Hi John.
((Even if you look at our great depression most of the damage was from 1930-32))
Well, damage to the stock markets. Of course, there was serious damage in the real economy through the entire decade of the 1930's.
But the other thing to note here was it was precisely 1930-1932 that the global currency system begin to collapse. Sorry if I tell a story you are already familiar with, but I'd like to set the context of today's situation with that of the early 1930's.
At the end of the 1920's, the global currency system was a highly-flawed modified version of the gold standard, whereby currencies were exchangeable for so many ounces of gold. The problem was, this "fixed exchange rate" did not properly reflect the strength of economies as they existed prior to WWI (which was the gold conversion rate was set at).
As a result, gold flowed out of the weaker economies to the stronger economies - creating pressure on weaker economies to raise interest rates to attract gold, which further weakened their economies, and so it went.
Initially, the way the Central banks got around the requirement was to effectively "sterilize" gold reserves. That is, it was agreed that none of the central banks would actually ask to convert currencies to gold. In a way, sort of like today it is agreed that no one will actually ask the US to provide real goods and services for all the paper dollars floating out there.
But of course, this ruptured. I don't recall the specifics, but at some point gold began to drain out of Great Britain I believe, which resulted in the British raising their interest rates to attract gold back into their treasury. This had very negative effects on the British economy, which in the end went off of the gold standard in Sept 1931. The US went off the the gold standard in March 1933. France, Switzerland, Belgium and Italy went off gold in 1936.
What transpired here was a genuine "flight to solvency". And the form it took, in part, was to trade in paper monetary certificates for gold. This flight to solvency highlighted gaping holes in an undercapitalized banking system, and caused a string of banking failures in Europe and the US.
From the following article:
fsmitha.com
"In 1929 there had been 659 bank failures. That number in 1930 rose to 1,352."
Wow!
Now the major difference I see today from the early 1930's is that today the global financial system rests on pure fiat currency. There is not gold standard in place, no matter how flawed. The positive side I suppose is that it has not yet created deflationary pressure in light of insolvent financial intermediaries. The negative side, I suppose, is that "it has not yet created deflationary pressure in light of insolvent financial intermediaries" - in other words, things were allowed I believe to get even more out of hand that they were in the late 1920's/early 1930's.
But, the major similarity is the explosion of credit and the insolvency of the financial system IMO. A proximate consequence of the unwinding in the 1930s was an inevitably "flight to solvency" as the system came apart. Another victim of this "flight to solvency" was a reevaluation of major currencies that occurred in conjunction with the rupture in the gold standard. And of course, a final symptom of this "flight to solvency" was very limited availability of credit, and a consequent collapse in global economic activity.
Now I don't know what form it's unwinding will take this time around, but I would be very surprised if the move to a fiat currency system repealed the laws of sound banking practices. Inevitably, I believe there will again be a "flight to solvency" this time around. And this problem will not be fixed in any way, shape, or form by printing more money. It will only make it worse. In the end, people will have to SAVE more, and SPEND less - it's really that simple IMO.
((Even if you look at our great depression most of the damage was from 1930-32))
Well yeah, but that resulted in the DOW losing 95% of its value! If you survived financially to see 1937, you were one of the lucky ones.
((We have had an unprecedented housing crash in parts of this country for over two years now. I live in one of the ground zero areas and the costs of everything else you need is going through the roof.))
There's no question that there has been serious inflation in the global economy at least since the reliquification of the Tech bubble bust - say since October 2002. In the US, it's probably more apparent than in Canada. But we've seen it here too. And there are some areas in the US that are for sure worse than others.
BUT, it appears that the credit bubble has only started to unwind. I'm not sure that the lessons of the past several years necessarily apply to the next several years. The "flight to solvency" is just starting it would seem.
So what happens to the US$ in a global "flight to solvency"? To my mind, a whole lot of bankruptcies - and this will likely be a global phenomenon. Quite possibly higher prices in US$ terms for the essentials of life. Rising real interest rates - after several years of negative real interest rates. And a whole lot of pain.
I personally don't believe the US will make good on many of its foreign IOUs - which will limit the inflationary impact in the US somewhat, but will amplify the deflationary impact in foreign countries that are holders of these bogus IOUs. But I could be wrong. :)
((Seems like only twice in history has [a credit bust] resulted in deflation.))
Could you elaborate on this John? Thanks.
Anyway, it will be an interesting decade that's for sure.
glenn |
