With history disappearing before our eyes (note the latest purge from You Tube of history lessons related to Nazi Germany and Hitler because – “Hate Speech”), it probably good to remember what your grandparents, or great grandparents said about the Great Depression. Possibly, you have only learned this from a history teacher, or from history books .. or, maybe you are unaware of what happened in 1929 that rippled out from the United States to the rest of the world.
However, history repeating itself has been a saying for a long time, but is it actually true? Sometimes it does, but it seems that there is a little different spin on it in every age. As a wise man said years ago:
What has been will be again, what has been done will be done again; there is nothing new under the sun.
Context does matter, but this does not mean we can’t learn from history, we just have to be smart about it. We have to be able to discern those “red flags” and take appropriate action to be prepared.
So when I read this post from Doug Casey I thought to myself, ‘this is why so many people don’t get it’ .. it is because there are certain things that don’t add up. What can make the Stock Market go up on bad news when in 1929 it went down on bad news. This is where we need to consider a few things without drawing our conclusion too soon.
Doug’s examples up front help set the tone:
During the American Revolution, the British came prepared to fight a successful war—but against a European army. Their formations, which gave them devastating firepower, and their red coats, which emphasized their numbers, proved the exact opposite of the tactics needed to fight a guerrilla war.
OK, so what worked in the past, did not work on the American continent. Next:
Before World War II, in anticipation of a German attack, the French built the “impenetrable” Maginot Line. History repeated itself and the attack came, but not in the way they expected. Their preparations were useless because the Germans didn’t attempt to penetrate it; they simply went around it, and France was defeated.
OK. Same thing .. only different. Now on to economics:
Investors, unfortunately, seem to make the same mistakes in marshaling their resources as do the generals. If the last 30 years have been prosperous, they base their actions on more prosperity. Talk of a depression isn’t real to them because things are, in fact, so different from the 1930s. To most people, a depression means ’30s-style conditions, and since they don’t see that, they can’t imagine a depression. That’s because they know what the last depression was like, but they don’t know what one is. It’s hard to visualize something you don’t understand.
True. We saw this before the last bubble ..
This brings me to another post, also put out today by my favorite independent financial guy who has a heart for the world, Jesse Colombo. His frustration is that most people conclude that he is sayin’ the sky is falling over and over again:
I have been criticized literally thousands of times as the stock market surges year after year and the economy continues to grow. The criticisms typically take the form of “you’ve been warning about bubbles for years – you’re a broken clock!,” “you’re a permabear!,” and “you’ve been missing out on tons of profits!” I’ve heard every criticism in the book and I’m completely unfazed by them because those criticisms are based on misunderstandings of my approach and because I know that my analyses are correct.
He was correct about the 2008 bubble, and his stats show that we are on a similar path since there has been nothing else the Federal Reserve can do but QE (Quantitative Easing) all over again as it is the last card they hold.
Jesse’s message is two-fold, and that is where many get confused. On the one hand is his message to the average person (get your own financial house in order) and on the other hand his message to investors is different:
I am able to separate anti-economic bubble activism from tactical trading and investing. I am fully aware that shorting a bubble too early (such as when I make my warnings) would completely wipe out any trader who is foolish enough to do so. Furthermore, I have publicly stated for years that I believe in “trading with the trend and not against it,” which is an approach that helps economic skeptics like myself avoid the bad outcomes experienced by typical “permabears” who are short all the time.
Back to Doug Casey for a moment. What can we learn about the 1930’s Depression that needs to be adapted to today’s situation?
First, we need to understand the foundational difference between then and now in the financial world when it comes to businesses and their relationship to the federal government:
1930s
Banks, insurance companies, and big corporations went under on a major scale. Institutions suffered the consequences of past mistakes, and there was no financial safety net to catch them as they fell. Mistakes were liquidated and only the prepared and efficient survived.
