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The Second Leg of the Great Depression Was Caused by European Defaults
Many Americans know that the Great Depression was started by the
bursting of the giant Wall Street bubble of the 1920's (fueled by the
use of bank deposits on speculative gambling, which is why
Glass-Steagall was passed) , which in turn caused a run on American
banks.
But most Americans don't know that the second leg of the Depression was caused by European defaults.
As Yves Smith reminds us:
Recall that the Great Depression nadir was the sovereign debt default phase.
The second leg down of the Depression was larger than the first, as shown by this chart of the Dow:
[Click here for full chart]
The
second leg down was primarily initiated by the failure of the
Creditanstalt (also spelled Kreditanstalt) bank in Austria. Creditanstalt declared bankruptcy in May
1931.
As Time Magazine noted on November 2, 1931:
May
14 [1931]: First thunderclap of the present crisis: collapse in Vienna
of Kreditanstalt, colossal Rothschild bank, which is taken over by the
Austrian Government, shaking confidence in related German banks.
A book written by Aurel Schubert, published by Cambridge University Press, points out that:
Austria
played a prominent role in the worldwide events of 1931 as the largest
bank in Central and Eastern Europe, the Viennese Credit-Anstalt,
collapsed and led Europe into a financial panic that spread to other
parts of the world. The events in Austria were pivotal to the economic
developments of the 1930s ....
As Megan McArdle points out:
The
Great Depression was composed of two separate panics. As you can see
from contemporary accounts ... in 1930 people thought they'd seen the
worst of things.Unfortunately, the economic conditions created
by the first panic were now eating away at the foundations of financial
institutions and governments, notably the failure of Creditanstalt in
Austria. The Austrian government, mired in its own problems, couldn't
forestall bankruptcy; though the bank was ultimately bought by a
Norwegian bank, the contagion had already spread. To Germany. Which was
one of the reasons that the Nazis came to power. It's also, ultimately,
one of the reasons that we had our second banking crisis
, which pushed America to the bottom of the Great Depression, and brought FDR to power here.Not
that I think we're going to get another Third Reich out of this, or
even another Great Depression. But it means we should be wary of the
infamous "double dip" that a lot of economists have been expecting.
Way to go, guys ... you're re-creating history.
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Thanks for bringing this to our attention ... very interesting comparison ... but of course we are too bing to fail.
Just as the first GD helped to give rise to the Third Reich the second GD will give rise to the Turd Reich under O'Bummer & the Bonus Nazi's.
The worlds economy is in DEEEEEEP shyte.
regards
You have a grand way wit words.
Gold is simply one more "asset" people are fleeing to because of gold's historical relation to the value of money.
It's currently just one more asset bubble waiting to be popped.
Doesn't this chart show that gold did well against
other assets like stocks? A dollar bought more stocks and until the peg
was lifted a dollar=gold.
Great stuff. As usual you all are looking at the wrong market, though. Talk of "honesty" in the Depression should remind everyone that interest rates were pretty much fixed at or around 1 or 2% back then. What we have now is far, far worse and it's been going on a lot longer than the last couple of years. 73-74 is the watershed year in the history of "what's left of our Republic." It was at that time that interest rates "decoupled" and were allowed to float. It's been WWIII ever since. Sure equities could go up or down--but what is assured is that interest rates have nowhere to go but up and the debt that is backing all that crapola has nowhere to go but down. In short it's the debt markets that are "exploding" not the equity markets (occasional 1000 point hiccups notwithstanding.) this makes the GD look like a cake walk since debt markets are twice the size of equity markets and the destruction of that boondoggle makes people not merely flee "for the safety of gold" but for the safety of "extreme buys" like corn and wheat.
Yves confuses cause and effect. Where did all that money come from?
In Kindleberger's book on the Great Depression, he discussed a proposed bailout for Germany by the UK, US and France. They dithered, and dithered, and then finally came to agreement. It was to late. Germany was already slipping beyond the event horizon at that point. The details escape me - it was either 1930 or 1931.
As the current EU bailout discussions were going on, and on, and on...I couldn't help but be struck by the similarities.
I hope that history does not repeat or rhyme in this case, but to ignore the red flags would be foolish.
This thread is print-worthy...
