Sunday, June 27, 2010

This Great Depression is Different

During the Great Depression of the 1930’s the banks, trust funds, and stock market lost 90 percent of their value. If you had a thousand dollars saved up or invested back then, you were left with one hundred dollars. If you lost your job there was no unemployment or Social Security. Deflation became a very serious issue; nobody had any money left to speak of. If you had been living paycheck to paycheck, all you could lose was your job (a rather anemic understatement).

March forward to today. No depositor has lost a dime in the banking system. All of the foreclosures will be bought by the government. Unemployment is collectible for two years. There has been no 90% loss of savings. The government has printed dollars to cover all bank failures.

Millions of people are collecting unemployment and not producing anything, but they are consuming product using their government check. At the same time, tax collection revenues have been decreasing at an alarming rate while government expenditures have been increasing geometrically.

Our government has no increased tax revenues coming in unless you count the new health care. They are printing money to pay the bills. At some point this leads to inflation. Deflation cannot happen, everyone has their dollars. The unemployed are consuming the products we savers chose forego, when we deposited our money in a retirement account. Our savings were a way to defer consumption into the future.

As long as retirement redemptions are minimal, inflation does not even enter the picture. The product produced matches the printed dollars spent. We will see inflation when the baby boomers decide to spend some of their deferred consumption.

The Economic rhetoric from Bernanke claiming his actions will save the country from a deflationary spiral, is pure nonsense. The Emperor is wearing no clothes, claiming otherwise changes nothing. Inflation is the name of the game, and hyper inflation is our destination. It cures all of Fannie Mae’s and Freddie Mac’s problems. They don’t have to mark down to market; they get to mark up to market.

At one point the government had a choice of deflation or inflation to solve this bubble. If we had done nothing, we would have had the 90 percent haircut and deflation just like the 1930's did. We chose to solve the problem differently with a printing press.

What’s it mean? The government can’t stop the inevitable; they can only slow it down. Our dollar will be the new dime of the 21st century. We still get the 90 percent haircut. The money borrowed was squandered on consumption. It is gone, it can't be undone. This is not something that can be reversed with a printing press. The government is only increasing the number of dollars chasing a decreasing inventory of product.

Where to from here? 15 trillion in debt and we have a President who keeps on saying “We are not out of the woods yet.” If you owe 15 trillion dollars, why get out of the woods? Stay there and hide!


Paco Bell said...

You nailed it. The Banksters led by Grand Poobah/toilet cleaner Benron have merely painted themselves into a different corner than the last time.

Cui bono? Who wins in this madness? I guess the people who have the most moolah have the least to lose.

That's not me!

AIM said...

No doubt about it... it's deflation. The Fed and govmt are both powerless to deal with it. We've had a 60 year credit expansion, and all of these insane derivatives and securitizations that have been created over the last few decades, (and they have all been turbocharged by extreme leverage). It will take years for all of this debt to unwind in the form of payoff and default.

Govmts could never print enough money to handle the tens of trillions of debt destruction we are going to have to go through.

And the dollar won't be devalued either. Think about it... it isn't pegged to gold or any commodity. It is a floating fiat currency indexed against a few other floating fiat currencies. Devalue it against what?

The dollar will be strong for some time to come. Save and hold onto them as they will become more and more valuable. Watch the trend of the dollar index.

Deflation will teach the US administrations, the Fed and Congress what mistakes they have made and how powerless they are as regards turning things around or having a "recovery". Market forces will overcome and prove the Keynesian theories to be false.

Anonymous said...

Hi Jim,

I don't think the great depression is any different. It's still deflation. Bernanke and the last two administrations have tried to paper over the problem with "print money" but, deflation still wanes as the dominant force.

As unemployment continues to rise where is the the money velocity going to come from to spend and consume especially when wealth continues to be destroyed when the markets crash? Will it really be the Baby Boomers? I seriously doubt that. They will be lucky if they can retire.

As for the printed money that printed money is debt and debt is the problem. Federal government has too much debt, state, local municipalities have too much debt and individuals have too much debt.

Let's talk housing for a bit;
I was doing some reasearch this weekend looking at new homes with my fiance and I wanted to get an idea how people were affoding $500K homes in Upper Marlboro, MD. When I asked the sales person how were people affording their homes and he said everyone was going FHA route. 3.5% on a $500K home is $17,500. These people don't have the money to pay for these homes plus these K. Hovanian homes they were giving $20K for closing essntially closing the deal and allowing these homeowner (renter debt slaves)prospects to walk away with about $5-7K on the day of closing. This stupidity is still happening in the housing market.

Most of the people that live in this area the DMV complex (DC, Maryland, Virginia) work for the government. There is no way they can afford $500K homes let alone in Upper Marlboro which is suppose to be a modest area. Now we currently live in Columbia which is more expensive than Upper Marlboro where the average income is $77K for a single man/woman and new homes are going for the $600-700K range. What do you think is going to happen to those housing prices as things get worse? They will sink like a rock.

