States grew to be a huge, industrialized economy making up nearly a quarter of the world economy. Key reasons for this growth included:
The economy has maintained high wages, attracting millions of immigrants from all over the world.
The debts that the United States has accrued in real dollars is incomprehensible. It has not demonstrated collectively enough willpower yet to stop its own economic trend of accruing debt.
It can be argued that the United States is following the path of Great Britain. It doesn't have the vast empire of land holdings around the world like Great Britain did at one time.
In the next page, click below, we look further at economic trends and identify the risks of the global economy.
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