“One of these clouds was an American wave of optimism, born of continued progress over the decade, which the Federal Reserve Board transformed into the stock-exchange Mississippi Bubble. Another of the little clouds arose from the fact that the segment of our economy based on catching up with the war lag was coming to its terminal, particularly in the construction industries. Still another, a by-product of our enormous increase in individual productivity, was a need for readjustment of commodity prices between groups.

“Our reconstruction from the war had proceeded with such steady success, and the other impulses to progress were so very great that, with the growing optimism, they gave birth to a foolish idea called the "New Economic Era." That notion spread over the whole country. We were assured that we were in a new period where the old laws of economics no longer applied."  -Herbert Hoover

The last gasp of the welfare state likely ends in a global debt crisis (oops, one is already underway.)

Let’s assume for a moment the world’s central bankers and governments were right to throw so much money into the market in order to stave off a global depression.  I of course would say much of the stimulus was simply to save the old order, i.e. the welfare state in Europe, which Mr. Obama seems desperate to emulate on this side of the pond.  But that’s me.  But even someone who supports this “stimulus” must be worried when they look at the numbers. If they aren’t afraid, they should be ... they should be (to paraphrase Yoda, the mini-Jedi Warrior of Star Wars fame).

Based on the chart below, on a global basis, $0.89 cents for every $1.00 of “stimulus” is disappearing down the rabbit hole instead of going into the economy:

This chart says that since 2008:

1. Global GDP has grown 4.7% or $2.90 trillion dollars.
2. Global Debt has grown 14% or $25.70 trillion dollars.

Once again, the phrase “The only thing new in the world is the history we don’t know” resonates.  This from Herbert Hoover’s summary of the Great Depression [my emphasis]:

⁸ An interesting summary of the contribution of Federal Reserve policies to the boom appeared five years later in the magazine Sphere of July, 1935, summarizing public statements by Adolph Miller, a member of the Reserve Board at that time:

"Mr. Miller, of the Federal Reserve Board, states that the easy credit policy of 1927, which was father and mother to the subsequent 1929 collapse, was originated by Governor Strong, of the New York Federal Reserve Bank, and that it did not represent a policy either developed or imposed by the Board on the Reserve Banks against their will.

"The policy was the result of a visit to this country of the Governors of foreign central banks, who unequivocally stated in New York that unless the United States did adopt it there would be an economic collapse in Europe. It was a European policy, adopted by the United States.

". . . Mr. Miller states that after waiting for the individual Reserve Banks to initiate a policy of safety, the Board, in February, 1929, took matters into its own hands, adopted a policy of 'direct pressure' and issued a 'warning' to the public. It did so, says Mr. Miller, because its anxiety over the situation had become very great. That was one month before Mr. Hoover was inaugurated as President.

"The fact seems to be that the Board, in January, 1928, intended to curb the speculation, but was overridden by President Coolidge, who issued his famous statement from the White House that the speculation was not dangerous and merely reflected the growing wealth and power of the United States.

"The Board only began issuing warnings when Mr. Hoover was about to take office; and it was safe to do so then because the Board knew that Mr. Hoover, from 1926 on, had been protesting that the money policy of the Reserve System was certain to bring about disaster and calamity. Mr. Hoover, before and after he took office, was struggling desperately to curb credit extravagance. He wanted to deflate the utter extravagance then rampant, and his every influence in the Presidency was in that direction. The record will show that he became the victim of a policy that was anathema to.”

A few more numbers to view in sheer horror:

Industrialized Countries Debt/GDP % adding private indebtedness to the equation:

US                                     350%

Japan                                 490%

Euro currency countries         443%

United Kingdom                     459%

And of course, in case you missed yesterday’s front page of the Financial Times, it said China is being forced to extend out the time for repayment on debts to local governments, in the $1.7 trillion range, because they can’t be repaid now.  Many mistakenly believe, I think, that China’s Debt/GDP is perfectly manageable, and believe the official numbers suggesting it is in the 30% range.  But more savvy estimates out of the guise of Commie Information Officers peg the debt closer to 90%.  No problem you say when compared with the industrialized countries.  Maybe you should rethink that.

Why?  Because emerging economies have a much lower threshold for debt, according to Rogoff and Reinheart, economists extraordinaire and authors of This Time is Different: Eight Centuries of Financial Folly:

Not too many seem worried.  Faith in central banks and governments springs eternal despite the lessons of history:

Dow Jones Industrial Average versus the Fear Index (VIX):

To be continued.