GW - thanks again, great post....I wonder what sent the second leg down in other crashes, I'm sure its similar contagion-type things..
"Blessed are the young for they shall inherit the national debt."
"Economic depression cannot be cured by legislative action or executive pronouncement."
"Economic wounds must be healed by the action of the cells of the economic body - the producers and consumers themselves."
"I'm the only person of distinction who has ever had a depression named for him."
"It is just as important that business keep out of government as that government keep out of business."
"Once upon a time my political opponents honored me as possessing the fabulous intellectual and economic power by which I created a worldwide depression all by myself."
"Prosperity cannot be restored by raids upon the public Treasury."
Herbert Hoover.
Did you know that FDR called Hoover a "socialist" during the 1932 election?
BB is an academic who has been published and specializes in the causes of the Great Depression. He is of the school of thought that the GD was primarily caused by the FED through tightening the money supply, not the stock market crash of 1929 or asset bubbles preceding the crash. BB will never allow a deflationary depression to happen; he'll pay banks to take money before he will preside over another such crisis.
He is of the school of thought ...
I believe he is of whatever school of thought his bosses tell him to be of.
But I agree he will print away try to prop up the PTB.
Pay banks to take money? That makes no sense whatsoever. If they didn't want the money in the first place why would they accept pay to take it? And what would he pay them with? More dollars? Gold?
Decent questions. Let's see if you get an answer.
http://www.zerohedge.com/users/amorallybankrupt
Not sure how low it will go but my guess is about Dow 5000 once it bottoms out.
Look at Japan's market now compared to the mid 80's.....
yeah, and they had a fairly healthy global economy to export to, yen carry trade etc...who do we have to export to, what do we have to export?
weapons and war
I hate having this feeling that we are about at the chart where it says '60% rebound/1930'. In other words, the 2010s look, chart wise, like the 1930s. I don't like the view down THAT stepped slope! Even if history just rhymed and didn't repeat, it STILL don't look good. I DO agree with the posts that suggest we won't see a visual replay of the 30s charts due to fiat devaluations. It won't LOOK the same on a graph but it may FEEL the same 'in the streets'...
Do the chart against fiat FRNs and I agree. As increasingly pointed out though, there are other, more reliable metrics to plot against the S&P.
"Oh God, i know in my bones GW is right," .... said after consuming too much sake, but still...
Area Federal Reserve Chairman studies/causes depressions.
"The Second Leg of the Great Depression Was Caused by European Defaults"
Don't Worry GW, Bald Bennie Has It All Figured Out
Not to worry GW... Bennie Bernak-ster studied the Great Depression while dozing off at University.
Bald Bennie is the Man With the Plan
He's got it all figured out... I'm telling you...
Bennie: "These specific allegations you’ve made, I think are absolutely bizarre...”
Bennie: "And I have absolutely no knowledge of anything remotely like what you just described"
See? Bennie gotta plan...
Bennie's a genius. He must be, I hear it all the time. He's exceptional really.
Really?
"absolutely bizarre"
the ultimate tell.
"absolutely bizarre" is going to be Bennie Bernank-ster's epitaph...
A great article from GW. thanks.
So now it is deflation NOT inflation we are to expect
I am getting very tired of the Invisible hand
my guess is we have have opposite of what happened on way up...consumer goods were cheap until commorditied spiked at very end and assets like stock, housings were expsensive...think assets will deflate, most goods common consumer goods will get expensive relative to dollars worth...but some commodities and labor will be cheaper, so a mixed bag...
Your spot on about the second leg of the depression, just like back then it's happening now. We are going into a depression the likes of which will make the 1929 one look like a Friday afternoon correction in the market. People will riot because they will find out there won't be any govt. checks coming out to them and what money they have won't do a bit of good since we will be in a Hyperinflation Depression.
http://www.youtube.com/watch?v=V8vINCq_IAI&playnext_from=TL&videos=Vttd-1ZHg_g
Great post GW. Outstanding.
Clearly what is happening is that we are being engineered into a soft landing and being saved from a 1929-1933 type crash. The CBs have issued debt out the wazoo to replace all of the lost equity value and have managed (with the help of the MSM) a wonderful Tinkerbell illusion that everything is all right ("do you believe?").
