On the 15th of September 2008 the US economy entered a phase that I predict shall be called the Second Great Depression.
The making of this 2nd depression can be directly attributed to macroeconomic instability. History is taught in schools with a view that we, as
collective humanity, may learn from the mistakes of our forebears. Sadly it would appear not to be so.
American consumers and businesses relied on cheap credit to purchase consumer goods such as automobiles and furniture, and for capital investment to
increase production. This fueled strong short-term growth but created consumer and commercial debt to the tune that has never been seen in history.
People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. House owners
were faced with negative equity- the scenario where it is more economically feasible to allow repossession rather than make provisions for
Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work
and factory orders plunged.
Massive layoffs occurred, resulting in unemployment rates of over 25%. (US) Banks which had financed this debt began to fail as debtors defaulted on
debt and depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations
to prevent such panics were ineffective or not used, or in some cases even exarcebated the situation. Bank failures led to the loss of billions of
dollars in assets.
You may have read the passage above and taken it to relate to the present situation in the world economy. Here's the stark revelation: The account
above is Ben Bernanke's assessment of the Great Depression of 1929. Surely a man who is so well informed of the causes and effects of the 1929 crash
and 1930 depression can spot the impending signs of the 2nd depression that is fast approaching. This is the man who controls the tyrannic Federal
Reserve... the man who can print money at will, and yet even he cannot offer up a solution.
A Brief timeline:
In July 2007 Bear Stearns fell. The world's 5th largest investment bank had gone kaput.
August 2007: BNP locks in capital invested in its funds. It tells investors that they no longer have control over their assets invested in BNP.
August 2007: Central economies of the major G8 players pump in capital to the tune of $300bn. This achieves nothing, at tremendous cost to the
September 2007: Northern Rock falls. The first run on a bank since 1930, and the first run on a British bank in 159 years.
October 2007 onwards : Major banks begin huge profit writedowns. UBS leads the tally with approx $15bn written down to date.
July 2008 : IndyMac fails. The second biggest bank failure in US history.
September 2008 : Fannie Mae, Freddie Mac, the two quasi-governmental mortgage companies specialising in sub-prime teeter on the brink of failure.
Their collective books carried a value of $ 4 trillion. The Fed bailed out and nationalised both.
September 2008 : In a single, historic day, Lehman Brothers files for Chapter 11; Merrill Lynch is acquired by BoA; AIG seeks $40bn emergency Fed
funding. The fourth and third biggest investment banks are thus folded.
September 2008 : Calculated analyses from S&P et al show a budget deficit of half a trillion dollars for the US federal government. Oil prices retreat
as consumer demand falls, while the dollar also retreats as its value is undermined by a lack of confidence in the US economy.
As it stands, the US economy is on a precipice of a huge fall. There isn't much that can prevent a market correction in not only the financial
markets, but also on a global macroeconomic scale as dollar hegemony draws to a close. The only two options for investors are now either gold, or
In 1930 Charlie Chaplin invested his entire fortune in gold prior to the Great Depression. He came out the other side with a fortune worth 10 times as
much. Perhaps we can learn more from Chaplin than John Maynard Keynes.