Recessions come and go. The nature of our business cycles, sometimes a mystery even to economists, requires a period of recession in order to recalibrate discordant market forces. Our present recession, although now claimed to have officially ended in July of 2009, has been one of the longest on record and harkens back to similarities and differences between it and the Great Depression. Since the theories that define the causes and dynamics of economic recessions are subject to debate, the fear of an extended recessionary period is always on everyone's mind. Many analysts today are suggesting that our lackluster recovery may require another “dip” into negative GDP growth, a “W” recovery as it is called. These conclusions only exacerbate the fear that another Great Depression is a strong possibility.

When one goes back to the history books, there are a few stark contrasts between today and the 1930's that stand out. The United States had large trade surpluses back then, much like China has today. We were the creditor nation for the world. The price of Gold was fixed, currencies were tied to it, and no one but the government could own it directly. Since Gold prices were fixed, the deflation in market prices for nearly everything that followed was a result of relative values declining versus a fixed value for Gold. The search for economic explanations led to the advent of Keynesian macroeconomic theory that postulated the need for government stimulus when monetary policy failed to revive the economy.

Government stimulus spending is still favored today as an intermediate solution to soften the effects of a business slowdown. Today's global economic landscape, however, is considerably more complex. This is the era of Globalization. The interdependence of our individual economies overrules any attempts to control capital flows. The best observation of these flows is provided daily by our global currency markets, where currency trading exceeds $2.5 trillion daily. Changes in fundamental economic data anywhere in the world can ripple through valuations of currency pairs in seconds, and a crisis, like the potential of government defaults on debt in Europe, can cause havoc on currency charts as capital takes flight to find “safe havens”.

These capital flows can thwart attempts at economic recovery and draw out a recession as the uncertainty of available capital affects the psychology of business investment. This issue of delayed investment by the business community is what plagues our recovery today and what provides the strongest link back to Great Depression times. Richard Koo, known today as the most reliable economist in Asia, has dubbed both periods of depressed economic activity “Balance Sheet Recessions”.

Mr. Koo theorizes that prolonged recessions always follow the collapse of a major “ asset bubble ”. Banks and corporations move quickly to repair their credit ratings instead of investing funds in production. The focus is on debt minimization, not profit maximization. The economy will not enter self-sustaining growth until the private sector balance sheets are fully repaired. Monetary policy has no effect since there are no borrowers. Fiscal consolidation should begin only after it is ascertained that funds NOT borrowed by the government will be borrowed and spent by the private sector.

Corporations have over $1.7 trillion in cash on their balance sheets today, reluctant to invest due to market uncertainty. Fiscal conservatives are demanding curtailment of stimulus programs. Investors are in a quandary about their next move. Gold mining stocks and bonds were the only securities that appreciated during Great Depression times, but interest rates were depressed for decades. Gold may be the only “safe haven” at the moment. Time will tell.