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The Second Leg of the Great Depression Was Caused by European Defaults



May 15, 2010 – Comments (6)

This weekend's article comes from a website I like to frequent from time-to-time called, who benefited from a guest poster at In the article below the author points out that during the Great Depression, the second leg of the downturn, which took the market to its lowest levels was actually caused by European defaults, which didn't surface until the market had made a "V" shaped rebound of 60% off of its original lows (the initial sell-off). This article I found to be truly fascinating.  

Many Americans know that the Great Depression was started by the bursting of the giant Wall Street bubble of the 1920's (fueled by the use of bank deposits on speculative gambling, which is why Glass-Steagall was passed) , which in turn caused a run on American banks.

But most Americans don't know that the second leg of the Depression was caused by European defaults.

As Yves Smith reminds us:

Recall that the Great Depression nadir was the sovereign debt default phase.

The second leg down of the Depression was larger than the first, as shown by this chart of the Dow:

Click Here to See the Chart and Rest of the Story.

6 Comments – Post Your Own

#1) On May 15, 2010 at 1:09 PM, Teacherman1 (< 20) wrote:

Good post and interesting article.

Well worth pondering. 

Can't help but wonder how weak the European economy was because of WWI, and whether that might have been a contributing factor.


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#2) On May 15, 2010 at 1:52 PM, bigcat1969 (79.95) wrote:

Thanks for that link.  It will be very interesting to see if we play out in virtually the same manner or if the trillions being borrowed/printed along with almost 0% interest to banks are enough to keep the US recovery going.  Europe could certainly replay since the Euro seems to be creating more problems than it has solved.  With German politics and French threats in the mix its possible that the EU could change a whole lot in a shorter time than we think possible.  England has a shaky government that isn't Euro friendy, Germany's government just got unsteady and each future election will probably punish the ruling parties for any more gift to other Euro nations, France has always as the saying goes been all mouth and no trousers, the PIIGS will either default or see GDPs fall to earth, maybe both.  None of that seems to make for a strong EU response to a crises.

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#3) On May 15, 2010 at 2:42 PM, dibble905 (< 20) wrote:

European Debt Defaults will most likely not occur. A more likely scenario, as displayed by the amount of liquidity been thrown out once again, is rapid devaluation of fiat currencies -- especially that of the euro.

In either case, even if the recent European crisis package can avert a similar feat of the Great Depression, the worth of each and every single currency will be greatly diminished. Since every currency will devalue, the devaluation of fiat currency will not be evident from currency pairs. Rather, gold and precious metals will most likely sky rocket as it will play a significant role as a "store of value"

Although my age suggests a strategic asset allocation of mostly equity (riskier assets), I have tactically adjusted my portfolio to be about 15% gold, 10% oil, 25% equity and 50% long-duration treasuries (through derivatives).

Whatever Equity that I do own is in segmented emerging markets such as Africa, Middle East and Asia. I would much rather take on the risk-aversion risk of a set of geographical regions which show great promise over the long-term versus slightly lower risk (historically) in developed market equities which face enormous purchasing power destruction.

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#4) On May 16, 2010 at 2:12 AM, Beorn10 (29.26) wrote:

Great find! 

Europe’s problem and the gulf oil spill are symbolically very similar.  The spewing oil is like the loss of saving of the EU, which will eventually tarnish the landscape.  Neither have an easy solution and both were probably preventable.



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#5) On May 16, 2010 at 2:31 AM, bigcat1969 (79.95) wrote:

The reason I think you might see default is because of Germany.  They hold the power in the EU.  France actually has little power versus size as you can see when they resort to threatening to pull out if German doesn't do what France wants, Spain and Italy are so messed up that they have very little power for the size of the country, while the UK has little interest and isn't part of the Euro.  So Germany has a massive amount of power and based on recent elections, the German people are not interested in hurting themselves.  Since bailing out Portugal and Ireland will be the next steps, you might see a grudging ok, but when Spain and Italy hit German leaders will either say no or be thrown out of office possibly by force.  Even if the EU goes farther toward printing Euors rather than bailouts, I expect Germany to refuse because devaluation does them no good and the last thing they want is a repeat of the situation that led to WW2.

So at some point what does Germany have to gain by bailing out two of the five most potent countries in Europe or in letting the Euro drop like a rock and watching food prices grow by the hour because of inflation.  Nothing.  They have nothing to gain and everything to lose.

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#6) On May 16, 2010 at 4:18 AM, uclayoda87 (28.68) wrote:

Looks like June to Dec 2008

And maybe April 30, 2010 to ?

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