Sunday, February 8, 2009

2009 depression is worse than 1929, we can’t create demand like what we did in WWII.

People forget that the Wall Street crash of 1929 was actually the last gasp after a 2 year decline. The market lost 87% of it’s value from the high of 452 to the bottom of 58. If the Dow loses 87% of it’s value from the August 2007 high of 14,300, we will bottom at around 1,859. THAT is really possible. It is actually more LIKELY than a turn-around. The reason it’s more likely is because the numbers are WAY BIGGER than they were by comparison in 1929 numbers. Our bankers and businessmen, with the help of the Bush administration and congress, have REALLY DONE IT this time. But, this time, we don’t have a Hoover in office that has maintained a balanced budget, enabling the next FDR to go out and run up deficits for a “New Deal” spending program. Nope. This time, the deficits are already staggering, the government is running out of bullets, and the next president hasn’t even been inaugurated yet.

For anyone who has any lingering hope that the “bail-out” will actually help, remember, Paulson’s plan to buy bank shares was tried in 1929 by the titans of Wall Street themselves and they were quickly overwhelmed, just as Paulson’s plan to buy shares has been overwhelmed. Investors who have seen the writing on the wall and recognize all the similarities between this economic disaster and the conditions leading to the Great Depression are doing just what traders did in ‘29. When the titans of Wall Street began buying, traders began selling, essentially saying, “Great, someone is willing to take this junk off my hands.”

So many people are looking for precedents in the hope of understanding what is happening.
I have no doubt doubt that in every bear market some commentators have brought up the 1929 Crisis in the hopes of understanding what was happenening. The seriousness of the current situation leads many to do this again.

But today, to lock on to the fact that in 1929 the market dropped 87% and then to extrapolate this to the current market is just an intellectual excercise, but can no way serve as roadmap for things to come. If things were that simple, then none of us would be sitting on losses today… Though history repeats itself, markets really just do their own thing.

All of these stimulus efforts and bail-outs have been tried before, but they don’t address the fundamentals, so they just won’t work. People can’t borrow if they don’t have a job. People won’t have jobs if no one is willing to invest in business in the U.S. Just as happened in the 1930s, no one trusts the economic climate or the government enough to invest in business. I’m not talking about global mega-corps. They really don’t employ that many people. Small, local corporations and limited partnerships account for most of the employment in the U.S.

With all the trade deals and corporations shifting manufacturing overseas, and the government desperately trying to keep the biggest global mega-corps in business at the expense of the REAL businesses in the U.S. that hire most of the workers in this country, there will be no bang for the buck. The mega corps are too expensive to operate and they won’t fair well in a depressed economy. Most of them will not survive.

Instead of forcing them into bankruptcy and letting creditors break them up to more manageable size so that they can survive, the government is pouring all it’s resources into trying to keep the biggest, most expensive corporations in the U.S. operating. It can’t last.

The big three automakers are losing 2.5 billion dollars a month. How long will $50 or even $75 billion last them before they tank? 20 months if it’s $50 billion, $30 months if it’s $75 billion. Does anyone really believe the automakers will be selling hundreds of thousands of cars and trucks again in 30 months? They just can’t be saved in their present form.

This mess will be excacerbated by the Washington adherance to the old paradigm of “bigger is better”. They want to rescue the biggest corporations while ignoring the small business that actually keeps this country working. The bigger the corporation, the more money it takes to pull it out of the hole and meanwhile, no one is buying those mega-corps’ products. There is no profit. It’s a losing proposition. If all those old geezers in Washington don’t wake up tomorrow and realize that bigger is NOT better. Bigger is more EXPENSIVE. And bailing out mega-corps only delays the inevitable suffering, putting off even longer the day when smaller, less expensive, more solvent companies fill the void, this country is likely to spend more than a decade in a depression. It could be as long as 25 or 30 years or even more.

Just remember, manufacturing for WWII war materials is really what pulled the U.S. out of the Great Depression. Even if we have another world war, we won’t likely be putting our nation to work building war machines because we have already spent ourselves into unimagineable deficits.
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