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Have Central Banks Brought Us Back to 2008… or 1929?
In the early 2000s, Alan Greenspan was worried about deflation. So he hired Ben Bernanke, the self-proclaimed expert on the Great Depression from Princeton. The idea was that with Bernanke as his right hand man, Greenspan could put off deflation from hitting the US. Indeed, one of Bernanke’s first speeches was titled “Deflation: Making Sure It Doesn't Happen Here"
The US did briefly experience a bout of deflation from late 2007 to early 2009. To combat this, Fed Chairman Ben Bernanke unleashed an unprecedented amount of Fed money. Remember, Bernanke claims to be an expert on the Great Depression, and his entire focus was to insure that the US didn’t repeat the era of the ‘30s again.
Current Fed Chair Janet Yellen is cut of the same cloth as Bernanke. And her efforts (along with Bernanke’s) aided and abetted by the most fiscally irresponsible Congress in history, have recreated an environment almost identical to that of the 1920s.
Let’s take a quick walk down history lane.
In the 1920s, most of Europe was bankrupt due to after effects of WWI. Germany in particular was completely insolvent due to the war and due to the war reparations foisted upon it by the Treaty of Versailles. Remember, at this time Germany was the second largest economy in the world (the US was the largest, then Germany, then the UK).
Germany attempted to deal with the economic implosion created by WWI by increasing social spending: social spending per resident grew from 20.5 Deutsche Marks in 1913 to 65 Deutsche Marks in 1929.
Since the country was broke, incomes and taxes remained low, forcing Germany to run massive deficits. As its debt loads swelled, the county cut interest rates and began to print money, hoping to inflate away its debs.
When the country lurched towards default, US and other banks loaned it money, doing anything they could to keep the country from defaulting on its debt. As a result of this and the US’s relative economic strength compared to most of Europe, capital flew from Europe to the US.
This created a MASSIVE stock market bubble, arguably the second largest in history. From its bottom in 1921 to its peak in 1929, stocks rose over 400%. Things were so out of control that the Fed actually raised interest rates hoping to curb speculation.
The bubble burst as all bubbles do and stocks lost 90% of their value in a mere two years.
Today, the environment is almost identical but for different reasons. The ECB first cut interest rates to negative in June 2014. Since that time capital has fled Europe and moved into the US because 1) interest rates here are still positive, albeit marginally, and 2) the US continues to be perceived as a safe-haven due to its allegedly strong economy.
This process has accelerated in 2015.
· Globally, there have been 20 interest rate cuts since the years started a mere two months ago.
· Interest rates are now at record lows in Australia, Canada, Switzerland, Russia and India.
· Many of these rates cuts have resulted in actual negative interest rates, particularly in Europe (Denmark, Sweden, and Switzerland).
· Both the ECB and the Bank of Japan are actively engaging in QE programs forcing rates even lower.
· All told, SEVEN of the 10 largest economies in the world are currently easing.
Because the US is neutral, money has been flowing into the country by the billions. A lot of it is moving into luxury real estate (particularly in LA and York), but a substantial amount has moved into stocks as well as the US Dollar.
As a result of this, the US stock market is trading at 1929-bubblesque valuations, with a CAPE of 27.34 (the 1929 CAPE was only slightly higher at 30. And when that bubble burst, stocks lost over 90% of their value in the span of 24 months.
Another Crash is coming… and smart investors would do well to prepare now before it hits.
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Shit on toast, this column is so bad, it defies description.
everything is fine. obama and yellen are in charge. happy days are here again. you can buttfuck your neighbors dog if you like, even marry it. Forward
I was going to go with 1929, but i've become too distracted with that hot robot-mannequin looking chick in the "Lengthen your Healthspan" ad. God forbid i accidentally click on one of those while i'm waiting for the screen to catch up.
I'm gonna go with 2007 thanks Bob,
Do I win the Car ?
It's like 2007, except now instead of just Fanny Mae, Freddie Mac, Bear Sterns and the Madov clowns, it's everyone in an all or nothing play that is going is brake every bank.
\\BitCoins, get some and get out of the way
"And when that bubble burst, stocks lost over 90% of their value in the span of 24 months."