What will happen is that we will see the slow (and the CBs hope), orderly devaluation of the currencies of the developed countries against both commodities and the currencies of the developing nations that have not created their own bubbles.
It is a basic law of economics that people will do anything to defend their standard of living. That's what all this debt that we took on did and all of this new debt is doing. We replaced our lost equity with debt.
Our standard of living will now be reduced slowly either through the devaluations, through defaults or through both. The countries that went into this crash too indebted to actually borrow more got hit with this standard of living haircut right away. That's why you see the rioting in the streets.
Mitch - It is a basic law of economics that most people will do anything to defend their standard of living.
I revolted against the mega-Mcmansion, super-SUV keeping up with the Jones' standard.
So many, so hollow, see no other way - how depressing is that?
My aim is to defend quality of life.
Bringin It, I have done the same as you. And every day I try to suppress the rage I feel at watching the powers that be do everything they can to punish me for being fiscally responsible.
Mitchman, I think you stated it very well. Our standard of living has to come down in relation to the rest of the world. The question is how swift the decline will be. I'm not sure the hoped for engineered soft landing is realistic.
I agree wages must equalize
Nature hates a vaccuum
China's wages are just too low
Nixon opened the pandora's box with that ping pong diplomacy ----and that started China on the road to be competitive world wide but they did not pass along wealth in the form of wages to the masses
Nixon can be excused --- he was trying to extricate himself from another Asian land war.
What would you rather fight Asian land wars or compete ith the Asians in the free market place
I always thought global wages would converge which meant US/Europe/Japan real estate costs would have to come down because our salaries couldn't support such pricey housing...but seems China real estate as expensive as ours..
Thanks for the great additional thoughts. It's the best part of being on the site.
Eery, this is playing out like Battlestar Galactica!
Tyler, bitch. I'm scared now.
Shiverrr. Need more gold. More gold tomorrow. Don't forget...(set timer)
I think you are spot on here. I can't rule out another great depression. Has anyone ever compared the wealth destruction just within the construction industry and real estate to the wealth destruction of the 29 depression? The question is "does the depression spread"? It may take several years, but I say yes.
I always thought deflation-depression was a cleansing
Runaway inflation -- that is destruction-- Germany is still worried and their runaway inflation was 1925
inflation cleanses debts too....pain just falls in different areas...
I may be wrong but in None Dare Call it Conspiracy Webb stated that to create a one world government TPTB needed to lower the standard of living in the US while raising it in the rest of the world.
Which we have been watching over the past decades.
I always thought that the American Union required US poor to be equivalent to Mexico's while handing out health care like Canada. That makes the union palatable to all.
I mean how is that scary. This is Robert Rubin. That's all. He's the brains, the rest are just little players.
He created the conditions for it to appear that a "third solution" was viable. That's why Labor became so big in Britain, why the US-UK connection became so close, and how they held together NATO after the fall of the Warsaw Pact.
Rubin also advised Larry Summers on how to handle Russia. This is Chicago School / Keynsian doctrine in action. There's nothing secret about it. Stop getting all googly-eyed just because the establishment is run by addled hippies.
Why are people obsessed with worrying about some one-world-government??
I don't know. Some biblical thing I think. It's not like it would be successful anyways. People would go back to using their own currencies in their own countries.
No doubt the depression will spread, but with no gold peg, it will not be a deflationary depression, but a hyperinflationary one.
Ever seen a chart of the Zimbabwe stock market circa 2007?
http://mises.org/daily/2532
Exactly how I see it. When the economy is seeing no real growth, monetary policy cannot prevent a depression, but it can decide who lives and who dies. A deflationary depression results in writing down/ off bad debts and protecting the integrity of money. The people who survive are those with lower debts and more cash, the people who do not are those with too much leverage and too much debts. In today's economy, those with most debts are actually the governments and the banks. The sovereign debts and banking system are too high to survive a long period of deflation. Therefore, in order to protect the system, monetary policy will result in devaluation and end in hyperinflation. Treasuries (beyond 18th) and TIPS are not a good investment, this flight towards these assets is a headfake. Seems to me we should be in short term debt esp cash, or gold/ silver as we wait for the next bounce, though this could be months away.