Great(er) Depression 2?

After reading a couple of books about the Great Depression, I think that this economic recovery we are seeing in the stock market (primarily) is a sucker's rally and that we will soon see a terrible downturn, with a situation coming that will be worse than that of the 1930's.

In fact, I think the downturn will be so bad that we won't see a bottom for almost 2 years (other than occasional little counter rallies) once this thing gets rolling. After that, it will be a long, long recovery of at least a decade. What do you think?

 

What's your rationale for drawing that conclusion?

Since you've studied the Great Depression, you surely know that the combination of factors that most directly contributed to the stock market crash in 1929 can't happen again, because of regulations that were put in place after the crash. Obviously, that's not to say that we won't have recessions and/or market downturns, only that a 1929-style crash won't happen again.

The capital markets in general are one of the engines that drive the American economy, but they in turn are driven by the psychology of buying and selling. If people believe they can make money in various securities, they will invest in them ... the key word being "believe". The psychology is just as important, if not more so, than the so-called fundamentals of the companies themselves.

Recessions happen when money stops moving, because of clogged capital markets or some other reason. That's why it's possible to spend your way out of a recession, but you have to have some way to pay for it, and there are two ways to do that ... you can tax or you can borrow. Which one you choose is a matter of philosophy, but neither of them comes for free ... they both have long-term consequences.

For a capitalist economy to work on a national scale, the most basic needs are demand and the means to supply that demand. But in addition, you must also have a liquid, mobile supply of money, and that's been our problem over the past year or two. But it's a problem that's being addressed.

I don't think anyone doubts that the United States and the rest of the world have the demand and the means to supply it, so it remains to be seen if the money can be gotten moving again. I'm betting it can.

 

this issue was addressed fully back in 1995 by the economic policy institute.
the institute published a book on thi matter enitled: "beware the u.s. model: jobs and wages in a deregulated economy."
they warned the wave of massive deregulation that started under reagan and thatcher would lead to where we are today.

another great depression. we are in a major depression right now! the only thing that stopped us all from going into another great depression like the one from 1928-1945 were, what was left of the regulations from the 1930's to the 1960's.
nixon started that rollback of those regulations and, reagan and thatcher made a title wave out of what nixon started.

the question for now remains... do we and our "leaders" have the political will to do the right thing and re-regulate financial markets both in our home nations and internationally too.

 

They'll fight it tooth and nail.Regulations are anathema to bankers/lenders.Rules that preclude their unbridled greed,to the disadvantage of everyone but themselves probably will not happen because of PAC money and the impending decision of the conservative supreme court regarding corporations unlimited donations to politicians.If money is free speech and by setting limits the constitutional rights of corporations are being violated ,given that they will vote as expected to remove limits,then the oligarchy by which we are ruled carries on.

 

For our purposes, I would put the lending institutions into a different category than the securities markets. Not to oversimplify, but the securities markets are leading indicators, the banks are "trailing" indicators, and by themselves, the banks don't have the power to throw the entire economy into the toilet.

I guess it depends on your definition. But we're a long way from the misery of the 1930's. We don't have 25% unemployment, nor are banks and insurance companies falling like flies. We also don't have a Dust Bowl going on, which helps.

The Great Depression was more than an economic catastrophe. It created a social upheaval in American life and in the way the economy was managed, and I don't see that happening this time.

 

That social upheaval brought the Smith family to California from Enid,Oklahoma in the 40s.One of their daughters eventually went to college as did I.We met --we married-and had a daughter.So,I guess there's one person glad the depression worked out as it did.(Hint:not the ex wife.)--------------sorry.Just thought I"d throw that in.Off to work now.

 

Your very own "Grapes of Wrath" ..

 

Indubitably.I went to school with many ,many rough-hewn kids that were poor as the proverbial church mice and often times smelled worse because of living in cars and camps with not much in the way of fascilities.They came out with their parents in junky old clunkers of course, to get a new start on life and get away from the dust bowl where along with their topsoil, their lives and dreams blew away.They were mistreated badly,just like in the movie and the the usual culprits were those that put money above human dignity.Those types are still around and hasn't it been ever thus?There are huge amounts of decendants from Oklahoma,Arkansas,ect still in the valley where the Grapes of Wrath as shown by Steinbeck took place.One of my favorite movies,by the way.

 

Periods of social upheaval often lead to interesting times. Perhaps the San Joaquin Valley wouldn't have turned into the food basket of the US if all those Okies hadn't been forced to move there.