Now combined my fiance and I make over $240K and I don't want to pay for these houses because of the area. I'm a doctor and my wife is a contract specialist we can afford to pay for these homes and we choose to rent and will continue to do so because we are convinced that prices will have to come down.

The only reason I brought this up is because the same problems of 2004-07 are still present and the deflation that needed to occur stil hasn't and its just transfering to the government unlike then. The deleveraging that needs to occur across all segments in societies to eliminate debt is the greater force and no way can government print fast enough to paper over all the debts.

Anonymous said...

If hyperinflation comes, and a 100k house sells for 2mil+, isn't that government confiscation? You have the same house, but now most of the "principal" eventually becomes "capital appreciation". I guess if they got really nasty they would also track every used item sale (cars, garage sales, ebay), and tax the heck out of everyone.

Jim in San Marcos said...

Hi Paco

Those with no saving lose little. Its the people with money who will lose 90 percent of their buying power. Cigarettes instead of $5 will be $50 a pack and gas will be $30 a gallon. Wages will have to increase, and at some point people could lose faith in the currency.

It's the old people ready to retire that get burned, and it kind of sucks, because I'm one of them.

The rich won't see a numerical loss in their wealth, just a tremendous loss of buying power. Their toys will be too costly to maintain and they'll probably lose even more before they realize it.

The next few years will tell, we all have front row seats.

Thank you for your comments.

Jim in San Marcos said...


Let's get away from the idea of inflation and deflation. In the depression of the 1930's you lost almost all of your money. It was just plain gone.

In the current mess you get to keep your money, but it is going to become nearly worthless.

Our government has taken risk out of the market by guaranteeing everything.

Our government has no problem printing money, all they have to do is raise the National Debt Ceiling. They printed two trillion for the bank bailout. You could argue that they borrowed it, my question is "borrowed it from whom?" The Treasury issues the bond and the Federal Reserve buys it. The neat thing about this sort of transaction the interest payments are not to a third party.

Once you realize that when times were good we didn't have the money for this sort of extravagant spending, how does it come to be, that in bad times we find the money to spend as we never have before?

You're right, the dollar isn't pegged to anything, a pack of cigarettes could cost $100. But that silver quarter that bought my lunch in 1964 will still buy me lunch today.

My whole theme on this missive is that our dollars are being diluted by government printing. Gas isn't going up in price, our dollar is decreasing in value, and they keep on printing.

I am suggesting that we will be in the same place as the great depression when gas goes to $30 a gallon and a dozen eggs cost $12.

It matters little whether we have several worthless dollars from today's world or a just a few pennies from the 1930's. The real question is what can you buy with what you have? And the answer in both cases is, "Not much."

That's how I see it, I guess we can afford to differ.

Take care.

Jim in San Marcos said...

Hi Anon 12:23

The big trick on real estate is buy and never sell. If you have to sell you either paid too much or married a wife a lot younger than yourself.

It is to be assumed that as a an asset increases in value, government will tax the hell out of it. They are quite efficient, you will pay.

The thing that bothers me, is that if gas prices double, it's inflation. If your home price doubles, that's profit. The government doesn't care, you pay more tax on both items. Go Figure.

frakrak said...

Jim Apparently the M3 has been on a track south in the U.S. economy for 18 months, the last two months it has stalled to the 1930's level. I am not too familar with the previous 1930's depression, but I am assuming the government of that time did not try and print their way out of the mess?

If this is the case then Benanke and company are putting some theory into practise here, perhaps this why we are seeing such mixed signals re the direction this is playing out at the moment?

It is with alarm that I see governments from around the world basically socialising society. The only real winner in this transaction of power has been government.
That for me is a depression in personal freedom....

Anonymous said...

Inflation is only bad for those people whose wages do not increase.
About 20% of the workforce are government workers. They get automatic annual cost of living increases (on top of "regular" raises). So if the cost of living doubles, their salaries go up, right along with it.
Retirees also benefit in the same way.
No harm, no foul.

Jim in San Marcos said...

Hi Frakrak

They did try to print their way out in the 1930's. But you have to remember, the stock market had already crashed, the banks had collapsed and housing was a waste land. No one was being bailed out. There were no large social programs in place like Social Security or unemployment and government was a lot smaller. The national debt was manageable.

You can't play poker with IOU's forever, and that is what the government is trying to do. Paper money is a little like religion, its done on faith. The stuff it use to represent (gold, silver, a cow, an ox) were real to the touch.

Our government has no intensions of every paying back what they have borrowed the concept is to just pay the interest and that won't work for long.

FDR might be credited with starting Social Security, but it was the first plan in America that was able to tax every worker and enabled the government to grow. People were mostly dead by age 65 back then.

So it's a little different this time, we won't be dead, we'll get to enjoy a life of poverty, in our old age.

Hope I'm wrong--take care.

frakrak said...

Thanks Jim, I think you knew what was meant by "socialising society" (economy) = socialism :)many distractions at the moment :)
There seems to be many differences with the 1930's scenario, thank you for pointing some out ..

Ohio Loan Officer said...

