Saturday, July 10, 2010

We Have Been Here Before (Reprinted)

Reprinted from 2/1/07.
Today we read that the savings rate in the US has dropped to a negative one percent. It is also mentioned that it hasn’t been this bad since the Great Depression years of 1932 and 1933. The following is an article from way back when, that appeared in the Saturday Evening Post, CCV (November 5, 1932), pp. 3-4 titled" What about the Banks." It was written by Frank A. Vanderlip, former president of the National City Bank of New York. Bear in mind that 1932 was three years into the Great Depression. So if we carry forward to today, this would have appeared in the future year 2012. So we are not really where he was at, when he wrote this.

The present economic disturbance has been so severe that it as make even some changes in our language. No longer is it an apt metaphor to say that anything is “as safe as a bank.” The word “securities” has almost become obsolete. An investment that drops in price to a tenth or, perhaps, even to a twentieth of its former range is not a security; it is a jeopardy. The page of stock-and-bond quotations might well be headed Quotations of Risks and Hazards. To call them securities in the light of their fluctuations is ironical.

In 1720, a financial debacle added to the English language a phrase which has persisted in common world-wide use for two centuries. A hopelessly exploded financial venture is to this day called a South Sea Bubble.

The South Sea Company in its time was the rival of the Bank of England. It was the ambition of the Tories that it should supplant the Bank of England. When the bubble burst, the extreme decline in the price of the stock was from 1,000 to 135. The company withstood the shock, however and continued in business for eighty years.

Here is an example from out own times: United States Steel and General Motors stocks, the two leading industrials of the country, declined from the high quotations of 1929 to 8 per cent of that price. The decline in the stock of the South Sea Company was only to 13 ½ per cent of its highest quotation. Take another: The stock of what has long been one of the premier banks of the country declined from 585 to 23 ½. That is to say, it fell to 4 percent of its highest quotation. The decline in the market price of this great American banking institution was therefore more than three times as severe as was the fall in the stock of the South Sea Company.

That illustration is by no means a unique one. There were innumerable American bank stocks which made a more distressing record. Between October 1, 1929, and August 31 1932, 4,835 American banks failed. They had deposits aggregating $3,263,049,000. . . . .

The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929 $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.

Stockholders had lost $74,000,000,000. This figure is so large, that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War (WWI). . . . . . .

Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4,835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or secreted elsewhere, more than $1,500,000,000.
In the Great Depression there was a very good reason for feeling negative about life. The interest only mortgage loan had ruined many banks. If you had any money invested, it was probably gone by then. Age 65 ready to retire, it must have been very depressing to some.

This bit of history was full of pain, the players from that era are just memories. The show will play again and we will be the actors upon the stage. The trouble is, we are not willing participants.


SPECTRE of Deflation said...

It will play out as deflation, as the power elites control the strings of govt., and a hyper inflation would screw them royal. What is in their best self interest? Allowing debtors to pay off loans with ever depreciating dollars, or would they like money to be very dear which allows them to pick off assets at pennies on the dollar? Remember that all the losses have been transferred to the poor schmucks called taxpayers.

This will play out as it always does. We are nothing special from a historical perspective. No empire has ever run more than 40 years once they go pure fiat. We came off the gold standard in 1971.

SPECTRE of Deflation said...

The last 18 months has been all about transfering private losses to the public debt of the United States. It was never about helping Main Street although most everyone bought this trojan horse hook, line and sinker. Now that they, the power elite, have tranfered their losses and been made whole, it's time for a shopping spree with assets going for pennies on the dollar. Did we learn nothing from the last Depression?

Poly said...

It's never different "this time", this blog wouldn't exist if it was :)

As for 1932 being 2012, what's your basis?

The 2008 crash would match the 1929 crash making 1932 equal to 2011.

OR, if you start with the official recession, 2007, it would make 1932 equal to 2010.

Or, using your blog title (Great depression of 2006 as the start), 1932 would equal 2009 and we're in recovery :)

ca said...

