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One huge difference between the Great Depression and today

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January 14, 2009 – Comments (11)

 

Love it or hate it, it is undeniable that the Federal Reserve and the Treasury currently have one of the loosest monetary policies ever seen.  This is one key difference between the Great Depression and today. 

Back in the late 1920s there was a great deal of political turmoil in Europe, specifically Weimar Republic.  Many Europeans, fearing that the German government would fail, were sending their gold to the United States.  In 1929, $175 million worth of gold flowed into the U.S.  The influx during 1930 was an even larger $280 million.  Had the Federal Reserve at the time followed the existing gold standard rules, this gold would have increased the amount of money available to individuals and banks.  However, many at the Fed feared that this would cause massive inflation, so they altered the existing gold standard rules and tightened their monetary policy to soak up this excess money.

Despite this massive influx of foreign capital, the money supply in the Unites States actually dropped by 4% between the end of 1928 and the end of 1930.  As hard as it is to believe with the economy and the stock market were rapidly deteriorating, the Dow Jones Industrial Average fell from a high of 368 on August 20th 1929 to 230 on October 29th and eventually through the 200 barrier in October of 1930, the government was tightening its monetary policy instead of loosening it.  This action likely caused things to get much worse than they needed to.

Contrast this 4% contraction in the money supply back then with the following charts of M1 & M2 in the United States today:

Now I realize that the velocity of money has certainly dropped significantly, meaning that every dollar that the government prints today does not have the same effect that it would have had a few years ago, but this unprecedented increase in the money supply may just be what keeps the current bad recession from becoming a depression.  The economy will definitely get worse before they get better, but those who believe that we are headed for 20%+ unemployment are probably way off base.

Deej

Note, the statistics for this post were obtained from "The Forgotten Man: A New History of the Great Depression" by Amity Shlaes.

11 Comments – Post Your Own

#1) On January 14, 2009 at 1:54 PM, cbwang888 (25.93) wrote:

Great post, as usual.

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#2) On January 14, 2009 at 2:06 PM, EPS100Momentum (72.42) wrote:

Yeah but we just got Another hit to market by Fed. Beige Book

Just when you think it can't get worse it does. Report this comment
#3) On January 14, 2009 at 3:12 PM, alstry (35.34) wrote:

"Now I realize that the velocity of money has certainly dropped significantly"

Then you should realize that the options at the current time are not WHETHER we have a depression.....but whether it is a deflationary depression or inflationary depression.  Both suck, but the latter sucks a whole lot more!!!!!!

It's OK...I have little doubt you will realize it very soon.

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#4) On January 14, 2009 at 3:22 PM, socialconscious wrote:

Ditto great post as usual. To add on topic.Harry S. Dent, an economist and demographic researcher who with a few predicted the dot-com bubble said in 2004 there would be a bad recession in 2010 worse than the 70's. He also moved up the prediction in a Wired Magazine 2006 interview. Great magazine.One of the excerpts is spot on imho.

WN: You predict this new stock-market bubble will burst in late 2010, followed by a long decline. Are we talking about something like the 1970s or more of a cataclysmic downturn like the Great Depression?

Dent: I'd say it's going to be in between. It won't be as extreme as the Great Depression. But it will be worse than the '70s downturn, and I think it will be worse than what Japan saw from 1990 to 2003. Maybe we'll see unemployment at 15 percent, give or take. The worst part of it is you're going to see deflationary trends in prices from a shrinking work force. Deflation is the enemy of asset prices. You've got to remember that in the '70s, while the Bob Hope generation was declining in their spending, you had a bigger generation coming behind them entering the work force and picking up some of the slack. Now you've got a smaller generation following the largest generation in history. So it makes the downward trend even more pronounced.

IMHO all and I believe the compilation of financial ideas of many is much better than one financial "expert" In short I am impressed when someone really nails it. My nickle Social C 

http://www.wired.com/science/discoveries/news/2006/01/70034

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#5) On January 14, 2009 at 3:42 PM, socialconscious wrote:

also it really scary what he says in his 2009 book "The Great Depression Ahead. Do not agree to that extent but defaltion IMHO will be huge.Please debunk this for me!!Excerpt below....

