Ten comparisons about these two significant financial crises

Deficit Spending and Monetary Policy

The understanding of fiscal policy prior to the Great Depression was simple – the federal government should be run on a balanced budget. That is not the case today. The first similarity of the Great Recession to the Great Depression is the amount of deficit spending as part of the federal monetary policy. As America spends to get out of the recession, the deficit increases exponentially. The federal government now plays a role in Medicare, Medicaid, Social Security and military spending. Based on the insufficient tax rates we desire, this position is unsustainable over the long-term.

During an economic crisis, private spending evaporates. Consumer spending represents 70% of the U.S. economy.  If nothing fills the consumer gap, deflation is inevitable and recovery becomes more difficult. The U. S. is flirting with deflation today as home prices continue to decline.

What does this mean for the future? As of January 3, 2011, the federal deficit was $14 trillion. It is anticipated to rise to $19.6 trillion by 2015. The government has to pay interest on its debt. If you have a deficit every month, you keep borrowing and your debt grows. Soon the interest payment on your loan is bigger than any other item in your budget. Eventually, all you can do is pay the interest payment, and you don't have any money left over for anything else. The risk is bankruptcy.

Each year since 1969, Congress has spent more money than its income. The Treasury Department has to borrow money to meet Congress's appropriations. We pay interest on that huge debt. The debt is being held by China and other world powers, hence another long-term risk for the American Dream.