What We Should Have Learned From The 1920's...
I know what you’re thinking... That I will elaborate on some aspect of the Great Depression...but your wrong. While our Fed Chairmen, Treasury Secretary and President have combined forces to ruin the dollar via quantitative easing, bailouts, purchase of worthless assets (MBS), deficit spending, unfunded liabilities and the public debt, they look back on the past in an attempt to see the error of their way. I completely agree with this approach, but comparing this to the great depression is like apples to bananas. In the 20's-30's we had a strong manufacturing base, we were the biggest creditor nation, we actually saved our money thus causing real capital formation, we had a much smaller government that wasn't running unfunded programs that would be put on the backs of future generations and most of all we were not intellectually bankrupt.
Instead of looking back on the Great Depression to figure out what we could have done to prevent the problem/ minimize the duration, we should look at how we made the problem exponentially worse. We went against all the free market forces which would have fixed this in 2 years or so as opposed to the 15+ years it took with government intervention. They enacted programs such as the TVA which put people to work, but for the wrong reasons. This is very similar to the broken window fallacy, which goes as follows
A man throws a rock through a shop owner’s window- which economically is a good thing because it employs a repairman / creates a job, But in reality, this is like shooting fish in a barrel... as in utterly pointless. The shop owner could have invested in his business, hired an additional worker or he could have bought a new suit which would have given the tailor that money instead of window repairman. This fallacy is the problem, as it is still believed by such people as our president- when he says he will "create jobs". In other words, there is no point in working just to work. Work must be productive, as increases in productivity increase everyone’s standard of living.
One Question: If You Think Bernanke and His Cronies Are Doing The Right Thing, Answer The Following:
Why Have You Never Heard Of The Great Depression Of 1920-1921?
The answer is because it was never great! The conditions were far worse but the duration was less than two years. As Lew Rockwell Points out
"Harding resisted intervening at all in the recession of 1921, and it thereby went away rather quickly, as all recessions will tend to do. He signed the peace treaties which formally ended WWI, and sought world naval disarmament at the Washington Naval Conference of 1921–22. The Teapot Dome Affair that wrecked his administration was a big nothing compared to the crimes of presidents past and future. Of course historians hate him. They say he was a do-nothing president. Harding himself admitted it. He said that he was unqualified to be president. Indeed, no man is qualified to be president. Harding was honest enough to say it outright. "
THE GOVERNMENT DIDN"T DO A SINGLE THING! Warren G.Harding and the FED didn't do anything during this severe crisis, and the free market fixed the problem very quickly. We could also have taken a page from Argentina and their hyperinflation during the 90's. We are not inflating like Weimar or Zimbabwe because most everyone has a bank account these days. We are inflating via Electronic accounts/ Booking (remember Bernanke on 60 minutes saying the FED just adds 000's to provide capital). So how are we different than Argentina? We are not and not even "THE MIGHTY US OF A" can print their way to prosperity.
I hope most people have woken up an realized this is the making of a huge currency crisis in the very near future. Thankfully, there is still time to buy real assets i.e precious metals, agriculture, etc. There is also the gold etf (GLD) and silver etf (SLV) to hedge your equity portfolio from inflation. In my Opinion, however, the ideal hedge would be to buy individual Gold and Silver miners or for the more prudent investor, but the gold miners etf (GDX) as it is levered to the price of gold ( about 3.5-4x depending on the time period). Personally I think a great strategy for both camps (inflation or deflation) is to short the GLD and buy call options on the GDX out to 2011'. Of Course there is DBL Bearish on the USD Idx (UDN)
Just some raw numbers to think about:
Bailouts - Over 12 Trillion To Date
*PV of Social Security, Medicare, Medicaid - I have seen figures as low as 54 trillion to as high as 102 trillion. (This of course goes out 50 Years)
*Fed's has purchased a total of about 2 Trillion of MBS To Date or over 3 Trillion if you include debt monetization and other commercial paper.
*The Monetary Base has Jumped from about 850 Billion a years ago to 1.8 Trillion currently.
*Almost a 13+ Trillion dollar Debt burden - Interest to service this is unsustainable.
* 2 Trillion Dollar deficit inclusive of 800 billion dollar stimulus