"The first and last economic depression that you will experience in your lifetime is just ahead. The year 2009 will be the beginning of the next long-term winter season and the initial end of prosperity in almost every market, ushering in a downturn like most of us have not experienced before. Are you aware that we have seen long-term peaks in our stock market and economy very close to every 40 years due to generational spending trends: as in 1929, 1968, and next around 2009? Are you aware that oil and commodity prices have peaked nearly every 30 years, as in 1920, 1951, 1980 — and next likely around late 2009 to mid-2010? The three massive bubbles that have been booming for the last few decades — stocks, real estate, and commodities — have all reached their peak and are deflating simultaneously"

http://www.hsdent.com/2008/07/23/the-great-crash-ahead-a-new-book-by-harry-s-dent-jr/

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#6) On January 14, 2009 at 3:47 PM, TMFDeej (99.40) wrote:

Excellent information, socialconscious.  Thanks for sharing.  I'll have to read the entire article.

Deej

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#7) On January 14, 2009 at 3:49 PM, TMFDeej (99.40) wrote:

I appreciate the wealth of data and historical precident that you have brought to the table, alstry.  Hours of research must have been necessary for a message like that.  Thanks for reading and for taking the time to lay out your argument so intelligently.

Deej

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#8) On January 14, 2009 at 3:58 PM, TMFDeej (99.40) wrote:

Interesting book as well, social.  Have you read it yet?  Just in case you're interested, here's a summary of the key points courtesy of Barnes and Noble:

"• The economy appears to recover from the subprime crisis and minor recession by mid-2009 -- "the calm before the real storm."

• Stock prices start to crash again between mid- and late 2009 into late 2010, and likely finally bottom around mid-2012 -- between Dow 3,800 and 7,200.

• The economy enters a deeper depression betweenmid-2010 and early 2011, likely extending off and on into late 2012 or mid-2013.

• Asian markets may bottom by late 2010, along with health care, and be the first great buy opportunities in stocks.

• Gold and precious metals will appear to be a hedge at first, but will ultimately collapse as well after mid- to late 2010.

• A first major stock rally, likely between mid-2012 and mid-2017, will be followed by a final setdback around late 2019/early 2020.

• The next broad-based global bull market will be from 2020-2023 into 2035-2036.

Conventional investment wisdom will no longer apply, and investors on every level -- from billion-dollar firms to the individual trader -- must drastically reevaluate their policies in order to survive. But despite the dire news and dark predictions, there are real opportunities to come from the greatest fire sale on financial assets since the early 1930s. Dent outlines the critical issues that will face our government and other major institutions, offering long- and short-term tactics for weathering the storm. He offers recommendations that will allow families, businesses, investors, and individuals to manage their assets correctly and come out on top. With the right knowledge and preparation, you can take advantage of new wealth opportunities rather than get caught in a downward spiral. Your life is about to change for reasons outside of your control. You can't change the direction of the winds, but you can reset your sails!"

The demographic explanation for what we are currently going through makes quite a bit of sense.  This is the sort of post that I appreciate, not just one that says "We're all doomed, because I say you so." without any well laid out reasoning.

I may have to add this book to my reading list.  But there's no way that I'm going to read it back-to-back with The Forgotten Man.  Two consecutive books about an economic depression would suck the life out of me.  I'll have to slide some junky fiction in the middle there somewhere like Michael Connelly or James Patterson.

Deej

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#9) On January 14, 2009 at 9:04 PM, cwcj63 (69.32) wrote:

I think some ice cream might make me feel better after reading this.thanks people for this great insight.

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#10) On January 14, 2009 at 10:07 PM, Option1307 (29.75) wrote:

TMFDeej

"The Forgotten Man: A New History of the Great Depression" by Amity Shlaes.

Super good book, glad you found it too. I read it about a year ago and I feel it opened my eyes to a lot of things. It is an incredibly relevant book because of the current situation we are in and I recommend it to all. It highlights the failed policies of both Hoover and FDR, and how they basically turned a bad recession nito the Great Depression...Hmm, sound familiar?

Thanks for the post, you bring up some valid points that deserve more tthought and discussion.

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#11) On January 15, 2009 at 2:24 PM, TMFDeej (99.40) wrote:

Talk about fast service.  I ordered The Great Crash Ahead from Barnes & Noble.com yesterday at 4:00 PM and it was already at my hous this morning.  Wow.

Deej

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