The Major Causes of the Great Depression

It is hard to get economists to agree on much. But there is fairly strong agreement about the four major causes of the Great Depression. To keep this brief they are:

– The speculative boom of the 1920's, policies of monetary contraction going into a recession, the gold standard, and ill-timed tariffs (Smoot-Hawley Act).

We have of course dropped the gold standard. But there is a strong case to be made that we are facing the other three conditions all at once, although admittedly to a lesser degree.

The Speculative Boom

There is no denying we have experienced a strong speculative boom recently. You can see it readily in the stock market, but in plenty of other markets as well. Houses that were listed at 150k in some markets are being sold to rabid buyers for half a million just two years later.

Retail involvement in markets has likewise exploded. The use of leveraged tools such as margin debt and options contracts have continually broken new records. The US economy itself has become the gambling pit of the world, with apps like Robinhood leading the way.

I mean for &*$% sake, there is a “virtual currency” that was created as a joke and named after a dog breed sitting at a multi-billion dollar market cap. People are buying pixelated images for tens of thousands of dollars on the internet. I don't think I need to belabor the point here, we have put the 1920's speculative boom to shame at this point.

Mismanaged Monetary Policy

Doomers like me have been warning people about this issue for years. Monetary policy is our primary defense against economic crisis. We absolutely need to retain the tools of interest rates and quantitative easing in order to protect ourselves against an economic collapse.

Obviously the 2008 “great recession” and the Covid economic shutdown were serious events that necessitated Fed action, using their tools to prevent disaster. But they went much too far and for much too long. Fed interest rates have steadily decreased for the past decade and are currently sitting at zero with no room to budge. QE has ballooned into the trillions and has continued to increase even after the economy significantly improved.

In short, the Fed has used all the bullets in the gun, and is now essentially out of ammo. They have gambled the entire US economy on us not having to face another economic crisis for at least another year, while they ever so slowly raise interest rates and reduce their balance sheet. Well, it's a little too late for that…

The Fed With It's Back To The Wall

Inflation has become a serious danger to the US economy, and the Federal Reserve knows it. They have no choice but to combat inflation by paring back economic demand. They have to raise interest rates, and they have to reduce their balance sheet. Allowing inflation to rise out of control puts the dollar and the entire global economy at risk. They must take action.

At the same time, we are seeing increasing turmoil in the markets. Rising energy costs are putting the US at risk of another economic recession. The natural response to an economic recession is to set more accommodative policy. But we can't, because inflation is spiraling out of control.

In short, the Fed is screwed. There is just no other way to put it. They are stuck between a rock and a hard place, and there is no clear solution. At the moment inflation seems to be the bigger threat than recession, but I see that changing very soon…

Is Putin Playing 4D Chess With Sanctions?

I don't want anyone to get the wrong idea here and think I am praising this man, because I am obviously not. I'm simply suggesting we consider the situation from his perspective for a moment. Let's just speculate a bit here, shall we?

You are a highly trained strategist for the KGB. You are studied in history, including the history of the Great Depression. You see the United States, your primary rival and economic competitor, teetering on the edge of an economic cliff. You see that the Fed has run out of ammo, that inflation is rising out of control, that debt and speculation have run rampant. You see that with just a little push, you could potentially send that car teetering over the edge of the cliff. I think you see where I'm going with this.

The invasion of Ukraine itself would not have much impact on Western economies. As always it is the Western reaction to events which has a much bigger impact than the events themselves would in isolation. The West was forced to shoot itself in the foot by enacting sweeping sanctions on Russia, sending energy, food, and commodity prices skyrocketing out of control during a period of already severe inflation.

Now there is little hope that inflation will be “transitory” or will resolve itself with supply side untangling. In a time of already restricted supply, the supply has just been artificially restricted even more intensely by government policy. Hmmm, sound familiar?

The Looming Danger

Perhaps you start to see all the pieces coming together here. The table is set for the worst economic disaster of our lifetimes. The economy spirals into recession due to exploding supply costs. The Fed has its hands tied unable to help and is forced to restrict monetary policy to deal with the severe inflation. The already strained economy suffers even more under the more restrictive monetary policy, and the downward recessionary spiral worsens. The extreme speculation and leverage pumped into various markets begins to rapidly unwind. Margin calls start to hit not just individuals but massive institutions, with spreading collateral damage. Panic and fear finally grips the public as everyone collectively rushes for the exit at once, and we have a market crash unseen since 1929.

I hope it doesn't happen. I really do. And I don't put the odds of these events very high. But the odds are clearly there, and they are only rising with time.

Be Prepared.