Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17
Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat - 9th Aug 17
Why Is The Stock Market Not Trading On Fundamentals Lately? - 9th Aug 17
USD/CAD - Can We Trust This Breakout? - 9th Aug 17
New Monthly Rebate to Help Reduce Your Trading Costs - 9th Aug 17
Stock Market Divergences Are Now Appearing! - 9th Aug 17
Is Inflation an issue or did the Fed Mess Up? - 8th Aug 17
Top 3 Technical Trading Tools Part 1: Japanese Candlesticks - 8th Aug 17
Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - 8th Aug 17
What Happened to Thousands of Sheffield's Street Trees 2017 - Fellings Documentary - 8th Aug 17
Solar, Bubble, Banks, War, and Legal Tender: Five Reasons Why You Should Buy Silver Now - 7th Aug 17
CRASH - If Some People Do It, Nothing Bad Happens, But If Everyone Does It, All Hell Breaks Loose - 7th Aug 17
Gold and Silver : The Battle for Control - 7th Aug 17
Precious Metals Sector is on Major Buy Signal - 7th Aug 17
Stock Market - Has Time Run Out? - 7th Aug 17
Get Ready for an Historic Upside Gold and Silver Run - 7th Aug 17
BOOM! Bitcoin Rockets To New All-Time High As Cryptocurrencies Surge Higher! - 7th Aug 17
U.S. Dollar: This Crash Signals the End - 6th Aug 17
Predicting The Price Of Gold Is A Fool’s Game - 6th Aug 17
Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - 6th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Great Depression 2009 Similarities to 1930's

Economics / Economic Depression Dec 29, 2008 - 09:47 AM GMT

By: Money_and_Markets

Economics Best Financial Markets Analysis ArticleMartin Weiss writes: I have just received a series of urgent questions about the massive crisis swirling all around us. So to help you prepare for 2009, I am going to give you my best answers right here and now. First, though, an important reminder: December 31 — this coming Wednesday — will be your last chance to sign up for Jack's new landmark recommendations aiming for high double-digit returns early in the new year. Plus, it's the last day you can save $295 before a price increase that goes into effect on the dawn of January 1.


So unless you're OK missing the opportunity both to make and save a large amount of money, click here .

Urgent Questions from Readers

Q: I see disturbing similarities between this crisis and The Great Depression. Both were triggered by the bursting of massive debt bubbles, for instance. But this time, the government is doing so much more to pump up the economy. So is it safe to assume that this crisis will be a lot less severe than the 1930s?

A: No, it's not safe to make that assumption. True, the government's massive intervention is a major factor. But there are also powerful factors that can offset or even overwhelm the government's impact:

* Broader speculative bubbles. In the years prior to the Crash of 1929, the bubbles were limited primarily to stock speculation and restricted to a minority of the population. This time, the speculation has engulfed not only stocks but also millions of homes, commercial properties, local governments, corporations, and entire nations.

* More household debt. U.S. households are in far greater debt today with much less savings. In the 1930s, mortgages were rarer and less onerous. For all practical purposes, second mortgages, home equity loans, creative financing, and credit cards didn't even exist. Today, they are everywhere in our society.

* U.S. is now a debtor nation. In the 1930s, the U.S. had large surpluses of foreign reserves and was a creditor to the rest of the world. Now, it has minimal reserves and huge foreign debts. As a result, there's ultimately a limit to how much Washington can throw good money after bad to save the U.S. economy before foreign investors rebel, refusing to continue providing abundant credit.

* Derivatives. In the early 1930s, derivatives were virtually unknown — a tiny niche of little consequence. Today there are nearly $600 trillion in notional value derivatives globally, according to the Bank of International Settlements. The forced liquidation of many of these derivatives could frustrate government efforts to revive credit markets, driving the global economy into a deeper decline than would normally be expected.

Q. A major factor that deepened the Great Depression was the Smoot-Hawley Act, which helped set off a global trade war as each nation rushed to protect its own domestic market. But today, it's unlikely we will repeat that mistake. So doesn't that imply a less severe decline?

