The United States’ stock market was in a bubble until it burst on that “Black Thursday” of 1929. Thus began the Great Depression of the 1930s which lasted for 10 years. Economists say the stock market crash devastated consumer confidence resulting in shrunken spending and major business failures and job losses. At its, lowest point,13 to 15 million Americans were out of work and in dire poverty during the Great Depression.
Some believe that the 1930s’ Great Depression is history about to repeat itself in the 21st century. But just as the black plague and smallpox of the old world have now been replaced by modern pandemics like avian flu and ebola, the global economy is also facing a different breed of financial malaise these days. With technology and the innovations of our financial markets also come unprecedented complications and worst case scenarios. And so, we now face a setup much different from the 1970s.
What actually makes our economic situation differ from the 1970s this time around?
An eroded trust in the US dollar. Ever since 1934, when the dollar decoupled from the gold standard, the US Federal reserve has been printing its currency by fiat. This has been sustainable up to the present because the world trusts the United States, thus affording it reserve currency status. They say when the United States sneezes, the world catches a cold. Conversely, the stability of the global economy all these decades has been possible because of the stable and sensible economic policies of the US superpower.
But recent economic and political events have begun to erode that position of trust. This reversal of trend started in September 2008 when, because of its toxic subprime mortgages, the US economy nearly tanked and brought the rest of the modern world’s economies along with it. Nowadays, countries like China, Russia and Germany are beginning to take measures that would effectively decouple their economies from that of the US. Germany has been very vocal about blaming the United States for the economic crisis in Europe today. It has been repatriating its gold reserves from the US federal reserve since 2012. Meanwhile, China has recently pioneered the Asian Infrastructure Investment Bank as an alternative global banking system.
It seems the United States economy has maintained its stability all this time because of the positive sentiments of its neighbors. But sentiments can easily change. We can actually see them beginning to turn today.
Quantitative Easing. Allan Greenspan pioneered the strategy of using monetary policy to steer the economy. After him, when the housing bubble burst in 2008, Ben Bernanke continued in that tradition of throwing money at the market to cure it of its ills. The US Fed flooded the markets with fresh cash, printed by fiat, to spur lending and spending, and to bail out those institutions that were too big to fail. However, it is that policy of quantitative easing that has now led to current, seemingly absurd market phenomenon wherein investors and traders cheer low GDP growth because they know such will spur the Fed to cut rates and thus lead to a rise in stock prices. Conversely, the stock market dips when analysts forecast a possible improvement in GDP, because that may possibly cause the Fed to increase interest rates, which will, in turn, push stock prices down.
Another facet of this policy of quantitative easing is that it effectively devalues the US’ sovereign debt. Again, this erodes the trust of US’ creditor nations such as China who have been turning to an accumulation of physical gold as their recourse against the dilution of the value of their receivables.
There is a limit to how low interest rates can go. But global economies try to keep kicking the can as far down the road as they can, trying to fix themselves with the same monetary policies. If and when those monetary policies cease to become applicable, the world economy will then be finding itself in overwhelmingly uncharted territory.
Sovereign Debt Bubble. An increasing number of analysts and economists speculate that the next bubble to burst after housing is the US’ sovereign debt. This type of crisis has already been demonstrated by Greece when it defaulted on its national debt. The nation failed to honor its obligations to the EU and then imposed a tax on its citizens to help gather up the necessary funds just so the nation can continue to operate, in effect, to exist. The US federal debt as of the date of writing this article stands at $18.8 Trillion, excluding unfunded liabilities like Social Security and Medicare. China alone, which holds $1.2 Trillion in US government securities, can destroy the US dollar and bring down the US economy at will.
Considering all the above issues confounding global economic policy makers, it seems highly likely that the world is going to fall into another recession, albeit with causes much more complex than in the 1930s.
Individuals, however, actually seem to have a better chance than their respective governments at directing their own individual course and setting themselves up in the right financial direction. A person can prepare for a Great Depression scenario by diversifying his assets, offshore stock brokers are masters at helping you do that. Those who were fully invested in equities during Black Thursday were wiped out. Those who were all-in real property were also severely debilitated in 2008. The key to surviving a market collapse is by hedging and diversification into asset classes that can even possibly increase in value in the event of a market failure.