Monday, September 16, 2013

Will We Stop 1929 From Repeating

Here is a reprint of mine from a few years back, that is still relevant.

The Great Depression was a financial event. There was no war, earthquake or hurricane. The financial system ruptured and just about died. People stood in line to withdraw their saving from the banks. Thousands of banks collapsed. People, worldwide, lost their life savings. It was contended that the runs on the banks are what brought the system down. Upon closer examination, it’s easy to extrapolate the banks eventual demise from the poor economic conditions. The money borrowed could not be paid back by the unemployed. Many people were forced to live off of their savings (if they had any left).

In order to stem bank runs, the government came up with FDIC insurance. The Glass Segal act put this into effect January 1, 1934. This was after the horses escaped and the barn door was locked. If your bank met muster, you qualified for insurance and if it didn’t, you were toast. It didn’t cost the government a dime.

Let’s bracket that date January 1, 1934; either 100% of the population had collectively lost 80 percent of their wealth, or 80 percent of the population lost everything and 20 percent lost nothing. Almost everyone fell somewhere in-between the two categories. There was an obvious destruction of savings that was catastrophic in nature. This money wasn’t destroyed; it had been spent very foolishly over the previous 10 years on consumption. If you paid one million dollars for a dog or a wedding, you got your money’s worth, although I would argue that.

Fast forward to today. Bank deposits worldwide are insured. No one has lost a dime. The last part of the Kondratieff wave has to do with the contraction of the money supply and the repudiation of debt. The US Treasury is expanding the money supply while debtors have no problem walking away from their obligations. The most important thing to realize about the last part Kondratieff cycle is the end result. It destroys the obscenely rich and returns financial systems to a more normal functioning state. Bernanke is trying to preserve the status quo. The Fed is going to print us into prosperity.

Food prices have double this year. It is a little hard to see in some cases, the giant size potato chips bags, now fit in a lunch box. And then there is the specter of deflation. Autos and homes are just not selling.

Even if you have a job, your wages are not increasing, but your cost of living is increasing. So you dip into your savings, which seem to have lost a lot of buying power. Maybe that’s what deflation is all about, you spend until you are broke and then do without.  We can now drive to the poor house in style. It kind of sets your mind at ease, doesn't it?


dearieme said...

"Bank deposits worldwide are insured. No one has lost a dime." Except in Cyprus. And perhaps Iceland. They are small, you say. So are canaries in coal mines.

Joseph Oppenheim said...

BTW, the Dow crashed abt 90% from 1929 top to 1932 bottom - a complete wipeout of US corporations. And never dropped to a level lower than abt 124% higher than that bottom.

Jim in San Marcos said...

HI dearieme

In todays world they replace the canary and tell you to keep mining.

Jim in San Marcos said...

Hi Joseph

No deneying the drop in the market, but it didn't affect the companies only the stockholders. RCA went from 280 to three dollars and the company did fine. You could have lost your life savings as a stockholder.

As you suggested in the past, stock can be a great deal if bought at the right price.

The only real bond between the company and the shareholder is the dividend.

Joseph Oppenheim said... dad was in pharmacy school in 1929 and right after the crash, pharmacist salaries dropped from $35 to $27/week. Businesses and their employees were immediately affected. Money vanishes when stocks crash. He was in NYC, the largest city in the US. What happens in NYC affects all in the world very quickly, especially a monstrous crash.

Jim in San Marcos said...

Hi Joseph

I don't think that "wrong" covers the situation.

What I was referring to is the fact that a company goes public on the stock exchange. They have an initial IPO (initial public offering) aka "I probably overpaid." From that point on everyone that buys and sells that stock goes through the transfer agent for that company. It is his job to associate the owner of the stock with the company. The company is out of the financial transaction, it is seller to buyer. All the transfer agent does is keep track of who to mail the dividends and yearly statement to.

The company could care less the price the stock is selling for after the IPO. They got their money at the initial offering and that is it.

So if Google was to go to $10 a share, that would not bother the company, they already have their funds from the IPO.

Now if the company goes broke because consumers stop buying the product, because of new economic conditions, I agree, that could be crash related.

But you need to realize that if and when the market tanks, dividends will determine what stocks hold their value. Just watch what happens when a utility cuts dividends by 50 percent, the stock drops to half its value.

But what needs to be realized, a crash of any sort could be a buying opportunity.

Joseph Oppenheim said...

No, after an IPO, the company almost always cares what the stock price is since the company usually retains tons of stock and retains the right to issue even new shares. Plus, the investor cares more than just the dividend, but also retained earnings used by the company, which adds equity value and furthers research, added costs, including worker costs like wages. Wealth is destroyed all over the place - company and investors, also since municipalities, financial institutions like insurance companies and state gov'ts hold company stocks and bonds they lose solvency to compensate workers. Plus, a sinking stock price hurts a company from borrowing since less collateral (retained stock and earnings - book value). A stock crash destroys money/wealth almost instantly all over. Financial markets freeze up.

Jim in San Marcos said...


Lets say gold is trading at $2,000 an ounce and you buy 100 ounces. Then the market crashes and gold is now selling for $2 and ounce. The gold hasn't gone anywhere.

The same with the companies listed on the stock market. The price of the stock is determined by what the investor is willing to pay.

dearieme said...

Keynes, as quoted in this morning's Telegraph:

To think output and income can be raised by increasing the quantity of money is rather like trying to get fat by buying a larger belt.

Jim in San Marcos said...

Hi dearieme

Thank you for the quote, the analogy "fits."

AIM said...

I don't think it will repeat Jim. We weren't so globally interconnected then, we didn't have the debt we have now, and we didn't have hundreds of trillions of derivatives.

A perfect example of it not repeating is 50M+ on foodstamps and no soup lines. This keeps the private sector from seeing what state the economy is truly in and maintains "confidence".

I believe this panic/crash/depression will be the 30's depression on steroids. The size, complexity and global inter-connectedness of the crash will also make the negative effects last a lot longer than the Great Depression. That mere 15+ years will probably be more like 25 years now this time.

I think in the future when people refer to "The Great Depression" they'll be talking about the one we are in now, not the depression of the 30s... as that was a picnic compared to this one.

Just my opinion.

Jim in San Marcos said...


I think you're right. We are still in "A Great Recession worse than anything since the Great Depression," if you listen to the pundits. Pregnancy comes in stages and we are getting there--slowly.

My next missive that I am working on deals with how the government is messing with retirees and their savings. The retirees are being ripped by this "Recessionary Recovery." We are in the midst of a full blown depression. -- I guess we are not supposed to panic the sheeple.

AIM said...

I hope that our corrupt and mis-informed governments can continue with their intervention and "extend and pretend" ploys to keep our existing systems above water for as long as possible. I hope for a decade.

My wife and I (both 60) haven't capitalized and grown our investment portfolio enough, nor built up our reserves enough, nor acquired the service facilities that we need for a productive future. We need more time before there is a sovereign debt crisis, currency collapse, or a global or domestic financial system breakdown.

We need the time to build up our net worth and then prepare for the worst by getting out of the USD and reorganizing our portfolio into tangible assets to help us weather the storm and hopefully preserve as much of our wealth as possible.

There are so many negative possibilities on the horizon and no one knows exactly how this will play out. Having all your key basics and a diversified portfolio of tangible assets is the only chance of survival. (That portfolio should also have assets that short China, the yen, euro and USD, etc. so you can make money from the crash, as a hedge.

I'd prefer calm and stable golden years but I don't think that is what is in store for us over the next 20 years.