That shouldn't be a problem today. The FED will simply buy stocks. Problem solved.
/sarc
they didn't have a free market back then either
Some of the rather bizarre market action recently has me wondering if we are in the middle of a bear market rally, and if so how violently it might end. Several stocks on an uptrend appear fundamentally unstable. We have witnessed massive moves in several speculative stocks like Tesla and Netflix that are hard to defend by any other reasoning than shorts being squeezed out of the market.
The higher the market goes the more vulnerable it becomes to a major collapse and sudden downward price move. A lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. The article below delves into how this could be a problem going forward.
http://brucewilds.blogspot.com/2015/07/is-this-bear-market-rally.html
So for the Greeks the shit has hit the fan. Banks closed and upon reopening extreme restrictions on withdrawal amounts.
If you are a Greek who kept a stash of gold instead of cash in the bank, who is going to give you cash for your gold trinkets? Whose going to give you anything in enough quantity for you to part with them?
Bit coin bitchez /s
So many myths, so little time:
This created a MASSIVE stock market bubble, arguably the second largest in history. From its bottom in 1921 to its peak in 1929, stocks rose over 400%. Things were so out of control that the Fed actually raised interest rates hoping to curb speculation.
The Fed lowered interest rates on purpose. This was to help England recover some of her Gold from WW1.
From 1914 to 1919 Gold poured into America for war materials. This allowed a large increase in the money supply, especially as bank credit was levered on top of Gold in a 10:1 ratio. From June 1914 to April 1917 the money stock increased 46% and wholesale prices increased 65%.
Say it isn’t so! Inflation under a Gold Standard!
From April 1917 to May 1920 the money stock rose another 49% and wholesale prices rose another 55%. Gold coins thus lost over 75% of their value against commodity wholesale prices during the first 6 years of Fed rule.
A commodity money system cannot protect against inflation. Only a law money system that controls volume, and is scientific, can then match goods and services production.
But, I digress:
In the interwar years, Britain wanted her gold back. See above on how it transferred to the U.S. Benjamin Strong (J) Federal Reserve, and Montague Norman, Bank of England were more than friends as evidenced by their “love” letters to each other.
The roaring 20’s were not due to U.S. treasury spending. In 1920 U.S. Government expenditure was 8% of national income, by 1929 is was only 4%.
In the 1920’s the banks abandoned the real bills doctrine of funding industrial production. Instead they started finance engineering and speculation. From 21 to 29 commercial loans to industry stayed the same, security loans (stock speculations) increased 121%, real estate 178%.
Why did the FED KEEP A LOW DISCOUNT RATE TO ENCOURAGE SPECULATION!
Congressional stabilization hearings in 1928 get to the root of this:
In 1926 a group of bankers (English mostly, French, German and their American counterparts. Yes, Schacht was one of the bankers) met in a Washington Hotel. They encouraged low rates in order to help out their British “brothers.” Congressional Testimony by Federal Reserve Board Governor Adolph Miller lays out the case when being interviewed by Committee Chairman McFadden. (See Congressional Stabilization Hearings in 1928)
The various “private bank” governors met in Washington for a day, made their plans, then left back for their respective countries. They bypassed Government and Treasury completely.
The “international” bankers wanted an easy money market in New York, with lower rates, that would deter Gold from moving from Europe to the U.S.
Basically, the bankers said F.U. to Americans, and let’s keep the credit interest rate valve low and blow some private credit bubbles. We need to get the gold back to Europe.
As to the politics of thhe situation then, I cannot comment but gold during inflaation, I can.
Jastram's book 'The Golden Constant' shows that over the last 500 years gold loses purchasing power during inflation and gains it during deflation.
This makes sense if you consider that Gold-is-money.
Check out the book, you can download from every where, its out of print.
Squid
Geese, you guys are good. if mentally deranged.
It takes a long time to dispel myths. It is like Goebbels big lie, once it is born it takes on a life of its own. It becomes an implanted false memory. This comment by the author is preganant with the big lie.
Since the country was broke, incomes and taxes remained low, forcing Germany to run massive deficits. As its debt loads swelled, the county cut interest rates and began to print money, hoping to inflate away its debs
The Mark came under exchange rate pressure as Germany was disallowed to export goods to get hard currency. She needed hard currency to pay reparations. Inter Allied debts created a triangular flow. Germany would get dollars/Francs/Pounds, and then pay to the Allies, especially Britain and France. Britain and France would turn around and pay the U.S. treasury. Inportant: Britain and France were on the Debt hook also...to the U.S. Treasury.
Germany also got into debt problems as her municipalities would issue bonds to borrow new U.S. credit from Wall Street Commercial Banks. Having external debts outside of your law is a third rail problem; touch the rail and you die. Think about this carefully: Treasury Debts are a different mechanism than Wall Street Credit - both look like dollars, but one is Treasury money, and the other is Bank Credit.
PRIVATE CREDIT BANKS were then used to short the German Mark. This is called a Bear Raid. As more and more "shorts" were levied against the Mark, it became a self fulfulling prophesy. Dollars were used to back the shorts, and the dollars were likely credit money created from nothing (in wall street) as well. More volume of German shorting loans hence new credit would come on line, cause inflation, which then made more loans. Private BANKS and PRINTERs then were allowed to create more marks.
It WAS NOT THE REICHSBANK that was the bad actor. Schacht was brought into the Reichsbank to fix the problem, and he slammed the door on this Bear Raid Mechanism, thus bringing Germany back into solvency.
If one digs just a little, one ALWAYS finds that private credit issuing banks are bad actors. Private banks are fine provided they DON'T MAKE THE MONEY. Allowing private uncontrolled issuance of our transaction medium is the height of stupidity.
These myths about the German hyperinflation serve to perpetuate the narrative that only private control of central banks, meaning a central bank that looks out for banker interests, is the best thing for humanity. The Reichsbank was under private control during the Hyperinflation as required by the Dawes plan. On May 26, 1922, the law establishing independence of the Reichsbank and withdrawing from the Chancellor of the Reich was passed. This granted total private control over the German currency, and was the KEY factor in the hyperinflation.
By July of 1922 the German mark fell to 300 per $1, by July 1923 is was 1M per $1.
Schacht's book, "The Magic of Money" can be read for some of the details.
The money supply has to be volume controlled. Private issuance of credit uses an interest rate knob to control volume, and of course, this doesn't work very well as history so abundantly tells us. That would be a history where the smoke and mirrors is removed; and this smoke and mirror hypnotism seems to be funded by the very same finance money powers that created the problems to begin with.
German history teaches that money problems began in 1919 and culminated in 1923 with a postage stamp costing over 5,000,000 Duetsch marks.
Fast food was invented in these tumultious times.
Before 1920 paying for food in a restraunt in advance was unheard of most anywhere in Europe unless you were a Gypsy.
Inflation got so out of hand you now entered a restraunt and ordered food you paid in advance or the price tripled by the time you hit the till to pay.
Between 1921 1and 1923 no insurance policys were paid out fore the simple fact the stamp cost more than the policy was worth.
Workmen were paid 4 to 5 times a day.
You might come to work getting 40,000 marks an hour and leave that evening getting 190,000 marks an hour.
You need to document to be credible, despite your time on the site.
My name and time is still for sale for $70,000.00 USD.
http://lmgtfy.com/?q=Weimar+Republic+hyperinflation+stories
You do not believe me?
Can I pay you in 2009 Zimbahbwe $?
Wasn't the mainstream economist view that the Fed screwed up by tightening the money supply when they should have loosened it? It seems this time they loosened it for a few, and tightened up the rest. So we can expect the same sort of outcome this time unless something goes Krakatoa.
"Interest rates are now at record lows in Australia, Canada, Switzerland, Russia and India."
Not sure how you can lump Russia in that group listed above, their interest rate is presently around 11.5%, according to this reference at least: http://www.global-rates.com/interest-rates/central-banks/central-bank-ru...
Which is double the rate from just two years ago. :blankstare
wwxx
I live in Venezuela and am out of toilet paper so I got one.
It took what, like 2 weeks, to go from 50 copies to the 'last 25'?
blah blah blah
http://www.amazon.com/History-Financial-Disasters-1763-1995-vol/dp/18519...
despite the CNBC review and recommendation.
Another of my 'for dummies' good informative reads.