Great Depression Online Archive Issue:

Making Sure "It" Doesn't Happen Here

Great Depression Online
Long Beach, CA
September 07, 2010

Inside This Issue You Will Discover…

*** A Japanese Depression
*** Some GDO Optimism
*** Making Sure “It” Doesn’t Happen Here
*** And More

A Japanese Depression

Here at the GDO we’ve resisted the comparison.  We thought the U.S. economy would blow up with a bang rather than turn over and whimper.  Maybe it still will…one day.  But, for now, we can no longer deny it.  The U.S. economy has turned Japanese… 

“We can understand that this is not exactly cocktail conversation, but this is a Japanese-style (even worse perhaps) modern-day depression,” wrote Daniel Rosenberg to his clients last week.

Obviously, depressions these days ain’t what they use to be…

“It's not the 1930s because soup lines have been replaced with unemployment insurance lines -- over 10 million checks and for up to 99 weeks.  The poor souls who endured the bitter 1930s had no such relief.”

~~~~~~Uncle Scam~~~~~~

The most pressing macro-observation I’d like to make – an observation that’s critical for investors to understand (though most don’t or won’t) – is that the tectonic monetary shift now underway is truly global in nature.  And it’s not going to be over until a new and markedly different monetary regime has been implemented.

All Scams Must End 

~~~~~~~~~~~~~~~~~~~~~~~~~

Rosenberg also remarked “…here we are 33 months after the Great Recession began, and yet home prices, gross domestic product, credit outstanding, organic personal income and employment are all lower now than they were prior to the onset of the downturn.”

As the U.S. economy follows Japan into a long, slow, soft depression, the only thing really increasing is public spending.  Regrettably, this just stretches out the period of adjustment that must follow the great misallocation of capital that occurred in the years leading up to the bust.  Moreover, for stock market investors, this may result in a 20-plus year bear market…

Some GDO Optimism

Not since before President George H.W. Bush barfed on Japanese Prime Minister Kiichi Miyazawa has the Japanese economy, or its stock market, experienced sustained growth.  Sure there have been glimmers of hope, green shoots of recovery, and periods of optimism over the years, but the sanguinity has always quickly turned to despair.

The simple fact remains: On December 29, 1989, the Nikkei 225 closed at 38,916.  Last Friday it closed at 9,114…down 76-percent over 20-years later.  The unfortunate souls who bought stocks in December of 1989 and held on to them will see most of their adult lives pass by before getting back to even – if ever.

So much for ‘buy-and-hold’ or ‘stocks for the long run.’

Back here in the United States the bear market didn’t start until 10-years later.  On January 14, 2000, the DOW closed at 11,722 – its inflation adjusted high.  Then, after crashing to about 7,590 in July of 2002, with the help of massive monetary stimulus, it ran all the way up to 14,164 on October 9, 2007.  Last Friday the DOW closed at 10,447…down over 10-percent over the last 10-years.

During this period there has been several market crashes; the most recent bringing the DOW down to 6,547 on March 9, 2009. 

A bear market isn’t over, however, until it’s over.  What we mean is, the bear market will not be over until every glimmer of hope and green shoot of optimism has been crushed out of it.  This takes time and money.  Looking to Japan for instruction, the bear market could go on for another 10-years – or more.

Here at the GDO we’re optimists.  We believe the bear market will be over in about 6-years.  In the meantime, the economy must sort itself out…if the Fed will let it…

Making Sure “It” Doesn’t Happen Here

If there was every any doubt what Ben Bernanke would do in a time of financial crisis, look no further than his November 21, 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here.

Then as Federal Reserve Governor (now Chairman), Bernanke said the following…

“The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.  By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”

Later in this same speech, Bernanke made reference to a “helicopter drop”, alluding to a central banker hovering in a helicopter – dropping suitcases full of money to the public.

Bernanke’s solution to deflation, you see…is inflation.

And making sure deflation doesn’t happen here is precisely what Bernanke has staked his career on.  The man is a lunatic, no doubt.  So now that deflation is grasping a strangle hold around the economy’s neck, we rue to see what he does about it.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Throughout history governments have experimented with fiat money.  They have done so because the benefits to the government and the insiders that invariably latch on to power are just so damn attractive.  The Romans did it by debasing their coinage, but the modern version goes one better by completely disconnecting a currency from any value whatsoever, and then wantonly printing as politically motivated needs or wants arise.

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