Many of you know my story that the very first book that I opened in college for the very first class (Econ 101) had a statement on the first page, “We don’t know why the Great Depression happened, but we do know that it can never happen again.” The textbook was one written by Keynes and shaped my views from that point forward to one where I was skeptical of what I read and to always “dig” for the truth. So here we are some 30 years later and the Keynesian experiment seems to be faltering badly. “Deficits” were supposed to spur the economy out of recession and into boom times. Not only do we not have boom times, the current situation is one where it is finally dawning on investors (and the boneheads running the financial show) that deficits do matter and cannot be run up in unlimited fashion. Everything economic that was “known” by man prior to 2008 is now being proven to be false!
Which leads me to the question, “What is it?” What is it that suddenly turned the markets down last week? Is it the “fiscal cliff” that you hear about 24/7 these days? I suspect it is, but only in part. Many had forgotten that Jan 2013 was to be the beginnings of Obamacare (it was not even a campaign issue), many only woke up Wednesday morning to have their memory’s jogged. We also have a debt ceiling issue to deal with at a time when Congress is normally thinking about vacation. This is pretty stupid if you ask me because we already hit the absolute ceiling several years if you take away the Fed from purchasing what cannot be sold. “It” is not just one thing, it is many many things and far more than just the 3 listed above.
For a moment I’d like to go back to my college textbook. The reasons offered for a Great Depression never happening again were many but here were the main reasons. We would never make the same mistakes again. Money supply would not be tightened (which it wasn’t in the early 1930’s), taxes would never be raised upon a weak economy, regulations separating banks from investments banks to protect depositors and “safeguards” (FDIC etc.) were put into place to ensure “confidence” levels.
Fast forward to present and you will see money is very easy, virtually free, but ONLY for the banks and financial institutions. Credit has become very tight for anything that pertains to the real economy, construction or production (and even some sovereign governments). Next, tax rates are set to go up and spending cuts implemented. Glass-Steagall was repealed in 1999 so banks, brokers and investment banks became one big financial brothel. Then of course we have other regulators, the CFTC, SEC and others who have not prosecuted ANYTHING having to do with the fraud which took… and is taking place. Finally we have the FDIC, SIPC etc. in place to keep the confidence. Never mind that they are so underfunded as to having less than half a penny for every $1 insured, nothing here… please move along!
What we do have now which we did not back then is also important to point out. We did not have a fiat currency, the money itself was real, it was either Gold or backed directly by Gold. Today everything, EVERYTHING is only a “promise” to pay, nothing is ever actually paid or fully settled. We also have sovereign governments that are plainly broke and central banks “creating” money to patch the tires. As with a real tire, a financial “patch” will never hold if it is created from thin air. One other difference today is that the “plunge protection team” is actually a government entity as opposed to J. P. Morgan and his for profit cronies. Markets are rigged by governments to “portray” what the governments want, they were rigged back then only to extract profits from those not plugged in to the “fix.”
What we have coming is THE perfect storm. Tax rates are set to rise all over the world as (forced) “austerity” takes hold of governments too deeply in debt. In the U.S., on top of higher tax rates will be another “tax” in the form of healthcare which was shoved down the throats of the populace. Credit availability is set to further tighten as one by one, various sovereign governments are denied access. Nothing that is happening today was EVER supposed to happen but the laws of Mother Nature, decreasing marginal returns and the fact that “infinity” can never be attained, are all lining up to create the Greatest Depression. If you ask me what “it” really is, “it” is the Greatest Depression in the history of mankind… carved in stone because of many bad assumptions in the first place and making some of the exact same mistakes all over again!