A: Yes, it does. However, today there's another kind of economic war brewing: The U.S. and much of the world depend much more heavily on international capital than they did in the 1930s. This reliance on foreign capital has not been a major issue as long as we had continuing growth. But in a global economic decline, there's a real danger that each nation will scramble to grab back as much of its capital as possible to help rescue its own sinking economy. If so, we would see an international bidding war for capital, driving real interest rates sharply higher and sending the global economy into a deeper decline.

Bottom line: It's too soon to say if this crisis will be less severe, equally severe, or more severe than the 1930s.

Q. The Fed is now printing money like it was going out of style. Overall, the U.S. Government has now committed $8.5 trillion in bailouts, handouts, and guarantees to stop the crisis. Won't that lead to hyperinflation and the destruction of the U.S. dollar?

A: Only if governments succeed in overcoming the deflationary forces that have gripped the world. However, in our recent Deflation Survival Briefing, we demonstrated that the deflationary forces are now hundreds of times more powerful than the government's attempts to reflate. (Click here for the transcript)

Q. Why are you so pessimistic? Isn't there a silver lining in this crisis?

A: It's those who believe in the destruction of the dollar that are the true pessimists. In contrast, I am very optimistic that Washington will not only fail to overcome the deflation, but it will also …

  • Fail to reverse the long-overdue liquidation of excess debts,
  • Fail to stop a much-needed reduction in the cost of living,
  • Fail to kill the incentive for Americans to work hard and make needed sacrifices,
  • Fail to stop America from restoring its ability to compete globally,
  • Fail to sabotage our capitalist free market system,
  • Fail to trash the dollar or create hyperinflation, and
  • Fail to ruin our chances for a prosperous post-Depression era.

Q. Investors can't help but notice that Washington views certain companies as “too big to fail.”; Doesn't that create a de-facto government guarantee for their stocks and bonds, making them almost as good as Treasuries?

A: No. Regardless of any government guarantees, most investors recognize they're not nearly as good as Treasuries. They see that bailouts are hotly disputed in Congress, subject to severe conditions, and far from open-ended. They see growing signs of bailout fatigue in Congress and wonder whether or not Washington will be able to fulfill all its bailout promises. That's why investors routinely accept lower yields on Treasuries, while demanding much higher yields on equivalent bank CDs or corporate bonds in bailed out institutions.

Q. This is not a question, just a point of anger. CEOs of failing companies are getting their year-end bonuses, sometimes running into the tens of millions of dollars. And at companies that have benefitted from government bailouts, those bonuses are being paid with MY MONEY!

A: I am equally angered. But this trend will end and do so very abruptly. Even if companies are not trying to qualify for government money, you will soon see their executives either accepting drastic cuts in their compensation or getting canned.

Q: I have an employment question: Which industries are likely to produce the greatest lay-offs? Which kinds of jobs are likely to continue to be reliable for myself and my kids?

A: Lay-offs will be across the board — financial, manufacturing, services, even states and municipalities. Virtually no private-sector or local-government job will be secure. For now, you can rely more on jobs with the federal Government and with companies that provide debt recovery and bankruptcy services. Ultimately, however, the most reliable source of revenues may come from self-employment or extra income you can generate from the kinds of insights you can get here in our publications or from other sources with a track record of anticipating this crisis.

Q. You've written that this depression will be short and severe and that the recovery will come quickly. Elsewhere, you've compared it to the Japanese malaise that has lasted for nearly two decades. Which is it? The answer is crucial to me because it will determine how much extra money I'll need to continue paying the bills and to keep my family secure until this crisis ends.

A: What I've written is that we hope and pray we can get it over with quickly and move on to better times. Unfortunately, the reality is that, to the degree that the government continues to intervene, it can only prolong the agony.

