Great Depression and $200/Barrel Oil, Do You Believe Them?
Wednesday, November 12th, 2008
By Michael Lombardi, MBA for Profit Confidential
The works that I do, and the businesses I’m involved with, call for me to visit many cities. I see this as a blessing, as it gives me the opportunity to hear firsthand how many businesspeople are personally experiencing the economic downturn.
Recently, I’m traveling to Miami, New York, Washington, Chicago and Tampa. The stories in these cities are all the same: Business is down, restaurants are empty and people are worried about their jobs. The mood is sober at best.
The U.S. is currently shedding jobs at the rate of 8,000 per day — n unbelievable clip. Businesses that once expanded rapidly are contracting. And the debt these businesses took on – especially those enterprises that used debt to pay their expenses because they had no real profits — is becoming difficult to refinance.
In my career, I’ve lived through booms and I’ve lived through busts. I can still vividly remember the oil crisis of the 1970s; I remember interest rates of 20% in the early 1980s, the oil bust of the mid-1980s, the difficult real estate market of the early 1990s, the tech bust and now the real estate bust. At a deeper level, I’ve learned how these booms and busts play on the greed and fear of Americans.
Lately, I’ve been hearing, reading and seeing reporters’, analysts’ and journalists’ predictions on how we are headed for the Great Depression, Part II. There is a big difference between what happened in the 1930s depression and what is happening today, and I want to ensure my readers know the difference.
— In the late 1920s, an investor was able to buy stock 90% on margin. Today, 50% margin is available only to stocks that qualify (you can’t margin penny stocks).
— During the Great Depression, 8,000 U.S. banks failed. So far this year, 17 U.S. banks have been shut down. Now here’s the big difference: in the 1930s, there was no FDIC insurance. So, if you had your money in a bank and it closed it doors, you lost your life savings. Today, if a bank goes broke, the Federal Government will reimburse you up to $250,000. (This was part of the cause of the Great Depression; there was a run on bank deposits because customers literally took their money out and hid it at home because they did not want to risk their bank going bankrupt.)
— Never facing a “modern day” Depression before, the dministration at the time believed that a financially strong government without debt or with very little of it was important. Hence, it raised taxes on consumers in order to pay off government debt — a fatal mistake. Today, the Administration is piling on government debt to help consumers. Under Obama’s tax plan, if it goes through, overall consumer taxes go down.
— To prop up the U.S. dollar, the U.S. government in the 1930s raised interest rates and placed heavy tariffs on goods entering the United States. In retaliation, foreigners stopped buying American goods. Today, the U.S. policy is reduced interest rates and as much free trade as possible.
There are significant differences between what the U.S. government did during the Great Depression and what it is doing today. Yes, this will be nasty recession, much worse than what we experienced in the last recession, but for those reporters, analysts and journalists scaring consumers with the prediction of another Great Depression, they should take a quick history course on economists. But after all, are these not the same reporters, analysts and journalists who told us this past summer that oil prices were
headed to $200.00 U.S. a barrel?
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
