Tuesday, June 06, 2006

The Greater Depression


It's been said that if you spend 15 minutes a year thinking about the economy, you're wasting 13 minutes. That's generally true. But as an amateur historian, I can't help myself. And I'm forced to believe that this is a time when the subject is worth some real thought.

My view is that the longest, and certainly most important, trend in history is the ascent of man. I have little doubt that it will not only continue but accelerate. But that doesn't mean there won't be nasty setbacks along the way. As I have said before, possibly the best definition of a depression is a period when most people's standard of living drops significantly. You can also define it as a period when distortions in the economy and misallocations of capital are liquidated.The distortions are almost always the result of government intervention in the economy, through things like taxes, regulation and currency inflation.

Those are the factors that caused the unpleasantness that began in 1929. Since the government is exponentially more powerful and invasive today than it was in either the 1920s or the 1970s, I expect the consequences will be much worse this time around. Things could have come unglued, and almost did, back in the 1970s. I don't see how we'll dodge the bullet this time. Although that's not really a good analogy, in that, for reasons we don't have time to explore in depth, a depression is probably inevitable this time.

The only serious question in my mind is whether it will be essentially deflationary in nature, as it was the case in the U.S. in the 1930s, or inflationary like in Germany in the 1920s. My guess is the latter because the government is so much more powerful today. Or it could actually be both at once, in different sectors of the economy.


Inflation could drive interest rates to 20%. This would collapse the bond and real estate markets, wiping out trillions of dollars of purchasing power - which is deflationary. Meanwhile, that same inflation doubles the cost of food and fuel. In other words, the opposite of what we've mostly had for the last generation, when we had "good" inflation in stocks, bonds and property, but stable or dropping prices in "cost of living" items. This time the pattern could reverse, which would be a nightmare for most people.

And as people become more focused on speculation in a generally futile attempt to stay ahead of financial chaos, they inevitably divert effort from economic production. Which will decrease the general standard ofliving even more.

The situation isn't made easier by the possibility that we're facing PeakOil - the start of a secular decline in world oil production. Or the fact that Americans, both individually and collectively, are deeply in debt and living on the kindness of strangers. The problem with debt is that it artificially increases our standard of living. But when we pay it off, especially with interest, it reduces our standard of living in a very real way.

Wrap this economic environment around the so-called War on Terror, which is rapidly morphing into the War on Islam, which could easily turn into World War III, and you're looking at the perfect storm. The odds of a major conflagration are very high, and it's not being adequately discounted. If Bush starts a war against Iran, or if another incident like that of 9/11 occurs, or even if the trend of the last five years accelerates, the U.S. is going to be locked down like one of its numerous new federal penitentiaries. And that will be accompanied, and compounded, by mass hysteria among Boobus americanus.

At that point, your investment portfolio will be among your lesser concerns. People forget that, in every country and time, there's a standard distribution of sociopaths and misdirected losers. In normal times, they seem like normal people. But when the time is right, they show their colors, and they love to get jobs with the government, where they can lord it over their betters.

You may be asking yourself: Is the Greater Depression really inevitable? How bad will it be? Is there another side to the argument? Can it beavoided?

I suppose it's not absolutely inevitable. Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done. But we live in a world of cause and effect where actions have consequences. That being the case, I expect truly serious financial and economic trouble. And the government will make it vastly worse by trying to "do something" instead of recognizing itself as the cause and backing off. I don't see any way out.

How bad will it be? In historical terms, the last depression was relatively short and mild. The longest depression on record was the DarkAges. Residents of the old USSR and Mao's China suffered through a depression that lasted decades. I'm not predicting it will be that bad, if only because the U.S. has basically much sounder traditions and institutions and vastly more accumulated capital. But it's hard to overestimate how serious this could be. I sometimes joke that it will likely be worse than even I think it will be.

Getting back to whether it's truly inevitable, it's a question of degree. The recession of the late 1970s and early 1980s involved a terrible stockmarket, 15% inflation with interest rates to match, 10% unemployment and a near war with the USSR. But the country not only hung together, it went onto a tremendous rebound. My guess is, however, that the last 20 years of good times will later be viewed as an economic Indian Summer before a harsh winter.

The good news, of course, is that no matter what the economic conditions, technology - which is the mainspring of human progress - will keep advancing. And many individuals will continue innovating, saving and improving conditions for themselves and their associates. Also, it's entirely possible to go through even the worst of times and not get hurt. Indeed to profit from them. If the price of a house you want now but can't afford falls 75% (as outrageous as that may sound at the moment) while your own investments in the high-quality gold stocks we follow in our International Speculator quadruple, you're much better off. That house now really only costs you one-sixteenth of what it did before. Of course it's a problem for the guy who has to sell his house... but I always prefer to look at the bright side of the equation. There's time now to structure your affairs so that you're on the right side of the trade.

