Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
Gold Commitments of Traders and More - 1st May 16
The Magic of Gold Ratio Charts - 1st May 16
Consensus Forming: China Heading Back Into Financial Crisis - 30th Apr 16
The Next Technical Price Targets for Gold & Silver - 30th Apr 16
Stock Market Downtrend Should be Underway - 30th Apr 16
Gold And Silver – A Clarion Alarm Call For All Paper Assets - 30th Apr 16
US Economic Statistics LIES, LIES AND OMG, MORE LIES - 30th Apr 16
Stock Market Strong Elliott Wave Relationship is Developing - 29th Apr 16
Fed's Kaplan: Brexit to Factor in US June Interest Rate Decision - 29th Apr 16
Silver Miners Strong in Grim Q4 - 29th Apr 16
Is Silver a better bet than Gold in the Near Future? - 29th Apr 16
How to Use the CoT Report in Gold Investing? - 29th Apr 16
Sri Lanka is Intriguing: Areas to Consider for Value Investing - 29th Apr 16
Gold “Chart of The Decade” – Maths Suggest $10,000 Per Ounce Says Rickards - 29th Apr 16
Are We or Are We Not in a New Gold Bull Market? - 29th Apr 16
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16
Global Recession in 2016 and Beyond - The Obvious Evidence - 27th Apr 16
Why Gold Bugs Need to Stop Listening to The Fear Mongers and Start Thinking for a Change - 27th Apr 16
BlackRock’s Fink: Fed to Raise Interest Rates by Quarter Point ‘at Best’ - 27th Apr 16
Gold More Productive Than Cash?! - 27th Apr 16
Donald Trump Will Fire Janet Yellen and Be Trapped - 27th Apr 16
Money Saving Gardening by Propagating Roses From Cuttings - Propagating Rose Plants Over 2.5 Years - 27th Apr 16
Facebook Censors Pro Trump and Negative Hillary News - 27th Apr 16
This is the Era of the Democrats and Your Taxes are Going Up - 27th Apr 16
Long Awaited Gold Price Breakout - 26th Apr 16
Crude Oil Price Double Top or Further Rally? - 26th Apr 16
Madness in the Crimex Gold and Silver Trading Pits - 26th Apr 16
Britain's Prospects: GBP and BREXIT - MAP Wave Analysis - 26th Apr 16
CRB, Gold, Oil, Cotton, Coffee - 7 Must See Commodities Charts - 26th Apr 16
Gold Price Target is $3,000 and Silver is $75 per Ounce - 25th Apr 16
Parameters for a Stock Market Sell Signal-in-the-making - 25th Apr 16
Stock Market Dangerous Divergence - 25th Apr 16
Gold Miners Nub is the Sweat of the Sun - 24th Apr 16
US Dollar Price Forecast - 24th Apr 16
Stock Market Upside Objective Reached - 24th Apr 16
Why Leftist Greeks have more reasons than Liberals to favour Entrepreneurship and Support Entrepreneurs - 24th Apr 16
The Dow Jones is a Catalyst for Misplaced Stock Market Optimism - 24th Apr 16
Why Russia Harasses U.S. Aircraft and Ships - 24th Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

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

© 2005-2016 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