Today
The world’s financial institutions are in even worse shape than the last time, but now business ethics have changed and everyone expects the government to “step in.” Laws are already in place that not only allow but require government intervention in many instances. This time, mistakes will be compounded, and the strong, productive, and efficient will be forced to subsidize the weak, unproductive, and inefficient. It’s ironic that businesses were bankrupted in the last depression because the prices of their products fell too low; this time, it’ll be because they went too high.
You catch that? No deflation, but inflation, because of government interference in the “free” market.
But wait, there’s more:
UNEMPLOYMENT
1930s
If a man lost his job, he had to find another one as quickly as possible simply to keep from going hungry. A lot of other men in the same position competed desperately for what work was available, and an employer could hire those same men for much lower wages and expect them to work harder than what was the case before the depression. As a result, the men could get jobs and the employer could stay in business.
Today
The average man first has months of unemployment insurance; after that, he can go on welfare if he can’t find “suitable work.” Instead of taking whatever work is available, especially if it means that a white collar worker has to get his hands dirty, many will go on welfare. This will decrease the production of new wealth and delay the recovery. The worker no longer has to worry about some entrepreneur exploiting (i.e., employing) him at what he considers an unfair wage because the minimum wage laws, among others, precludes that possibility today. As a result, men stay unemployed and employers will go out of business.
Wait, you get that? Lowest unemployment statistics in years, so the economy MUST be buzzing. Hogwash!
WELFARE
1930s
If hard times really put a man down and out, he had little recourse but to rely on his family, friends, or local social and church group. There was quite a bit of opprobrium attached to that, and it was only a last resort. The breadlines set up by various government bodies were largely cosmetic measures to soothe the more terror-prone among the voting populace. People made do because they had to, and that meant radically reducing their standards of living and taking any job available at any wage. There were very, very few people on welfare during the last depression.
Today
It’s hard to say how those who are still working are going to support those who aren’t in this depression. Even in the U.S., 50% of the country is already on some form of welfare. But food stamps, aid to families with dependent children, Social Security, and local programs are already collapsing in prosperous times. And when the tidal wave hits, they’ll be totally overwhelmed. There aren’t going to be any breadlines because people who would be standing in them are going to be shopping in local supermarkets just like people who earned their money. Perhaps the most dangerous aspect of it is that people in general have come to think that these programs can just magically make wealth appear, and they expect them to be there, while a whole class of people have grown up never learning to survive without them. It’s ironic, yet predictable, that the programs that were supposed to help those who “need” them will serve to devastate those very people.
So what happened in 1865 when the slaves were free? They were UNPREPARED for real life. Ditto here with all the social programs that have made so many dependent on the Nanny State. This will not end well.
There are many more examples, but one more before I conclude:
THE FINANCIAL MARKETS
1930s
The last depression is identified with the collapse of the stock market, which lost over 90% of its value from 1929 to 1933. A secure bond was the best possible investment as interest rates dropped radically. Commodities plummeted, reducing millions of farmers to near subsistence levels. Since most real estate was owned outright and taxes were low, a drop in price didn’t make a lot of difference unless you had to sell. Land prices plummeted, but since people bought it to use, not unload to a greater fool, they didn’t usually have to sell.
Today
This time, stocks—and especially commodities—are likely to explode on the upside as people panic into them to get out of depreciating dollars in general and bonds in particular. Real estate will be—next to bonds—the most devastated single area of the economy because no one will lend money long term. And real estate is built on the mortgage market, which will vanish.
Everybody who invests in this depression thinking that it will turn out like the last one will be very unhappy with the results. Being aware of the differences between the last depression and this one makes it a lot easier to position yourself to minimize losses and maximize profits.
So much for the differences. The crucial, obvious, and most important similarity, however, is that most people’s standard of living will fall dramatically.
Ouch! Didn’t see that coming right?
So when Jesse’s stats show this:
You have to see the difference. Look at that Federal Debt level. We have built the largest military on the planet, probably in the hopes that the elite can remain safe under its protection in the years to come.
Sorry for all the Friday “Debbie Downer” news, but this was too important not to share.
Your mileage may vary
-SF1