Keep your eyes peeled for signs that indicate it's about to get ugly. One obvious indicator to watch is how the price of gold is running. Gold is the only financial asset left in the world that's either safe or cheap. It's also under owned and largely unrecognized, which is why the smartmoney has been moving into it.

Then there's the CPI itself - although I don't think it's very accurate, in that all the adjustments, exclusions, weightings and what-nots the government has insinuated into it over the years makes the CPI as much ofa floating abstraction as the dollar itself. It's funny how the government plays with figures for fear of hurting confidence. They believe the economy rests mainly on confidence, which, ironically, in today's world, is true. Unfortunately, confidence can blow away like a pile of feathers in a windstorm - and we have a class-5 hurricane coming. If the economy were sound and people for some reason lost confidence, the currency and the banks would be unhurt, and the next day things would go back to normal. But that's not the world we live in. So, higher CPI numbers are another thing that could destroy confidence and supercharge the goldprice. They're coming.

Higher interest rates, which we're already seeing, will inevitably burst the real estate bubble, which is floating on a sea of mostly adjustable-rate debt, a lot of it interest-only or even with negative amortization. Higher rates will also crush bonds and probably stocks. And they'll devastate the economy since everybody is deeply in debt. However, I feel the Fed will keep short-term rates - which are really the only ones they control - as low as possible for as long as possible. For one thing,they don't want a recession, which this time could snowball into the Greater Depression. For another, my guess is that they want to gradually depreciate the dollar against other currencies, in part to decrease the chronic, massive trade deficit. And because increasing the number of dollars makes people think they're richer than they really are, it can stimulate some additional spending... but these days that spending is mostly done on credit, so it is only illusionary.

The biggest single problem, however, is that there are trillions of U.S.dollars outside of the U.S. Unlike Americans, foreigners have no reason to hold them. And at some point very soon, perhaps when the Fed finally hits the wall on its ability to raise rates, these overseas dollars are going to start flooding back home, while the products and titles to real wealth flow out of America.

Therefore, when the trade deficit starts turning around - which most people will think is a good thing - that will be the real tip-off the game is over. Trillions coming back to the U.S. will skyrocket long-term interest rates and inflation. The dollar will go into freefall.

But although I think these are the things to watch, to my way of thinking it makes no sense to wait until the stampede starts to try to get out thedoor. If you haven't done so already, take advantage of the current correction in gold to begin repositioning your portfolio for what's next.

Doug Casey for The Daily Reckoning

Editor's Note: Doug Casey is the author of Crisis Investing, which was #1 on the New York Times Best-Seller list for 26 weeks. He is also editor and publisher of the International Speculator, one of the nation's most established and highly respected publications on gold, silver and other natural resource investments


BillyBob said...

His books sell for pennies on Amazon.

Anonymous said...

Are'nt you writing your own blog anymore?
Cut, copy, paste from another?
Why did'nt you just link us to the daily reckoning for the story?
Just curious...

Anonymous said...

Damn, those 1Q06 Vegas numbers are pretty strong: 9.9% YoY increase. Almost $30k. How's equities and gold doing?

contrarian2day said...

Anon 7:22

When I have new topics and time to write, I will. I stated such in a May post:


Until then, it's sometimes much easier to post the words of others who have feelings similar to my own. As for the link, I posted it... but the Daily Reckoning link actually links to numerous articles posted that day and any specific article is difficult to find.

Anon 9:36

You must be smoking Crack and drinking too much Kool-Aid. If you actually took the time to look at the stats, you would quickly find that Vegas is beginning to enter melt-down mode. > 21,700 homes listed w/ prices falling every month.


As for Gold, IMHO this is a technical correction (price far exceeded 50 & 200 DMA). When this correction is done, the next upleg will surpass $800.

Anonymous said...

Hearing someone characterize 9.9% YoY growth as "melt down mode" and "falling" prices goes a long way in establishing a level of credibility, don't you think?

contrarian2day said...

Anon 7:13,

Guess you're too lazy to look at the stats I supplied earlier. Well here you go again: http://www.benengebreth.org/housingtracker/location/Nevada/LasVegas/

If you don't live here, you haven't a clue as to what is taking place in this market.

I attended 3 open houses last weekend... Both the sellers and Realtors (in each of the cases) were in panic mode... I showed up at 3pm and was told that I was the only visitor that day.

