Let's Define "A Depression" (Reprinted)

Here is a reprint from May 13, 2007 that you may enjoy. It is a travel back in time 4 years.

Let's define a Depression:

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse could result in a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.

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