Jim --

As indicated by his post today, Charles Smith believes there will be deflation. I was wondering where/why you opinion diverges from his?


SPECTRE of Deflation said...

We had our inflation already. It was inflation in asset prices instead of wages/asset prices like we had in the 1970s. The problem with asset inflation of the type we experienced is that assets can also fall and not always rise, although this is a blue moon/black swan event usually. You are left with J6P being unable to service his/her debt because wages didn't keep up with the asset inflation, and they are stuck with depreciating assets which are no longer marked to make believe. Only the banks get to keep pretending and extending, or if you like, praying and delaying.

Debt saturation is a real be-atch when it shows itself. Welcome to Depression II.

Anonymous said...

I want to ask one question in regards to deflation/inflation. At the grocery store are we spending more or less as compared with five years ago. Yes I agree that some items have gone down in price. However the vast majority of people live hand to mouth with food being a major portion of there budgets. The things that they need to buy are going up in price. Spectre I think you underestimate the resolve of politicians to cover their collective behinds thru this mess. It is easier to print money and hand it to people than to let them dangle in the wind.

People tend to stay off the streets as long as they have a little food in their stomachs. So far, I'd have to say that plan seems to be working. Housing prices and new cars are the last things people worry about when they don't know where their next meal is coming from.

The government back in 30's had the luxury of a populace that was much more self sufficient and could practice "tough love" because most people grew up or knew somebody who had a farm. Nowadays people don't know how to make french fries and even less know how to grow them.


Anonymous said...

The White House, Congress and the judicial branch is your enemy. The military-industrial complex is your enemy. The power elite is your enemy. The big multi-national corps are your enemy. Organized religion is your enemy. Pharmaceutical companies are your enemy. Big Agri and food processing companies are your enemy. The media is your enemy.

Only thing you can do is observe their destructive actions and figure out how you can profit for it.

Jim in San Marcos said...

Hi Poly

If you go back to The Great Depression, it actually started in 1926 with the hurricane that hit Florida, housing there collapsed in 1927 and 1928. The stock market crashed in 1929 and everything was still OK. By 1932 most of the banks had collapsed and by 1933 people knew they were in depression. People tagged the great depression with the year 1929 because of the stock market crash.

The biggest thing was that no one accepted that there was a depression until 1932. The title to my blog using the year 2006 is a reference to the fact that it will take several years for what is happening to sink in just like back in 1933. At that point in time, all hope was gone.

This depression will evolve slowly over time just as the last one did.

Jim in San Marcos said...

Hi Ca

In the last depression housing collapsed and it took the banks with it. 90 percent of saving in the banks were lost. 4,000 banks closed and none of the money that was lost was ever recovered. There was no bail out of the banking system or real estate.

Note though after FDR got elected they passed bank insurance. There were no real losses to cover here all of the bad banks had already dropped dead. The FDIC insurance gave people confidence to deposit their funds.

Step forward to today and you will find that the government has bailed out the banks and paid off the bad housing loans with printed money. No one has lost a dime. In this case there has been no destruction of debt. In essence, government has taken the risk out of investments and interest rates have dropped to very low rates.

The government is trying to print its way out of this mess and as I have suggested in the past, you can print dollars, but you cannot print food; dollar bills have no nutritional value.

The total retirement savings of this country is around 17 trillion. The government is pretty close to borrowing all of it. At some point everyone will rather spend their dollars rather than save them with this paltry return. That's when you will see inflation. There is no problem as long as the money is "safe in the bank." It's the withdrawals down the line that will bring the game to an end; too little product chased by too many dollars.

Jim in San Marcos said...

Hi Rob

I also see food prices rising dramatically. That is the exact opposite of the Great Depression of 1930. From 1910 to 1930 we transformed from a nation of farmers 80% down to about 20% with the advent of the industrial age and the assembly line.

The people that had quit the farm could still return. But farmers were pouring milk in the streets in the 1930's. The government had to step in with price supports.