Kind of hard to sell a home if no one is looking...

This the beginning of major change and it'll only get worse from here-- with higher interest rates, higher fuel & energy costs, consumers strapped to the hilt and tightening lending standards, the game is over.


Anonymous said...

Aaahhh yes. Most economists who track the real estate market rely on Ben's blogpiss for accurate housing data and call you about on-the-ground open house intel, don't they?

Ooooops. NO they don't.

Just like the alien abduction fringe whack jobs you cling to for economic doom forecasting - you and 6 others true believers speak with the certitude of the righteous to each other or to people who smile politely and move away from you.

Here's some non-blogpiss news you can use:


Sales UP, prices UP.

You can spin that reality all the way to Area 51, and yes, the game is over - for you, as you now watch helplessly as the world passes you by and hope for disaster. How's that working out for you?

For some of us, watching you and your kind is pure entertainment, bud, pure entertainment.

panicearly said...

Statistics from Las Vegas may not be as strong as they appear

10:55, anon
THere is no bubble, re prices always go up, they are not making anymore land, my house is not sinking.... just keep repeating that over and over....
are you that Lareah guy?

.... bud, there is nothing for you to learn here, you are wasting your precious time while you could be out flipping homes.

Anonymous said...

But panic, I do learn here. Quite a bit, in fact. I enjoy, in a morbidly curious way, watching different human psychologies in action, and crash monkey / bubblehead blogs are a veritable petri dish buffet of viruses for one to feast on.

Anonymous said...

I was a blind quadrapalegic until I read The Daily Reckoning, and now I am a professional tennis player.

Anonymous said...

I was a blind quadrapalegic until I read the Daily Reckoning and now I am a pro tennis player.

Anonymous said...

I was a blind quadriplegic until I read the Daily Reckoning and now I am a pro tennis player.

Out at the peak said...

Anonymous people talk big. If they believed in their housing faith, why not post with a blogger name?

If housing is where all the money is at, I hope you invested in XHB, RYL, TOL, EUEYX, etc lately. Or even better yet, get more leverage with RE purchases. You are pointing to the ten year RE graph and just love the results.

Hey, I was a pumper for years too. I made my purchase and got coworkers to buy in too. But then I round them up last year and we all sold amid troubling data ahead. A few did not want to look back. They were convinced prices will fall and even crash, but they have no joy in renting no matter what the cost.

If I stayed in my house, I'd be out $50K-$60K in paper gains. I'm glad that I liquified that paper.

If you read what the bloggers post, they show historical evidence of housing busts. Nothing new is happening, but this cycle is more extreme than any other.

panicearly said...

anon, yes we bubbleheads are viruses,
and soon we will spread like the plague. too bad so many people wont know what ails them till they are broke.
if you are upside down on your home
chances are you are already broke. one sure way to find out is put that puppy
up for sale. oops they are doing that already, at the same time.
temperature rising? are you feeling
the chill, is that why you are here.

surfer-x said...

panicboy and peakyboo,
You boys are morons. You are no more or less "identified" or "anonymous" than any other blog pisser. You either know that and are kiddies with nothing better to argue or you are profoundly ignorant adults.

Out at the peak said...

Surfer-X, judging by your profile and comment, you are not taking any of this seriously. Why even try to participate with us 'morons'?

As far as those DQ numbers, they are in comparison to YoY. Many bubble areas have multiple QoQ declines.

Check Vegas, Phoenix, Florida, and other old hotspots. They led the bubble and have the first signs of trouble. Other places will follow over time.

Sales price right now is not the big issue. They are pretty sticky right now. Inventory is mounting almost everywhere. This will put pressure on prices.

If this evidence does not mean anything to you, I will never understand why you waste your time outside of your circle.

Anonymous said...

What do you think, next stop $500 for gold?

Benjones said...

Clearly gold had become disconnected to fundamentals and is in the process of reverting to the mean. What goes up must come down. Don't catch a falling knife or fall for a dead cat bounce.

Anonymous said...

Gold should hit resistance and come in for a nice soft landing at about $400. Maybe less.

BillyBob said...

Gold bugs are now officially taking the full, five finger anal raping.

Bart said...

Great blogging all around. Keep up the good work and the sideways humor.

Anonymous said...

Anyone who considers that author to be anything other than a blubbering idiot should not be allowed to have a family who relies on them for sound judgement.

Tom said...

Great Blog. Keep the great articles coming. Thanks

Anonymous said...

Looks like gold will not be denied its determined and downward downward march into the 400's. Eight bills? Not in your lifetime.

YourDaddy said...

