Happy 29 October!
For those of you who know your financial history, today marks the 92nd anniversary of the beginning of the Great Depression.
Naturally, it’s something we take note of here at The Daily Reckoning Australia.
Not just because it marks history’s biggest one-day market drop — now known as Black Tuesday — but because it marks the start of a debt cycle we’re pricing for to this very day.
You see, people only tend to remember those first 24 months of the great crash. But the depression it triggered would last for another eight years.
And, of course, drastic markets call for drastic action by a new wave of politicians.
And so stepped in President Franklin Delano Roosevelt in 1933…
Roosevelt did many things. But the two that stand out are the devaluation of the US dollar against gold…and an aggressive fiscal policy known as the ‘New Deal’.
Many people believe these measures were successful in bringing the US out of the Great Depression.
I believe the cure created an infinitely more dangerous problem.
Today, I want to explain why devaluing the US dollar and the New Deal were not really solutions to ending the Great Depression.
And in fact, the economic problems we face today are the direct result of them.
It may not win the approval of many economic historians.
But you can decide for yourself…
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Changing the goalposts of the monetary system
Economists argue that devaluing the dollar against gold freed up the economy to recover.
The markets suffered a massive crash in 1929. The Hoover administration experienced a withering deflation. A credit freeze slowed economic activity. Businesses stopped investing because of falling prices.
Devaluing the dollar was a crude way to reflate the market. All you have to do is make every dollar worth less so prices rise.
The gold standard played a big role in regulating prices until Roosevelt moved the goalposts by devaluing the US dollar from $25 to $35 in July 1933.
This may have helped reflate markets eventually. But the US dollar also lost 40% of its purchasing power.
But then came the big gun…
Building the foundations of a dependent society
The other key strategy to revive the economy came in the form of massive fiscal spending.
This program, known as the ‘New Deal’, involved huge spending on building infrastructure. It also set up a social security system to provide relief to the unemployed and poor people.
On the surface, it sounded great.
The government is spending to rebuild the country out of the ravages of the Great Depression. It would create jobs. And bring back hope to many households who faced bankruptcy and ruin.
Think of the government acting benevolently to help the poor, oppressed, and the orphaned.
What is there not to like?
Here’s the problem, which has reached epic proportions today…
Nothing more permanent than a temporary government solution
Government spending programs rarely shrink or disappear.
The social security system, which began with the New Deal, now costs the US taxpayer more than US$1 trillion. And you can expect it to keep going up due to the ageing population, political wrangling, and people seeking the path of least resistance in life.
Over time, it created a class of people who depend on the government, rather than on the voluntary generosity of businesses, church organisations, and individuals. And it burdens the working population with higher taxes as time passes.
Where do the people go when they cannot make ends meet?
Debt.
Thus, the vicious cycle continues.
We now live in a world drowning in debt.
The ravages of the Wuhan virus outbreak and government-imposed lockdowns have knocked out the global economy. The only reason the financial markets are still holding up is because the central banks have propped it up with more money printing and more debt.
In the halls of the US Congress, they are talking about more fiscal spending, in the form of the ‘Green New Deal’.
While the order of events is not the same as back in the 1920s and 1930s, I can see a similar pattern.
You know that the US government will try to pass the ‘Green New Deal’ if the US economy swings back into recession.
Meanwhile, the financial markets are rallying with little signs of slowing down or correcting.
Well, they were talking earlier this week about the VIX Index, a proxy measure of market volatility, being at its lowest this year.
I’m just waiting for a modern-day Irving Fisher to come out and say that we have found a permanent plateau in the markets.
Bullion and gold stocks should stand out when it happens.
I hope you’re prepared because no one rings the market at the top.
God bless,
 |
Brian Chu,
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.