Perhaps I myself wouldn't even be here to talk about it if my grandmother Rosalinda hadn't left Mexico during turbulent times to attend the University of California, where she met my grandfather.

You never know how things will turn out.

 

I know.I was thinking about that very thing last night.I can remember when a minute later--a minute sooner--a word unspoken or the opposite would have taken my life and its' consequences in completely differant directions with storylines unknown--and I mean by mere inches--left unknown but wondered about.Alas--no time machine.Interesting to contemplate occasionally.

 

Nah, you're wrong, in fact some countries have already exited the recession. What lead to the original market crash has systems in place to stop that from happening again, and we've learned from the original. You should also know what helped prolong the depression was the fact countries around the world instituted massive tarrifs to try to protect their home industries, bringing world trade to a halt

On the other hand, the causes are all still near the same, excessive credit and expansion of the money supply. Read up on Austrian economics
http://en.wikipedia.org/wiki/Austrian_school
(no it's not about the economy of Austria)

 

Well, there is lot going on here but I will try to provide just a few key points for now and perhaps more later.

The vast majority of economists are predicting a recovery starting this year which makes me comfortable to predict just the opposite being the contrarian that I am. When the lemmings (PhD economists) such as Krugman, Summers, Stiglitz and Bernanke started this incessant clamoring about the recovery two months ago, as a group (after they saw the stock market rising), I knew to start looking the other way. But then, with my Libertarian leanings, I have had my doubts all along with this house of cards. Anyhow, their profession missed this collapse almost en masse and they are going to miss it again….incredible. It is clearly evident that most of these men are reactionary, i.e., they only make a prediction after seeing a change in the conditions. The only tiny ray of light for their profession on the national scene is Yale’s Bob Shiller. But back to the group as a whole…they really don’t know what is going on - but they always seek comfort in numbers (it’s really quite funny to watch them twist and turn as they try to decide whether to stick with their Keynesian positions - or drop them - or jump back on - or back off…they don’t know what to do!!). Anyhow, once one made a move when he saw the market improving, they all jumped on the band wagon. Paul Krugman IMHO is perhaps the worst of the lot in that he goes further and has the chutzpah to call the others idiots and fools. Indeed, IMHO, he is a man that needs to buy more mirrors around the house whilst he makes such pronouncements.

Anyhow, looking beyond the official economic soothsayers, we can see that unemployment continues to grow and infect more areas of the economy. This a is deadly, deadly portent of a worsening economic situation. The head of the Atlanta Federal Reserve said recently that the real unemployment rate is probably 16%, not the officially reported rate of 9.4%. This real number counts those who have stopped looking – that is they have given up.

In the bond market, the credit spread between lower grade debt and higher grade debt is narrowing substantially. This is a harbinger of a decline; it is commonly seen as a speculative bid when investor caution is flagging and bullish spirits are overblown (and the market is oversold). Once the decline starts, this spread will start to widen significantly.

A recent AP story had the headline: Federal Tax Revenues Plummeting. The decline was projected at 18% this year, a huge decrease that will inflict serious pain on congressional budget makers….and it is the largest drop since 1932 (there is that decade again). Corporate tax revenues are projected to fall 53%!! Why? The core problem is a demand contraction of extremely unusual extent.

In a related statistic, according to the WSJ, the demand for electric power was down 4.4% in the first half of 2009. For perspective, these numbers have gone up gradually without interruption since almost anyone in the business can remember. A decline of this magnitude is unheard of. Why the change? The lights are going out as the doors are closing on factories. Factories are the largest users of electricity.

Prices are collapsing in a deflationary spiral. Yes, there has been a partial recovery in the stock market. But look at the whole landscape. Real estate has been devastated around the world. Commodities have been devastated with a few minor exceptions such as gold (I believe its time is coming…it should decline to around $700 an oz. or so). Interest rates on your savings are almost non existent. The Nasdaq crashed from approximately 5,000 to approximately 1,200 from March 2000 to September 2002 and then back down to around 1,250 again in March of this year. The Dow lost half of its value, crashing from 14,000 to 7,000 from October 2007 to March 2009. It has now regained about 36% of the decline.

The largest bank in the United States, Citibank, is all but bankrupt and kept in business only because of the U.S. government. This once proud flagship trades for a few dollars a share. If you had said this would happen a decade ago, you would have been declared a raving nut. But to make matters worse, most other large U.S. banks are in similar condition, with minimal reserves and a boatload of R.E. loans that decrease in value EVERY DAY. If the FDIC has to bail out more two more large banks, it will not be capable of doing such. Fannie and Freddie are, IMHO, bankrupt, but the show must go on until the audience wakes up. Barack is spending money like a shipload of drunken sailors. Even the Chinese are saying, …what the hell are you guys doing? Are you crazy? So there is bankruptcy pending on that front. The once pristine U.S. Treasury Bond is now in question because we took on all of that junk mortgage debt earlier this year……putting everyone’s savings at risk. It seems like the message is that the government will borrow until no one will lend and then they will turn the printing presses on high speed. Deflation and then hyperinflation.....

If you don't believe any of the above......Chart it! Depressions come on a fairly regular basis. 1720, 1837, 1929 and 2000/2007 (I would argue that this whole thing actually began with the collapse of the Nasdaq in 2000 wherein it lost 76% of its value). This does not mention a plethora of smaller crises such as the Panic of 1893. We are due according to the charts. And oh, yes, there was a stock/bond market in Europe, even in the 17th Century!!

Some persons have indicated that the governments “priming the pump” will get this thing going again. Ain’t gonna happen my friends. The size of the world economy compared to what the governments would have to provide is far too great. What government can do compared to industry is actually small. America’s debt alone is $52 trillion and we have allocated a few trillion and can't do much more. And while we are on the subject of governments and money…governments do not create wealth and jobs; entrepreneurs create wealth and jobs. Governments tax and take what entrepreneurs make. The same way that governments do not produce “real” jobs; they tax (in effect confiscate) money from entrepreneurs and use that money to create “fake” jobs. The best help government can provide assistance is to get out of the way. As a guy that runs his own small business, I can tell you that from personal experience!! If government produced real jobs…..there would be no problem here……..

And as far as the money flowing? There is no money flowing except to the big, connected banks like Goldman Sachs. If you want a scandal…..there is the scandal. The small businesses don’t get jack. We can’t get loans anywhere anymore. Wall Street banks get whatever they want. I used to think those conspiracy stories about the CFR and Goldman Sachs and the Illuminati, etc, etc, were a bunch of bullcrap.......now I am not so sure anymore.

So the question is why do I think things are going to get bad? I can’t figure out why anyone would be overly optimistic. And I have not even put out a full and detailed compilation of the problems and issues in this short little writeup.

 

Ah, more conspiracy theories ... LOL

 

Our debt more then tripled in one day? Zoinks scoob!(No really it's about $11-12 trillion)

America's debt is massive and a huge problem, but it actually is on par with a good deal of western European countries at around 65% of the GDP

Most economies are seeing their downturn begin to bottom out now and are predicting growth by the 2nd quarter of 2010

Japan's is over 200% of their GDP, they're truly fucked.

And real estate should be devastated, this all began because of a bubble that could not be sustained, prices of houses and building of them got to a level that was not practical but people assumed it would keep on going, same with the internet boom in the 90's

 

Like everything…..it depends to some degree on who you ask and how you count. It is certainly more than $12 Trillion, however. The $11 Trillion number is the official “wish it were” published number that you will hear from the White House...and you used to hear a slightly smaller number from W's White House too...(did you ever hear of on-line/off-line budget items?)...it's just wishful thinking unfortunately from the Executive Branch. Anyhow, the $12 Trillion is dwarfed by our SS and Medicare obligations alone!

But when I say America's debt, I am not just talking about just the government debt. We have been on a spending spree everywhere for the last few decades.

Here is a brief list of some of our debt (yours is item 2):

$9.7 Trillion in bailouts
http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok

$11 Trillion in national debt http://www.brillig.com/debt_clock/

$17 Trillion in corporate/financial debt
http://www.nytimes.com/2009/04/04/business/economy/04charts.html?_r=1&em

$13.8 Trillion in household debt
http://www.nytimes.com/2009/04/04/business/economy/04charts.html?_r=1&em


$1 Trillion in credit card debt
http://www.opposingviews.com/articles/opinion-americans-1-trillion-in-credit-card-debt


$10.5 Trillion lost in mortgages
http://money.cnn.com/2009/03/12/news/economy/flow_funds/


$52 Trillion (this is EXTREMELY conservative) in social security/Medicare obligations...that is as of today..

http://www.bio-medicine.org/medicin...lion-to-Current-Retirees-and-Workers-31244-1/



After you follow the links (hope they work) you will see that my number of $52 trillion (actually I meant to round it off to $50 Trillion) was quite conservative. And there might be a little overlap here and there. But by and large, these numbers should be just about the unfortunate reality.

So that is it on the debt issue…..we are basically screwed..........and a lot of it is due to our politicians - of both parties...they have been wrecklessly spending our money and never worrying about tomorrow.

 

Some of those links are back from January-February, and yes, the Fed did put up to near $12 trillion on the line for the economy, but no, we didn't come close to spending $12 trillion. You have to remember too we just didn't throw money at banks, GM and ect, the stimulus was direct money spent, but banks do have to pay back what they get, in fact the government has made some profit off early returners

Obligations don't matter, yes it's money we will spend in the future, I promise you we will still collect taxes in the future too. The national debt as a whole is both government and private debt, as eventually as it works its way up the chain, that debt becomes public. This is why despite the fears of China, most of the national debt in the US is in fact held by Americans, only about 30% is owned by foreign countries, and only 1/4 of that is China


If the US debt was at $60 trillion..............well that just couldn't happen, we'd all go bankrupt 1st, the world economy as an entire whole outside the US just isn't worth enough to finance that kind of debt minus hyper inflation around the world, in which case I guess $60 trillion wouldn't really be that much

 

Well, the World GDP is $60T....if that was ours, we wouldn't be in such bad shape.

But I truly believe you put too much faith in our politicians....it seems to me that they do everything they can to borrow or print their way to as much debt as they can without a regard to the consequences....

I really don't know what difference 5-6 months makes on some of these figures...it would be nice if all that debt would just vanish in such a time....we could only wish! These numbers are so incredibly huge that they will be with our country for generations and generations.....

As far as funding SS and Medicare......it will not be as easy as you state and the payments right now are small compared to what they will be SOON........Washington was supposed to be setting aside our payments but they have been spending every penny we have sent to D.C. since the program was initiated. There is absolutely NOTHING in the lockbox and now we have a HUGE demographic nightmare looming with a huge mass of boomers retiring and your generation being relatively small.

But to get some perspective on the magnitude of this, last year we took in $2.5 Trillion in tax revenue. We spent $3 Trillion. Those numbers are in the range of normal except the budget deficit was usually about $100-200 B. Tax revenue will decrease by 18 percent this year. Spending will increase $1 Trillion. Those numbers are NOT normal. There is and will be no money for anything.....and the interest in the future is going to KILL us when it starts taking off........

There's one small thing about all this debt that bugs me and that is that the people spent only $1 Trillion........at least they usually have something to show for what was the smallest number on the board that is a sea of RED....

 

But back to the original topic....I think this economy is going down and the market too. The Dow might squeak back up to 10,300 but that would be the most.

 

Economist from communists to the Austrian school would disagree with this, this would predict a future of no growth. It'd be pretty impossible to experience no growth unless everyone just stopped doing things.

The problem of social security is a large problem for in the fact if we can't find a way to fix it and make it work better, it's just going to drain money out of other government programs. But, even with no changes made what so ever, SS will in fact be solvent until around 2035, it is a problem but it is in fact not the mega disaster looming they tried to make it look like a few years ago when Bush wanted to privatize some of it.

The deficit is massive this year, but it will be far small next year. It'll still be huge, but not on this scale, why it's so large now is in a year with decreasing tax revenue the government launched a near $800 billion stimulus to try to raise the economy.

And the numbers and months matter because you fail to differentiate between money 6 months ago that was put on the line to possibly be spent, vs the actual money that had to be spent. There is a VERY large difference in the 2 numbers. The US economy did not implode, so we did not have to spend $10 trillion.

 

Re: my prediction of a downturn in the stockmarket or at best, a possible spurt to 10,300 on the Dow and then a downturn.....Economists from communists to the Austrian school would disagree with this, this would predict a future of no growth. It'd be pretty impossible to experience no growth unless everyone just stopped doing things.

I am not sure why you think this would predict a future of no growth. What I am saying is that we are not out of the woods...yet. I am saying that we have a long way to go. Eventually, there will be growth. But in comparative terms, I am saying were are in 1930. And, hey, I can dig laissez faire economics and the Austrian School......von Mises - okay but.....communist controlled markets....nonsense - who cares what those daft halfwits think. And I know you were drawing the range but still....who gives a damn what communist planners think?