Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US and European Economies Heading for Depression 2.0

Economics / Economic Depression Feb 01, 2008 - 12:17 AM GMT

By: Christopher_Laird

Economics

Best Financial Markets Analysis ArticleDepression 1.0 started about 1929 and ended around 1940 with the entry of the US into WW2. Even then, many economists say that, had the US not entered WW2, the depression would have continued for years in the US, and the rest of the world.

Now, since WW2, the US and West entered a period of unparalleled post war prosperity. This resulted in an incredible rise in the standard of living in the US and West. People don't realize, but much of the US didn't even have electricity in the 1920's!


The combination of a post war prosperity boom, cheap energy, and also a huge credit boom resulted in incredible economic growth. (Oil was new, guys, the world used coal and steam and wood prior to the 1900's, how far we have come in a few decades, no?) 

Where Are We Now

Modern big investors are saying that what we are witnessing right now is not merely another recession. It is the end of a 60 year post World War 2 prosperity and credit boom. It drove the whole world economy, and the US led the show. The USD was used as a world reserve currency during WW2 when the war in Europe threatened to collapse the European currencies and the Pound. I don't know if people know that is why the USD became the world reserve currency in the first place, in the Breton Woods agreement during WW2 to stabilize currencies.

The US gold stockpile (we had accumulated most of the world's gold in WW1 and WW2 backing our allies) was used in Breton Woods to act as a reserve for the USD. That was broken when Nixon went off the gold standard in the 1970's. But that is another story.

Getting back to what we are looking at now, a very similar unwinding of a credit bubble, similar to what developed in the US and West in the 1920's (Roaring 20's). But, this time, the amount of leverage out there, and money out there, in financial and asset markets such as real estate is nothing less than astounding.

And we are also seeing the damage that financial derivatives are doing when they go bad. These are leveraged bets and contracts that have 30 to 50 to 1 leverage. Try that in a stock exchange.

Well, of course they did try that in stock exchanges with mortgage backed securities, MBS, and we all know that is what started the unraveling of our world credit bubble – with Bear Stearns and their CDO mess and the other MBS messes that started to show themselves around Spring of last year. Then the mess multiplied in Summer, and finally detonated in August of 07, leading to our present collapsing and paralyzed credit markets today, Jan 31 08.

We are about to witness the onset of Depression 2.0

George Soros said that what we are seeing is not just another recession but the unwinding of the huge credit bubble that began after WW2. Fund manager Jim Rogers said we are going to see something much worse than a normal recession, and that the severity of the onset is surprising him.

Well, surprises to the downside appear to be the norm these days. I think the Central banks, the Fed and ECB, are nothing less than horrified, a bit panicked, and realize their normal major weapons to combat this Depression 2.0 are not working much at all. If this is a credit crisis, offering more credit does not work, people cannot pay what they already have borrowed. We already are seeing cases where banks are freezing their balance sheets (not lending new loans) to try and stem the bleeding. I saw one commentator (Mike Shedlock) say the US banks have lost their entire net capital so far! Financial institutions are literally shell shocked at how fast this happened. (Witness financial mass destruction ala W. Buffett thanks to derivatives.)

In fact, I am seeing comments from financial media that big investors are beginning to realize just what I said above, that the Central Banks have lost control of the situation.

Gold is rallying in this whole mess. In fact, if you look at gold's big rises in the last year, it correlates well with the onset of the credit crisis after Aug, September.

Gold seems to think we are in stagflation. Gold rose dramatically in the stagflation of the 1970s. We see many of the same trends today. The credit bust has caused central banks to flood out money, and growth is stalling. Inflation remains a problem, tying central bank's hands, and since we are in negative real rates (inflation is higher than US interest rates, hence negative) gold reacts by rising dramatically. Gold rises big in negative inflation environments.

As central banks combat Depression 2.0 and try to stave of deflation which wants to emerge, and markets contract and spending contracts, gold will rise during the stagflationary stage, which we are in now.

At some point, deflation might actually come into the picture, and gold steady if the US and ECB don't panic and just flood out $trillions and trillions to try and stop the deflation from emerging.

But, in any case, unless things change the direction they are going, and if the credit bubbles continue to be paralyzed and deleveraging, and central banks keep flooding out money and lowering interest rates, gold will rise well over $1000 in 08 and stay there.

We have been saying to subscribers that they should get gold while it is still below $1000. Of course gold right now may correct significantly, since it has risen so much in recent months. But, longer term, gold will soon be over $1000 an ounce, and people will be sorry for having to pay over $1000 when they could have had it for mere hundreds.

And there is always the possibility that the world stock markets will let go big and gold correct. I had a subscriber ask me (paraphrased) ‘I want to get some more gold but I might want to wait for a correction then get it. I have some now, but want to get more. But gold keeps going up, so I'm not sure?'

My reply was that I personally consider gold a buy below $1000 for reasons I just outlined here. I told him of course gold can and does correct significantly when the financial markets sell off. And that can happen. I personally buy gold when it's at these lower than $1000 levels. Gold has shown itself to recover rapidly after sell offs for liquidity in financial sell offs, when big investors need to cover margins so as not to be forced to sell on down markets. I said these exact comments when gold was at $635 in 06, even as it was dropping, I bought ounces. One reader back then asked me why in the heck I said I was buying at $635, when it was falling then. Well look at the price now, over $900….in only a year roughly.

General Commodities Different

This does not apply to the general commodity complex in my opinion. Gold will stay up overall because it's money, and a central bank reserve asset. Something like copper is not. And copper is super sensitive to any economic slowing, as we see now. Also, China just indicated they expect a tough 08, and a slowing in economic growth. That is something we have been discussing for over a year, that China is an overestimated factor. Sure, they can grow tremendously, but many people don't seem to realize that they have had an incredible industrial and financial boom, and it's time for them to also have an economic correction, and that will definitely hit general commodities hard in 08 I believe.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2008 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

Christopher Laird Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in