Sunday, June 24, 2012

The Difference between the Great Depression of 1929 and Today's

Lately you hear, “This is the worst it’s been since the Great Depression!” Think about it for a minute, know anyone that was around for the last one? They’d have to be about 100 years old. There is only history and statistics to define our present plight. So far, we seem to be off of the charts, of course, it’s still not a depression; it’s just the worst thing we have ever experienced.

What makes this depression different than the 1929 one? Credit, lots of it. Psst wana buy a house cheap, boy do we have a deal for you, sign here no money down. I can’t get 2 percent on my savings in the bank, but I can get 2 percent back on my consumption using my credit card. Want to buy on plastic with monthly payments? 20 percent  or more interest. Of course to point out the obvious, no one had a credit card in 1929.

The banks in Greece and Spain are not running out of money when the depositors make a run on the bank. In 1929 a bank run, would close the bank and put it out of business.

It has been suggested that there could be a possible charge card frenzy in Europe. People would buy on their card until the credit card companies refuse to honor them. This could have global ramifications. Credit has been abused worldwide by everyone and most excessively by governments. What happens if the world goes on mad buying spree and decides to buy and put it on plastic?

Bond yields in the US are down to one percent. Where is the incentive to save? Insurance companies invest their premiums in the financial arena and policy rates depend a lot on investment returns. Their worst case scenario model for future income generation from investments never went this low. The net result, insurance premiums have to at least double and a lot of people will no longer be able to afford insurance. We are talking, health care, life, fire and car insurance to name a few.

The CalPERs retirement plan has a real big headache. Their investment model assumes an 8 percent return on investments. Using the rule of 72, their invested funds double every 9 years. So if you’re a part of that plan and are 9 years away from retirement, the money you have in that fund is not going to double as anticipated. CalPERs did nothing wrong, their business model went to hell. As a retiree, you’re guaranteed X amount for life. X/2 is not an anticipated outcome, but it is a probable one.

Where was the mistake made? Everyone went on the assumption that the short term economic model would continue and it didn’t. The housing bubble collapsed and Congress picked up the tab. Then the financial bubble collapsed leading to massive bailouts and now we only have the national debt bubble. Of course, that’s not a bubble; we can still pay the interest on the debt.

The 17 trillion is real money borrowed from real people. Ever wonder who we borrowed that much money from? And why are they happy with 2 percent interest? But wait, interest rates, given time, will get back to 8 percent when good times return. There is just one little hitch, the interest on the national debt will be too large to pay.

Of course, there are two types of depressions, deflationary ones and inflationary ones. In 1929 our currency was married to gold and silver and it was a deflationary one (the country couldn’t print money). Today's dollar is not backed by any precious metal (Congress can print dollars). Conclusion: our money isn’t as real as the currency during the Great Depression. That’s what makes this depression different from the last one. This one is inflationary and of course Ben is putting out the deflationary fires.

Gold and silver are an option to consider. Not as investments, but as a good store of value. A silver quarter will buy two gallons of gas.

Copyright 2012 by Jim Brubaker


dearieme said...

I suppose you've just made the case for anyone who thinks they might need life insurance in the next couple of years to buy it now.

Your argument reminds me of the old joke that an insurance company is just an investment trust with an expensive hobby. said...

"Gold and silver are an option to consider." Under severe attack as traders pile into the "safehaven" greenback. Old habits are hard to break, no? Ugliest house on the block, and backed by nothing- such a refuge in these uncertain times makes lots of sense. Fundamentals for holding onto gold/silver don't appear to have changed, so your statement has significant merit.

Echo Boomer said...

Basically, I would add education as a part of the financial/government because it relies on both financial and government institutions. But you're right, we're about to see one bubble after another pop and make a mess out of everything.

Jim in San Marcos said...

Hi Echo Boomer

The interesting thing is that the bigger bubbles "absorb" (refinance) the smaller bubbles. The last bubble is getting bigger and bigger.

It's maddening, we know what going to happen and no one wants to accept our assessment of the situation. They don't believe that we are wrong, they think that there is a way out that hasn't been tried.

Cypress just asked for a bailout and now France is discussing the same thing.

I don't see the glass as half full or half empty, --its empty.

If you believe what you read in the newspapers, you're toast, that's yesterdays news or political speak.

30 years from now, this will be an event discussed in school rooms just like 1929 was. And they will be asking, "How did your grandparents get through it?"

A better question is, "Why they didn't see it coming?"

Anonymous said...


What are your thoughts on the Supreme Court decision?

Jim in San Marcos said...

Hi Anon 4:49

All the Supreme Court said was that it's not unconstitutional to make a dumb law.

The 50 million uninsured people are those 18 to 35 years old. They will refuse the insurance and pay the tax.

The insurance companies are counting on that group to lower rates if the young all sign up. More than likely, many employers will drop health care coverage and the health insurance industry will wither away and die. Then everyone pays premiums to the government.

At that point it's grab a number and wait, if you need treatment.