In The 1920s Credit Bubble, I explained how a credit binge gave rise to serial bubbles in housing, durable consumer goods, and the infamous stock bubble of the 1920s. Last week in The Panic of 2008: a Turning Point I gave a big picture overview of how our current credit crunch is unfolding. At that time I pointed out that there were some important differences between our credit crunch, and the collapse of the 1920s credit bubble into the Great Depression. The goal of this diary is to peer into our near future by means of a chronological examination of how the apparently mild if abrupt downturn that began in late 1929 transformed into a much more serious downturn that ultimately snowballed into the Great Depression, during the year following the stock market crash, 1930.

I. Introduction

Imagine it is a time like now, where there has been a remarkable credit binge that has ended in dramatic fashion, with the stock market suddenly crashing and losing 1/3 of its entire value. Consumers are saddled with debt, as are many who speculated on the newest baubles on offer by Wall Street. The assets pledged as collateral to back up the loans that went to buy both the consumer and financial baubles is caught in a vicious downward spiral. Eventually, and very soon, all of this bad debt is going to have to be liquidated, and both debtors and creditors may go under as a result.

You've probably never heard of the United States-China Economic and Security Review Commission, or USCC. Created in 2000, they research and review economic and security ties with China. Yes, someone, somewhere is trying to monitor the situation.

Today this commission held a hearing, " Research and Development, Technological Advances in Key Industries, and Changing Trade Flows with China".

Guess what folks! China doesn't want those low end jobs or even manufacturing as a long term economic strategy. Nope, they are going for high end research and development in key technical areas!

Walsh open statement:

To continue the current immigration policy and save the Banking Institutions, the U.S. will need to create millions of jobs -- right away. Since there is a job deficit of some 13 million jobs this decade, perhaps we should re-think immigration policy.

The economic health of the nation is generally measured by the BLS Unemployment statistic.  The Unemployment statistic is not historically comprable due to methodology changes. My interest is in immigration policy, I need an immigration related statistic that trumps the low unemployment statistic. 

Last November I wrote a diary called The Panic of 2008? in which I predicted:

This is NOT the Great Depression II. Nor is this the stagflationary 1970s. It is going to unfold as some other Beast. Only the broad outlines of this Beast appear discernable now: it will likely feature (1) increasing import prices; (2) wage stagnation (that does not keep up with price inflation); (3) real asset deflation; and (4) possibly a Japan-style "liquidity trap."

One of the heretical thoughts I continue to hold is that the "slow motion bust" that we are living through, may not proceed to destroy the entire economy like a nuclear bomb. Rather, like a neutron bomb over Wall Street, it might destroy the financial sector but leave most of the economic infrastructure in place. If it is a worthy goal that the doctrine of "Profits are privatized, losses are socialized" must cease, then it may be an absolute tonic if several financial enterprises thought "too big to fail", nevertheless do.

A noteworthy graph from Yahoo finance demonstrates that the "neutron bomb" scenario indeed may be unfurling. The graph below covers the last 3 years for the S & P 500 (red) and compares it with the financial sector as represented by the Financial SPDR (blue), starting from a baseline (0%) of 5 years ago: