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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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And one can only argue that the dollar has lost 35% of its value since 1999 ONLY if one believes the official CPI numbers, which anyone with a tenth of a brain knows to laughably and insultingly underreport the actual level of price inflation in the USA.
My best guess is more like 50-55% since 1999, as most prices on most goods and services that I see have just about doubled since then, which also more closely correlates with the inflation figures as reported by John Williams' ShadowStats (which I will admit I believe to somewhat OVERreport inflation). So your point about the crash in the REAL value of the DOW is even more grim.
In 1999 the dow bought roughly 900 barrels of oil...Today, roughly 100-150 bbl
1999 40 oz gold. Today 9 oz
The inflationists keep saying up and down we are going to have mass inflation, next week, we swear!! But from what I can tell, the inflation is behind us. Yes we have had a good dose of "reflation" via quantitative sleazing.
How many people here realize the Japanese were the inventors of QE? Wrong.
The US QE'd during the GD as well as the Civil War.
Thank you - very few point that out when they preach the buy and hold strategy that hasn't been the success that everyone thinks. If the future pans out like this post foretells, then "Buffett-way" will come under serious questoning. PS. I would like to thank the older generation still in power for running the printing presses to insanity and bailing out everyone/everything. Thank you very f*cking much for ruining the coming adulthood of my peers.
According to a well-respected analytics service, this bear market will not be over until investors like Buffett are thoroughly discredited. That could have started with his possibly ill-timed purchase of BNSF railroad. I used to be a huge fan of Buffett, until he started defending Goldman. fwiw.
I've heard figures as high as 70 percent devaluation, although the DXY doesn't show this, but the DXY is different.
Bottom line is that gas was .89 cents a gallon when I was in high school back in '99.
Who's the junker? Who believes the bureaucrats over Shadowstats?
The guy with the "tenth of a brain" took offense.
Bringin It
Thank you . Been wanting to let you know i appreciated your input on a previous thread.
That's an excellent point, and it's even more dramatic if you compare the S&P500 to gold.
But your point is beyond 95% of the population of non-ZH readers and probably beyond 20-30% of ZH readers as well. I don't think the population will "get it" until they realize that gas is $8/gal, milk is $10/gal, and the politicians are still flying on jets and spending money like it's free. At that point, maybe enough people will wake up.
IMO 8 & 12/gal are way too optimistic.
I've been wondering why everyone is freaking out about all the money printing...
Because I still don't see $8 milk, in fact it's lower.
Why is that?
And from what you guys are saying it's because (for now) all of the money is going straight to stocks and bonds. Will it ever trickle down to us common folk?
No shit. Milk was 4 bucks a gallon in 2007, and is 1.88 today.
Gas was four bucks a gallon, and is 2.59 today.
If you print a bunch of money, but it doesn't make it to the economy, does it create inflation?
Yes, but only in the assets it gets to.
(Stocks, real estate, GOLD)
All three are bubbles. Hyperinflationists are on dope. The sun will come out tomorrow, asset prices will be lower, as they should be.
Let me be very clear, because it is a constant misconception on this site and others. There has been NO money printing (or very very little). What central banks are doing is taking on the role of what regular banks used to do -provide loans. If one thinks of the money creation schemes as an inverted pyramid, the actual printing of notes an coins is the point on the bottom - at the top is the central banks creating credit. Fractional reserve rates are no longer relevant since securitization became popularized - whether fractional reserve requirement is 1% of 20% is of little difference now - the new 'money' created by FED an Euro central banks does not have a multiplier and does not 'ripple through the system'. For that a) Basel II capital is necessary at the relevant bank and b)there needs to be ample lending opportunities with good credit risk.
That is why most people viewing at whats happening as inflationary are missing the bigger picture - it might inflate assets as banks have more money to play with - but it doesnt translate to real lending, and certainly isn't 'printing'. That time has yet to come..
No, it isn't yet literal printing of ink onto paper. Nor does it need to be. The impetus for mass inflation (or, perhaps, hyperinflation) was laid earlier this decade with the credit boom and massive bad loans. The proper response upon discovery of bad loans would be to let it all fail and get sorted out. Of course this isn't what happened. The creation of "money," even if only as an entry among banks, serves to assign a higher nominal value to an asset that has less real value. This is highly inflationary. The cracks in the dam are appearing. But by all means, take a nap in the valley below the dam if you want to.
Nate, if the FRB purchases treasuries at auction are they not monetizing debt; ergo, printing money? So far they have not done so, but my understanding is that while PDs are making the purchases the FRB is backing them up. Thus, it seems to me, the FRB is buying "indirectly?"
Some of this is a replay of the 70's after the Yom Kippur War. Albeit, this time it's different - it's got a much worse ending. But alot of the questions and answers for now, are the same.
Example - How can we have inflation if the gobs of pumped up fiat never leak out? It does and it will.
You realize you just made my point, don't you?
I'm not sure what your point was.
Since you seem to be slow, let me spell it out: we will never again see a 1930s style nominal stock market crash. The unit of measure, the USD, will be diluted before that is allowed to happen.
Purchasing power may well collapse, but we won't get an 80% nominal decline.