The main reason: Nothing the government can do changes the fact that there are tens of trillions of bad debts that must be liquidated before a sustainable recovery can begin. That debt liquidation can occur either (a) quickly in a severe decline or (b) slowly in a far longer decline. Since it's too soon to say which it will be, I suggest you plan for a minimum of three years and a maximum of ten years.

Q. With unemployment nearly doubling and consumer spending cratering, you'd think we'd be seeing headlines about record numbers of corporate and personal bankruptcies. Why haven't we?

A. It looks like you missed them, and so did a lot of other people. Perhaps it's because the headlines about GM, Chrysler, Citigroup and other disasters were so shocking, they drowned out the news. But in mid-December, the Administrative Office of the U.S. Courts reported that personal bankruptcies in the U.S. surged 30%, while business bankruptcies jumped 49% compared to 2007. Overall, bankruptcies rose 34%. Three other troubling facts:

  • The trend is accelerating: In the third quarter, bankruptcies were up 60% from the year before.
  • That was before the devastating plunge in GDP that has taken place just now in the fourth quarter, estimated at an annual rate of minus 8% or worse.
  • The level of bankruptcies has not yet hit new records. But that's because most bankruptcies take place toward the end of a recession; and most economists now agree that this decline could continue at least until the end of 2009.

Q. Now I understand why you were pressing me to pay off my debts for all these years! But if I follow your advice now, I won't have any cash reserves left to see my family through. And if I don't pay them off, they will cost me more and more as my dollars become scarcer and more valuable. I'm between a rock and a hard place. What do I do?

A: First, take advantage of this temporary government-inspired decline in fixed 30-year mortgage rates to refinance immediately. Grab this opportunity while you can because it will not last for long. Second, pay off all of your high-interest credit cards. Third, sock away every extra penny you save in interest to build a cash nest-egg in short-term Treasuries or a Treasury-only money market fund.

Q. Everybody agrees that this crisis will eventually end. We'll reach rock-bottom, money will begin moving again, and the recovery will commence. When that happens, what impact will the trillions of dollars Washington has injected into the economy have? Will this great deflation be followed by an even greater wave of inflation? Is there something to do now to prepare for that?

A. It's too soon to prepare for what happens AFTER this crisis. First, let's cope with the deflation. Later, if that changes, you'll have plenty of time to adjust, and we'll be there to warn you with as much advance notice as we can.

Q. A year ago, my retirement nest-egg was in great shape — plenty of money to see me through my golden years. Now, it's a smoking gun and I'm staring down the barrel at — who knows? — years, possibly a decade or more, in which stocks are likely to continue to languish or even plunge. I may never be able to retire. My best friend had already retired; now, he's looking for a job just to survive — so far, no luck. Is there hope for us?

A. Yes! When you or your financial planner estimated how much you'd need for retirement, you assumed a continuation of the highest cost of living in U.S. history, or worse. Now, the cost of many essentials is plunging, and it's very possible that the cost of living will be far lower. Therefore, if you can just preserve what you have left in your nest-egg, you'll probably be much better off than you think. Plus, if you can use some (not all) of that money to generate extra revenues with unique investment strategies that are divorced from the ups and downs of the economy, that could also make a big difference for you.

Editor's note: Just remember — December 31 is the double-deadline for the unique investment strategy provided by Jack Crooks .

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

David T.
30 Dec 08, 16:05
Health insurance

I wish I could save some cash... my employee contribution to my employer's health plan (through Aetna) went up 44% for 2009!!! $152/mo just vanished out of my budget for 2009... poof! As the economy tanks, health insurers are going to rape us to keep up their profits. This is one area deflation hasn't hit yet, evidently.

On the positive side, my one remaining debt, a $330/mo car payment, will end this summer.


Jacira xavier
21 Apr 09, 05:44
1930's great depression and todays credit crunch

hi... i would like to know if you can tell me between the 1930's great depression and today's credit crunch, which do you think is the right approach to solving such crises and why? hope you can help me with this matter. thank you


Post Comment

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

Catching a Falling Financial Knife