How is this generation going to survive a real Depression? The people back in the 30s at least had some survival skills and most were not hooked on the crack of consumption:

My wife's friend is separated, no job, no savings, no credit. She has lost 130 Lbs in the last year. She literally has one pair of jeans that fit her. My wife offers her a bunch of Levi & Tommy jeans in her size. She tells my wife, "No thanks, I only wear Aeropostle or American Eagle jeans".

A relative's daughter lost her job. Her car was repoed. Now she is being evicted. Her grandfather offered her a little old pickup truck he has so she has transportation to find a job. She told him rudely, "I wouldn't be caught dead driving a purple truck".


Rob said...

Loan Officer

You are right on the money. I have three sons with two feet and a heartbeat and they can't seem to understand that you need to work to get money. The mantra used to be need money get work. Now it's need money get credit.


Rob said...


I am being a little hard on my kids. I thought about it over lunch and you can't blame the kids these days as governments are doing the same thing except on a grander scale. When the salad bar is chock a block with food and it's all you can eat you might as well pig out with everyone else. Maybe it is just they got this figured out sooner than me!


Ohio Loan Officer said...

You know Rob,
My wife was saying to me the other night how maybe we are the dumb ones paying our bills on time and trying to do the right thing----

One of her friends bought way too much house. Then charged up credit cards for all kinds of fancy furniture, clothes, electronics, ect.. She was struggling the last couple of years working 3 jobs trying to pay bills. Now she is filing bankruptcy and bragging about all the extra cash she has--- she's buying designer purses and taking a trip to Vegas.
My wife is so jealous.

Rob said...


I was sitting in doctor's office the other day waiting for my appointment when in walked a mother with two young children. It was grading day and receptionist knew them. Anyway long story short the little girl that had just graduated from grade four pulled a Blackberry out of here pocket and started texting someone. I couldn't believe it. That for me encapsulates the wanton materialism that has set in with our society. Looking at that ten year old girl I wondered to myself what kind of jeans she will be wearing ten years from now. I guess at least for me the only difference between the 1930's and today is the complete disconnect from reality that most people have with the world around them. You are right it matters not how we get there. Alot of people are going to get poorer. People in the 1930's knew they were broke because they went to the bank and the money was gone. Today thanks to inflation the same thing is about to happen. It will only hit home when people have to patch their Aeropostle jeans with their American Eagles.

SPECTRE of Deflation said...

You will have no inflation. You already had inflation through asset appreciation which has now turned south. You may be filling a bucket with dollars (juice), but the entire bottom is missing, and your juice isn't fast enough. Look at M3 and the the M1 Money Multiplier for the truth, and not what bendover Ben is saying.

Anonymous said...

Went to IKEA this week. Prices on many items are HALF of what they were a year ago.
Even if some of that is due to the exchange rate,bottom line is:
No inflation here.

Rob said...

The things that will be affected by inflation will be what we need to survive. Things like food, shelter and transportation. Yes I agree you can buy the crap they sell at Walmart or Ikea cheaper now than a couple of years ago but that is only because the manufacturers and retailers are getting rid of inventory. Enjoy it while it lasts. I'll wait till I can buy that stuff at yard sales for next to nothing.

I bought a chocolate bar for lunch today and noticed that it has gotten smaller. Wrapper made a point of letting me know it is for my own good as the bar only has 200calories now. I guess weight loss can be one of the side benifits of our current malaise.

frakrak said...

Jim I think your right re the intention to payback the money. Really the U.S. is just holding the house together, and my imagination would say that the smallest "uncovered" anomolie will bring it all unstuck, my guess would be Europe, but it won't matter where it comes from, the end result will be completely dire!! It's just a question of time.
Perhaps it is all a question of making sure the competition (China/Europe) are totally trashed economically before the inevitable? It would seem both economic blocs are well on their way .....
If the U.S. Fed didn't follow the policy of printing money and just let it all collapse (18 months ago) China may have been in a much stronger position to take a dominant global economic role. But 18 months have seen them being sucked into the event horizon of economic doom also ... I don't want to write of the U.S. too much smart money there to think otherwise

Jim in San Marcos said...

Hi Rob

Your last comments were pretty much about what I am next to publish. So I'll leave it there for now. We think alike.

Jim in San Marcos said...

Hi Frakrak

There is another item that hasn't come up. What if the other nations go bankrupt before us? If they are holding our paper, does it become non negotiable? Deutsche Bank literally owns Detroit. Would we be able to buy back the notes on Detroit for pennies on the dollar, or why even bother?

If China was to have a crash and if then the government fell, would the new government have claim to the Treasury's purchased from us?

Right now it kind of seems like a drinking contest, the winner is the one still standing.

We could win this one!

Anonymous said...

Dire is our current situation, but there are escape hatches.

One, eliminate retirement. You work until you die. Two, eliminate Medicare/Medicaid. Everybody goes to a county clinic or Walgreen's clinic, and buy generic drugs. You live as long as you can. Three, end all foreign wars. Use nukes, they are cheaper.

If the people resist, have the Supreme Court strip away the 2nd Amendment. It'll teach the peasants who's in charge.