I tend to believe as you do, that the increases in food prices demonstrate that inflation is the direction we are traveling in.

Housing as you suggest is not an item of concern, we produced too many of them and to point to them as a sign of deflation is foolish. There is no real demand for something that is still dropping in price. The reason we are in this mess is because we built too many houses. Now we are going to make it worse with the government buying up the surplus to try to keep the price artificially high and that has me scratching my head wondering why.

SPECTRE of Deflation said...

"Step forward to today and you will find that the government has bailed out the banks and paid off the bad housing loans with printed money. No one has lost a dime. In this case there has been no destruction of debt. In essence, government has taken the risk out of investments and interest rates have dropped to very low rates."

Paid off the housing loans? Nothing has been paid off. It's extend and pretend which works till it doesn't. I can show you lots of stats where many people have lost much more than a dime. Are you kidding me? The only thing that has happened is that the banks have been made whole on the backs of taxpayers. Now money becomes dear, and the bankers buy everything up just like the last time. We have been here before.

Jim in San Marcos said...

Hi Spector

I disagree the bank depositors have been made whole, the bank owners are being trashed every time the FDIC takes over a bank. The stockholders lose everything. If your bank loses all of the depositors money and then the FDIC comes in and bails them out, was there actually ever a real economic loss?

It's kind of like your son squandering the family fortune and then the government makes you whole again. He got to consume product and then you get the same chance also. The only problem is there is now twice as much money in the system and half of it was not earned, it is counterfit.

The bankers might have made money while times were good, now they can't even find anyone that can qualify to borrow money, so as a business, they are screwed. It kind of like being a dentist now, no customers.

Anonymous said...

Hard not to see the irony of the mess the banks are in. They are invested heavily in asset classes that are depreciating in value (homes, cars and credit cards)all the while the politicians continue to write cheques to large sectors of society who produce nothing of value for them to use as collateral for loans. A couple of years ago when I was in my conspiracy phase of my life I thought banking was the perfect business. Seeing as they could create money out of thin air. Oh how times have changed.

These days I wonder if it isn't us, John Q. Public, that is the tail wagging the dog rather than other way around like I used to think.


Griffin T. said...

High spending on products produced overseas + extremely low savings rates = poor long-term economy

Anonymous said...


the money has been printed/borrowed already ... how and when they will come into the market is just a matter of time.

As for alot of ppl and companies defaulting i.e. fictitious money collapsing, this is temporary thing (even that it is strong at the moment).
Yes it does shrink credit money, but it also causes two other things that increases the possibility of inflation :
1. Lower production capacity i.e. lower supply of goods i.e. higher price.
2. Currency depreciation. How strong currency is depends on the long term import/export balance..i.e. perceived ability to pay back in real terms which is dependent to the first one.

frakrak said...

Jim the next step should be deflation. Selected entities have been "reflated" by your Fed and the massive debt these entities have created has been "passed" on to the tax payers. I guess the question I would be asking is: "where do these giants of American capitalism invest their money now?" If it is off shore in large quantities then the game is over for the tax payers. Perhaps the U.S. is screwed, and these companies will come back in and pickup the spoils for peanuts?
Here's a link:

frakrak said...

This capital would have marched overseas when the U.S. greenback had value, here's another take on retirement in the U.S.

Jim in San Marcos said...

Hi Frakrak

Thank you for the links. Maybe I am just being stubborn, but I see no deflation anywhere. There has been no debt destruction.

The US has millions unemployed and all sorts of transfer payments to keep them afloat. These people do not represent taxes coming in to the federal government.

Without the debt destruction, everyone still has all of their dollars. The question you have to ask is: How you can have such a massive loss of investment funds in real estate and bank finance and no one has lost a dime? The conflict demonstrates the impossible.

With the actual destruction of debt, deflation would follow; less money following less goods. In our present case; we have more money following less goods.

Either one of us could be right, this is just how I see it.

Take care