Inflationists are betting that the Fed will provide relief to those in debt and penalize the savers. But this is exactly what the Fed has been doing for decades. Their only tools were a strong jawbone and inflation. Now we are at the threshold of the GREAT RECKONING.
The ONLY way to stop gold price rise is to RAISE interest rates and force a restructuring of the economy. There will be a lot of pain. Those betting on INFLATION are also betting that not only gold but all tangibles will go up in value. This will not happen. Inflation is a friend of those in debt. This time around, those in debt are trapped. They have to default or payoff their loans. The usual trick of the Fed to inflate their way out of a debt mess is totally neutralized by the sheer ratio of debt to cash. Never forget debt/credit is NOT the same as cash. As the economy crumbles and defaults rise, credit will be destroyed. Cash will be king
Okay Ghostface I'm editing my initial hostile and obscene response to your calling me "slow". If in your world someone who doesn't quite grasp what you are saying in a post is "slow", so be it.
Notice how the word "nominal" got sneaked in to qualify the argument?
You must be "slow" not to have understood that concept.
Thank you for maintaining your civility. More is needed.
Hey Tricky Dick, I understand your point. Cheeky has a post up with a chart showing cattle futures priced in gold. I think Ghostface is stuck on using a flawed tape measure.
I expect that the lack of a market crash priced in fiat will be irrelivant - soon.
[fingers crossed]
running out of silver or gold would help do that
<<Purchasing power may well collapse, but we won't get an 80% nominal decline.>>>
Scuse me, if purchasing power collapses we have inflation.
If the purchasing power increases we have deflation.
Whad if the gov bans gold ownership again
Let them ban any damn thing they want. If they want it, them that are left can take it after they pry my red hot guns from, as Charlton Heston said, my cold dead hands.
A) Too many guns
B) Cynical populace
C) Black market activity
D) Laws only keep the honest people honest...not that defending your own effing property is dishonest.
E) There is always silver which is in fact in legal tender form for those with "Junk in their Trunks"
If they decide to confiscate gold they better confiscate the guns first.
True. The US dollar may be debased to provide a semblance of progress locally, but in order for that to work it has to devalue in relation to other major currencies. It will not beat the euro down the tubes in the near future, thus the risk of '30s style crash is still present.
still say even trillions are not enough to keep up with credit collapse...how much leverage existing in '29 and '30? did they have anything like the derivatives market then? my understanding is derivative market dwarfs big markets like stock markets, housing markets...you collapse derivatives,even Bernanke can't keep up...
and right now I think its funny that both the deflationists and the inflationists are right...dollar up, gold up...only the ones that thought dollar was dead in relation to other currency (see Schiff) are wrong...
Shiff will make the argument that the strength of dollar is based on the weakness of the Euro, not because the US Economy is doing so great. Our ills are better hidden yet under the rug.
agreed, he did encourage gold...but when ever I have heard in speak and in his book, he always was laser focused on how bad US was relative to the world, thats where I think he was wrong...gold makes sense as safe haven...not an other currency as far as I'm concerned
boo,
"Whad if the gov bans gold ownership again"
At this point,they could ban almost anything.
The people from the 20's-30's, were a much more moral, and trusting lot.
Personally, although I have never knowingly broken any law,in 35yrs,(even a traffic citation), they most assuredly would not see ME in the line for turn in's.
Plus, you need to take into account, the Constitution / government was revered/ respected then,and we had a far more homogenous religious nation.
Totally unlike what we have roaming the streets, and D.C. of today.
Folks coming to dinner this time for search and seizure, would likely take an artificial limb.................this time.
I think humans aren't too sweet at judging was the past was like from the present..
Totally agree only the hair styles have changed as we not so much creatures of habit but rather creatures of bad habit.
I have never knowingly broken any law??
Never? Never even toked a spliff?? Drove 60 when the whole country was locked down at 55?
Dude, live a little.
But I agree not like the 30's. In some parts of the world, gold has always been money and exchanges abound. Banning gold in these places would be like banning teeth. Hey what about teeth? Do you have to pull your teeth if they ban gold?
I'm just sayin' in some places it's easier than in the Homeland.
OMG....we are behind the 8 ball!
so there is still hope that glass steagall will be reinstated..
wasnt the first one in 1933 (during second leg down) ?
yes it was in 1933 but the second leg down ends in the summer of 1932.
two points argued below seem a bit of a distinction without a difference: pegged (and revalued) gold vs. "free" (manipulated) market gold and nominal vs. "real" (inflation adjusted) stock market declines.
from 1930 to 1935 gold went up 60% (and people were "required" to turn it in at the old price but few were prosecuted and i don't believe anyone was jailed -- holding out was supposedly ten years hard time). gold miners however went up like 5x or more and shares were not seized.
on a "real" basis stocks declined less in the early thirties than the chart shows since the value of a dollar in goods and services rose during that period. still a brutal loss of wealth, in magnitude (for the u.s.) equalled since only by the 1965 to 1982 secular bear market (loss of about 85% in real terms, due mostly to inflation). the wealth is still gone even though the nominal chart doesn't look nearly as bad as the earlier one. so what?
both times gold wildly outperformed stocks generally. bullion did better in the inflation mega bear, miners in the deflation grizzly (inflation boosts miners' costs, deflation reduces them).