Good God. I hope that either your wife doesn't rely on you for her financial future or she is simply too stupid to know better.

BranchDavidians said...


All who posess the one true message know that the fiat currency being propped up by the New World Order, the Illuminati, and the Pointer Sisters is headed for collapse after the black helicopters can no longer be fueled due to peak oil. Verily it is thus spake.

Any Mouse Fence Sitter said...

7/7/06 Randy, I know you need to take some time with your family, your priorities are most correct. I do hope that some of the moronic posters here have not discouraged you in any way. Keith over at Housing Panic went through this BS. His Blog is doing well because everything he said was going to happen is happening.

The negative posters here need an outlet for their frustrations. These people have 125% mortgage loans on homes that lose value everyday. According to WSJ, Buffett, Heebner, Soros and many others in the know! These debtors along with the housing market are toast. The equity they think they have is already a big negative. In 2 years their homes will be worth half the purchase price. The Luxury SUV’s, Boats, 4 Wheelers, Flat Screens etc soon will be history.

Some of the negative posters are most likely the real estate and house flipper types. Yep! They are screwed big time.. CNBC just did a report on their bleak futures today and it don’t look good. They really need to get past the denial and accept the fact that it’s over! The real estate market won’t be back for a decade or more.

This blog has provided some really sound advice to anyone smart enough to listen.

I suggest the compulsive spender, gambler class get educated on terms like:

Fuel Efficiency
Yield Curve Inversion
Fed Rate

Anonymous said...

Great writing on the housing bubble. May I suggest you post it as a comment to the blog titled "Real Estate Markets Slows Down Fast" that is posted on RealBlogging


Anonymous said...

We actually did a study analysis in my ecomomics class and the predictions for another depression were very high. i suggest save your money . lol

wellington real estate

Vegas crash watcher said...

Housing true believers are great-that's who I sold my house to for a double in 2 1/2 years. Gold is heading to $300 and the world is heading for another depression, as they come on a semi-regular basis.

tom said...

"FOUR STARS (Highest Rating). The scariest damn film you'll see this year. It will leave you staggering out of the theatre, slack-jawed and trembling.”

Watch the entire film Here!!

AnalysisGuy said...

Take a look at my market history report for the Bakersfield and Los Angeles at


truth said...

Here's some good NWO stuff for you talking about the characteristics of American democracy. The Grace Commission and famous quotes are actually real. Whadya know anonymous, maybe you should "bone up" on your survival skills after all. By the way, did you know that we were supposed to be a Republic, not a democracy?

Dr Housing Bubble said...

Not sure if a "Great Depression" is on the horizon but definitely a readjustment to the current market. If 25% of all loans in 2006 originated were sub-prime and the same percent in 2005, guess where we end up?

Doesn't take a genius to know where we are heading.

Dr. Housing Bubble

Corey said...

Bernanke to congress: Housing issue "substantial." More at http://infohype.blogspot.com

Louisville Real Estate said...

I enjoyed the article very much. I think there are definitely a lot of things to potentially be concerned about; great topic for discussion.

Louisville Real Estate said...

Just checking back to see if you had any new articles...

Anonymous said...

Sign this petition against a Wall Street Bailout!


sb322 said...


This week we learned that on August 30 the United States Air Force flew a B-52, locked and loaded with nuclear warheads, from North Dakota to Louisiana. This broke a military policy going back to the 1960s against such flights.

There is a still more dreadful prospect though. Our "unitary executive" may be threatening or preparing a strike against us, the unruly and now war weary American People who are the greatest impediment to the Neocon New American Century plan. It used to be that only the 911 Truth community would entertain the idea that the next 911, the "911-2B" attack, could come from our own government. However, a recent spate of Bush administration pronouncements that we are due for such an attack has made it apparent to many other Americans that Bush would welcome a 911-2B event -- or might even arrange one



Why was a nuclear-armed bomber allowed to fly over the US?

Wednesday’s revelation that a US Air Force B-52 bomber flew over the length of the United States armed with six cruise missiles carrying nuclear warheads has attracted amazingly little media attention.

RUMOR: Within intelligence circles there are rumors that the munitions airmen acting on their own without orders, disconnected the powersuppy to each of the missiles prior to mounting them on the B52's pylons. This act prevented the onboard missile computers from being overridden from the ground and launched remotely [out of the control of the B52 pilots].


Anonymous said...


"Looks like gold will not be denied its determined and downward downward march into the 400's. Eight bills? Not in your lifetime."

Tehee... USD744 seems to be a price quoted for today. And the direction might as well be upwards ... You live, you learn.