Last weekend I was listening to a history of the 1929 market crash and ensuing great depression.
As I was listening I heard many things I have heard before but was still surprised how the attitudes and actions at that time parallel what we are actually seeing and doing today.
Many people, it seems, were totally oblivious to the fact that the entire bubble in stocks, real estate and farmland was built on the back of a debt-binge. Anything that you may have wanted- there was a loan for that.
People were so sure of themselves that they bought stocks on margin (borrowing) to create outsized gains that many of their friends were reporting as the bubble inflated. Of course, when the bubble burst those who were leveraged (bought their “assets” with debt) were exposed and when the margin clerk called in the loans this added exponentially to the downward movements in the stock markets in particular. Many of those who had mortgages on homes and farms lost those also as the economy ground to a halt and debts were not able to be carried. No bailouts back then!
Added to the fact that debts were imploding there was a double-whammy of the dust bowl which damaged crops and added to the helplessness of those who were trying to survive.
Today we are seeing many of the same conditions that were occurring in the 1920s.
The indebtedness of our society here, and indeed globally, has NEVER been more precarious. The debts are so far gone that all we can do is really guess at the actual indebtedness of nations. The accounting gimmicks make it virtually impossible to determine the actual amounts due. The only thing obvious is that the debts cannot be repaid if our fiat dollars maintain their value. At this point we are resorting to “printing” money and creating more debt just to maintain the illusion of solvency.
Most people probably remember our last “balanced budget” under Bill Clinton. I have many times argued with people that we have NEVER had a balanced budget in my lifetime- and I’m getting pretty old! Of course, the illusion of a balanced budget was achieved by taking $2 TRILLION out of social security and pretending to balance the budget. How many boomers would like to see that money put back? Good luck with that- it is spent and gone! (Freedomworks 3-6-2000)
Corporations have been on a debt binge for the last 10 years and have more debt than in any time in history. That is here in the USA and globally. State and local governments are drowning in debt and red ink as pension promises, healthcare costs and rising inflation is making it harder and harder to balance budgets. People in general are also in more debt than in any time in history. Record amounts of loans exist for mortgages, student debt, auto loans, and credit cards. For the individual it appears that debt has taken over the earned wages as a way to continue a lifestyle that is being inflated away and harder to achieve year after year.
While the panic in 1929 seemed to start on Wall Street and make its way into the economy it appears that this time the opposite may be true. The economy is obviously losing steam and every trick in the book is being used to keep interest rates low and stock indexes propped up.
In 1929 the leverage in the stock markets virtually caused an economic collapse. Today, it appears that if an economic collapse is near it will be initiated by an implosion of debt- which already happened by the
way in 2008. It appears to me that the “printing and buying” schemes of the central banks have put off the day of reckoning and have assured us of a much larger collapse because all of the problems still exist (mainly insolvency-the inability to carry existing debt with current income) at almost ALL levels of society. Falling interest rates and “money” from nowhere have masked our true reality. When this is finally apparent to the majority it will be far too late to prepare for the fallout.
We are seeing similar patterns exist with our weather also. Instead of a dust bowl we have the opposite. We have much of our rich Midwest farmland underwater. There are also reports of crop problems globally. Just this last weekend a hail storm in Guadelajara Mexico dumped up to 6.5 FEET of ice that buried cars and trucks. First of all – in Mexico? Second of all- In June?
Another parallel would be the Smoot-Hawley tariffs which many blame for slowing global trade down at a time when more was needed. Today, it is our president and most of the rest of the developed world battling over a smaller pie that all want larger slices of.
Those who don’t learn history are doomed to repeat it.
To me, the only question is how this will play out. The numbers are so egregious that a default is almost certain. It may start in corporations where there are many zombie companies. It may start with many individuals who can’t keep going or it could start with an insolvent major city or state. Ultimately, it will wind up on all of our doorsteps- even those who have tried to plan well and be out of debt. The trillions that our federal government has us on the hook for has someone on the other end expecting repayment.
When I mention default it doesn’t necessarily mean to not pay. An entity like a central bank which can “print” money will likely always “pay” but that doesn’t mean that the creditor will receive anywhere near the value expected. Buyer beware!
So far in our adult lives we have only really known inflation as central banks can print a virtually unlimited amount of money and have not been shy about “printing and buying”. The sheer amount of outstanding debt could lead to a situation where to “print” enough to keep the illusion alive may destroy the crux of their power- the ability to conjure up money out of nowhere and use it for payment of produced goods. In other words the amounts would be so ridiculous that the “money” would likely no longer be trusted. This could lead to massive inflation or even hyperinflation. This would also lead to most assets like gold, silver, oil, food, gas, etc. to rise possibly exponentially in price.
The bad news? Our cost of living would likely skyrocket and those struggling already would be in far worse shape going forward.
On the other hand, if the authorities decide to keep the fiat currencies afloat and allow the market to correct it would likely lead to a deflation like we have never seen. In that case cash would likely be a better asset than stocks or bonds because during the last deflationary event in 1929 stocks lost 90% of their value and many bonds were defaulted on. (100% loss).
Keep in mind that during the last deflationary depression gold rose 75% and gold stocks rose 525% while the overall market slipped over 90%. This is history- not a projection.
As I have noted in the past it appears that no matter how this may play out bonds appear to lose. Most other assets, besides gold, can go either way depending upon which way this plays out. It appears to me that gold wins in either case because in an inflation the fiat currency is debased and virtually all assets rise. In a deflation cash is king and most debt is not deemed serviceable and likely to default. This distrust has led many in the past to demand repayment with the ultimate money- namely gold.
This is my guess as to why the central banks are buying historic amounts of gold as we speak and the major banks and indeed countries are following suit.
Are YOU getting the picture? Be Prepared!