When the stock market started falling off the cliff during the credit crisis of 2008, one of the most common questions I was asked back then was, “Is this the start of the next depression?”
My answer was, and still is, we do not have the same conditions today as we had in 1930s.
Today, we have the FDIC, which insures bank deposits (about 10,000 U.S. banks closed during the Depression; only 300 banks have gone under since 2008.). Stock margin requirements in the 1930s were 10% to 20% on most stocks, compared to 50% today on only those stocks that qualify for margin. The money supply was tight in the 1930s; during the 2008-2009 recession, the Fed and the U.S. Treasury made it so easy to access that it bailed out the big banks, Wall Street, and even General Motors.
The above is the good news. Now, here’s the bad news:
There are other risks our economy faces today that are worse and more serious than those faced by Americans in the 1930s.
Dear friend, if you think we are “out of the woods” with the economy, think again. Millions of people thought the economy was fine back in the early 1930s after the 1929 stock-market crash. They were fooled, just as Americans will be fooled again this time around.
Look at the hard facts:
Stock market crashes in 1929. Eighty years later, in 2009, it does the same thing.
The bear market rally that started in October 1934 lasted until August 1937—35 months—and took the Dow Jones Industrial Average from a level of 90 to 185, a gain of 106%.
The bear market rally that started in March 2009 has lasted 25 months so far and has resulted in the Dow Jones gaining 92%.
If the current bear market rally follows the same path as the bear market rally of 1934 to 1937, we have 10 months left before the next phase of this bear market gets underway. But this time, the after-effects could be much worse than the Great Depression.
How could our economy face devastation worse than that of the Great Depression?
Simply because our government and economy are in much worse shape today than the government and economy of the 1930s.
Staying with the government…
This year, the U.S. federal deficit will reach $1.65 trillion. According to the White House’s own prediction, the national debt will hit $20.0 trillion before the end of this decade—not including off-balance-sheet items like old-age security and other government promises to its citizens.
In a letter to Congress earlier this year, Timothy Geithner, the Secretary of the Treasury, urged Congress to raise the national debt limit past $14.29 trillion immediately or face the eventual closure of government.
Politician after politician has failed to reduce government spending. By the year 2020, our national debt will be about 150% of our Gross Domestic Product—about the same level it was after World War II.
But, after World War II, America became a superpower. Our manufacturing base grew dramatically. The industrialized revolution was so great that the American dollar replaced gold as the reserve currency of other world central banks. There was a job boom.
Today, what do we have in America to carry us on to the next boom? The Internet?
To make matters worse, the government’s debt, our national debt, is much larger than the “official” number…
Fannie Mae and Freddie Mac own or guarantee half the residential mortgages in America. Who owns both of these companies? Why, it’s the U.S. government! In effect, the government either owns or guarantees half the outstanding residential mortgages in this country. How crazy is that?
More importantly, imagine the exposure our government has to the frozen residential mortgage market and how many trillions it will cost to keep those mortgages and guarantees in place.
Now, let’s move on to the economy:
During the credit crisis of 2008 and 2009, the Federal Reserve forked over trillions of dollars to bail out private and public companies. They are so secretive about who they bailed out that Bloomberg , the giant news company, had to go the Supreme Court of the United States to get the information into the public’s hands.
In an e-mail blast to thousands of my followers on July 21, 2005, I said, “The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of 2004) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.”
And that’s exactly what’s happened.
Interest rates have remained so low for so long that inflation will become a serious problem for America in the months and years ahead. With the price of gold rising from $300.00 an ounce to $1,400 per ounce (367%) in less than a decade, gold is screaming, “Inflation Ahead!”
How does the government and an economy deal with inflation? Inflation is dealt with via higher interest rates.
I keep writing about the yield on the 10-year U.S. Treasury having risen over 40% since October 2010. After a 30-year down-cycle in interest rates, I believe we are at the cusp of a new 30-year up-cycle in interest rates that will cripple the government and the economy.
Yes, there is a striking similarity between 1934-1937 and 2008-2011. Only this time, thanks to excessive government debt, unwanted inflation, and rising interest rates, the outcome could actually be worse.
Where the Market Stands; Where it’s Headed:
The bear market rally in stocks that started March 9, 2009, remains intact. I expect stock prices to rise in the immediate term. Short- to long-term, I remain bearish.
So far for 2011, the Dow Jones Industrial Average is up 5.9%.
What He Said:
“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over-extended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.