What happened to the economic earthquake?
Editor's Note: This article was written by Cofounder Larry Burkett in 2000.
I wrote a book in late 1991, The Coming Economic Earthquake, the gist of which was that the U.S. government was spending significantly more money than it was generating each year in tax revenues. I felt that our national debt and annual deficit were out of control and would eventually bring our economy to its knees, creating an economic collapse of historic proportions. Although I did not say that I thought the economy was going to drop in any particular year, I did feel that if we did not change our ways we would experience a huge economic crisis sometime after the turn of the century.
In the final year of the 20th century, instead of a collapse of America's economy, we saw that inflation in America was virtually nonexistent, unemployment was at its lowest point in decades, and the stock market continued to hit new highs regularly. But, whereas America seems to have entered an era of economic prosperity in which deficits, debt, and interest payments no longer matter, the same cannot be said for most other countries of the world. Some of these countries are experiencing an economic depression that rivals the Great Depression of the 1930s.
So why has the U.S. been spared from the economic chaos that for the past four years or more has victimized much of Central and South America, Eastern Europe (and to a lesser degree Western Europe), all of Africa, and much of Asia? I believe that there are four basic reasons: (1) We saw a decline in government regulations. (2) There was a reduction in governmental spending. (3) We instituted a pay-as-you go welfare system that encouraged Americans to work; and (4) Families began investing in the stock market through their retirement accounts, making up the difference in their living expenses by using credit cards for their everyday purchases. So, although the government and the consumer still carried an enormous amount of debt, our economy benefited from a new wave of optimism that spawned the largest peacetime economy in this nation’s history.
We must learn from our past
The last time we saw such a remarkable growth in the stock market was during the 1927 stock market acceleration as it rose to dizzy heights, inflating the economic bubble far beyond its ability to sustain, resulting in the crash of 1929. During the three-year bull market that had kicked off in 1927, the nation’s economy was booming, convincing even some of the most cynical that America’s economy was capable of spreading wealth and prosperity to the farthest reaches of the country. But, by the fall of 1929 the financial engine had begun to sputter. Steel and automobile production was waning, and the rest of the economy showed signs of decline. The bull run, which had been built out of overextended credit and inflated values, was on the verge of collapse, as investors were increasingly hard-pressed to pay back their loans. However, there were warning signs given before the October 29, 1929 collapse, and those who were paying attention and who heeded the warnings avoided financial ruin. Those who ignored the warnings suffered financial devastation.
Wall Street received its most direct warning of the upcoming stock market crash on August 9, 1929, when the New York Bank raised the rediscount rate on loans to brokers a full point, to 6 percent. The hike was precipitated by the unsettling news that brokers had racked up a record $6 million debt, the fourth time during August 1929 that their loans swelled to record levels. Still, bankers assured the business community that the move was not cause for alarm. The following day the Dow closed at a month-long low. Until that point, investors had been reveling in a record-setting bull market that had lasted well over two years. As the Dow hit new highs, the stock market became a national past time; the craze for playing the stocks spread from the big-city super-rich to small-town American laborer. The overall attitude of Wall Street at that time was best characterized by Charles E. Mitchell, the chairman of the National City Bank of New York, when just six days before the market crashed on October 22, 1929 he said that “The industrial situation of the Unites States is absolutely sound, and our credit situation is in no way critical…. The markets generally are now in a healthy condition…. I know of nothing wrong with the stock market or with the underlying business and credit structure.”
If we compare the financial headlines of precrash 1929 to today’s financial headlines, the parallels are remarkable. As the Dow continues to climb, economic analysts assure us that “the fundamentals are sound” and refuse to acknowledge that another crash is even possible, much less probable. So, although the previously mentioned four basic reasons brought us a temporary reprieve from financial decline, they are not permanent solutions. We still are faced with huge trade deficits; the federal government still borrows millions from the various trusts, which they then claim as income rather than debt; the government still spends more than it brings in; and consumers still are indebted on an average of $11,000 per family. These have prompted the chairman of the Federal Reserve Board, Dr. Alan Greenspan, to caution several times over the past three years that he sees a coming economic crisis on our horizon. Yet, the majority of economists and financial planners have announced that our economy can continue to expand indefinitely and that there are no serious, potential problems.
Recognizing problem areas
I tend to agree with Dr. Greenspan and feel that there are two major areas of concern with which we must deal if we are to avert a looming economic problem. First, there is the overinflated value of our stock market: a bubble economy. The second is what I call cruising economy. This is an attitude that our economy can continue at its present rate without being negatively influenced, even though the level of consumer debt continues to escalate and the savings rate continues to decline. In essence, I fear that this economy feels that it is immune to the economic struggles experienced by most of the other countries in the world. Nevertheless, I am still convinced that we will soon hit a major bump in the economic road, because these areas have not been addressed satisfactorily.
So, having considered all of the evidence—national debt and debt repayment, trade deficits and protectionism, increase in consumer debt and decline in savings, increased interest payments, and a greatly inflated bubble stock market—one thing is certain concerning this economy: it defies logic.
Historically, we know that when the economy does defy logic it tends to right itself; when it is oversold, it tends to retreat; when it is undersold, it tends to advance. As such, although I still believe that this economy cannot continue at its present rate without suffering irreversible damage, I do not suggest that everyone run out and withdraw from the stock market or change all of their investments or retirement plans. My intent is to inform people of the seriousness of our national economic situation, to encourage them to become debt free (including their homes), and to inspire people to get angry enough to demand changes in our current government spending patterns. We also must seek God’s intervention and encourage others to do so. Scripture is clear about repentance bringing change. “[If] My people who are called by My name humble themselves and pray and seek My face and turn from their wicked ways, then I will hear from heaven, will forgive their sin and will heal their land” (2 Chronicles 7:14).
Although we may not be able to forecast when the forthcoming economic collapse will happen or how to protect our holdings when it happens, God knows, and we can trust His guidance! Jesus told us to seek first the kingdom of God, and God would provide for our needs (see Matthew 6:33). One of the dangers of being “financially independent” is that it often means we no longer depend on God. When our money is lost, our security is taken away. This is not God’s will for our lives. We must decide if we truly believe God is able to supply our needs or if we are just saying we believe it. We may not be able to control the world economy, but we can allow God to control our lives, and we can live our lives for His glory. That is all God asks of each of us.
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