No Such Thing As An Opinion!

August 4, 2011

The cause of an economic Depression can be summed up in one sentence...


Yes, one sentence.

And no, I'm not going to go the typical route and say something like "George Bush" or "Barack Obama" (although they have certainly contributed to the United States' current financial condition!)

I'm going to present a brief, concise argument.  Well, brief...at least by my standards! ;)

First, let me explain how this article came about.

After the Dow Jones Industrial Average plunged by 513 points today, the possibility of an economic Depression came to the forefront.

After thinking about the nature of a Depression, I came to the following conclusion:

A Depression is caused when too much of society's money shifts from the hands of the poor and the middle class into the hands of too few people (the super-rich).

I believe it's that simple.

Now, I'm not going to claim that there necessarily aren't other potential causes of a Depression, but I am going to claim that a Depression is very likely to occur if such a shift in wealth occurs.


The Type Of Society That Suffers A Depression

First, you need to visualize the money in society.

If you read this article of mine (along with the incredible debates in its comment section), it will likely provide you with a perspective you haven't yet considered.

So, back to visualizing the money in society:

At any given time, there is a given amount of money floating around in the economy.

Picture scenario one: A society which, although it has wealthy and poor people, has a large middle class.  Has a large percentage of people with a comfortable level of money.

Now picture scenario two: A situation where the wealth of the poor and especially the middle class has shifted to rich people, making the rich become the super-rich and the middle class become the lower-middle class (or poor).depression, stock, market, plunge, collapse, plummeted, fall, 512, 513, points, August, 4, Aug,  rich, poor, middle, class, money,  shift, transfer

With scenario two, what are the chances that a Depression would not occur?


Why The Shift In Wealth Can Trigger A Depression

A reader might disagree with my argument and claim something along the lines of the following:

"In scenarios one and two, there is an equal amount of money.  Given that, why should there be a Depression in scenario two and not scenario one?  After all, isn't money related to the Depression?"

Here's my answer:

Yes, money influences a Depression.

But the difference between the two scenarios, money wise, is this:

In the first scenario, a larger percentage of society's total money is spent than it is in the second scenario.  

As a result, because less money is being spent, fewer people are hired, fewer people have an income, and a Depression occurs.


Why The Spending Difference?

But why is a larger percentage of money being spent by the society with the rich middle class as compared to the society with the money in the hands of the super-rich?

Simple:  The super-rich have so much money they don't spend as large of a proportion of it.  A large chunk sits in investments, or in savings accounts.

By comparison, the middle class spend a large chunk of their income because they must, simply to survive! 

The poor and middle class might spend, say, 40%+ of their income on housing (property tax, rent, or a mortgage-the latter, of course, includes interest).

But the super-rich might spend only 3% of their income on housing (property taxes), not needing to spend any on rent, not needing to spend any on a mortgage.

In fact, overall, their housing costs might be more than totally offset if they actually earn an income from their home(s), by renting out a room or an entire home to one of those poor or middle class people!

So again, I reiterate:

A Depression is caused when too much of society's money shifts from the hands of the poor and the middle class into the hands of too few people (the rich).

There are plenty of articles that show that the money is indeed being shifted to the super-rich.  Here's one, here's another, here's another, and here's an excellent one.

Unfortunately, unless the super-rich have their tax rates increased heavily, and soon, I'd say it's extremely likely that a Depression will soon occur in the United States.


Note:  Due to the market circumstances today, I chose to write this article, and to delay the continuation of yesterday's article (about the debates appearing in my comment sections).

That article will appear tomorrow.


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