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Von Aldo

The New Deal All Over Again?

That would be a bad thing. It's hard to believe that anyone could argue that the New Deal did anything but help turn a recession into a depression. (See here for a prior blog comparing Obama to FDR.)

And a friend brought this intersting bit to my attention from yesterday's Wall Street Journal (subscription required)

My friend, an advisor based in Nashville, wrote: Perhaps the title “Big Spending and Easy Money Will Produce a Recovery” (WSJ, 5/6/09, Michael T. Darda) was ironic. If not we are in trouble.

Mr. Darda writes: "The stock market, which had collapsed by 86.2% between September 1929 and June 1932, rose more than fourfold in the five years between 1932 and the peak of the next business cycle in 1937. Is this discreet rebound justification for the Obama administration’s planned tax increases, unprecedented government spending, and loose money? I don’t think so. Most investors use longer term measures to gauge success. There is little comfort in the fact that the market was up over 45% from 2003 to 2005 when the ten year returns ended 12/31/08 were negative. Likewise despite the 1932 to 1937 increase, from 1929-1954 the equity markets were flat. It took 25 years, 2 months, and 20 days from the September 3, 1929 high for the Dow Jones Industrial Average to break 381 again.

"Why? During this 25 year period there was a virtual take over of private industry by the US government started by Franklin Roosevelt and continued by Harry Truman. From 1929-1954 long-term corporate debt was relatively flat, while government debt increased by 14 fold, and state and local debt almost tripled. Total interest payments from private industry were flat while government interest payments increased 5 fold. Interest as a percentage of adjusted gross income dropped dramatically as interest tax liability mushroomed. And, there is a startling disintermediation from commercial bank savings accounts to US Savings Bonds. All this time tax rates are steadily increased and private activity is gradually crowded out by government.

It was a lousy 25 years for investors and a likelier future if the President, Treasury, and Congress have their way--not the rosy scenario that Mr. Darda portrays. Previous generations learned the hard lesson that extreme government “stimulation” deadens commercial activity. It appears that this generation will have to learn it too."

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