first majestic silver

Diary of a Depression

January 25, 2001

First of all, the cruel depression of the 1930's did not begin with the stock market crash of October 1929. Although the market had lost 84% of its value in that crash, the depression that rocked America and the rest of the world didn't really get into full bloom until almost two years later. Ford ceased production of its famous Model A in 1931, and had sold plenty of them. It was the 1932 models, and from then on, which were poor sellers and are difficult for collectors to obtain today. There was little currency around to buy them. The market crash was viewed by many as a wringing out of an over-inflated market, or the popping of a balloon, just as today's semi-crash is being regarded. So far, the Dow has lost a bit over 11%, which consists of 30 stocks, but the NASDAQ has lost 55%, which involves hundreds of stocks. NASDAQ has not achieved the unbelievable 84% market decline experienced in 1929, but many feel the decline is far from over.

What happens to cause a depression? A lot of things, none of which are sudden occurrences, but all of which may be, and indeed were caused in the '30's, by the crash in late '29. Today, over a hundred million citizens, retirement plans, banks, union assets, et al, have their wealth in a market that has lost over half of its value. The tragedy is enormous. Well over a trillion dollars has been wiped out. The trillion has not been transferred to someone else or stolen. It has ceased to exist. When a hundred million lose so much, a chain reaction begins, which no reduction of interest rates can possibly extinguish.

Undoubtedly, many of the hundred million have their life's savings tied up in one of the 8,000 mutual funds, or are depending on retirement funds and investments for their future welfare. Many became so infatuated with the market balloon that they even quit their jobs, and began "day trading." Others borrowed heavily and bought stocks on margin, and owe much to banks or brokers. Their assets have simply disappeared, and unfortunately many owe a lot to those institutions that loaned them funds, based on the market craze. In 1929, margins were allowed to run as high as 90%. Today, officially anyway, it has been limited to 50%, but innovative ones have many times figured out how to avoid those limits. The result of this loss of over a trillion dollars, is that individuals are becoming very conservative of their purchases of autos, homes, and other consumer goods. This is natural and unavoidable. If one has lost a lot of assets, why buy a new washer, furniture, or a new home? It is much wiser to pay off debts and return to financial security. A chain of events may have started that was triggered by the NASDAQ's 55% decline. That chain of events could cause a hideous depression, and in fact did so in the 1930's.

Near my community of Montrose Colorado, Louisiana Pacific (LP) owns and operates a strand board plant, one of several it operates, which uses as its main ingredient, aspen trees, cut from a radius of about a hundred miles. Strand board is used extensively in home and furniture construction. LP announced last week that it will cease buying logs, and will make a decision in April, whether to continue manufacturing the board. Why? Decreased consumption. Why? Decreased manufacturing. What effects will this have on the local economy? First, the trucks will cease delivery of logs. There are many dozen truckers, who financed trucks, owe for them, will not have a way to use them. The payments will continue to come due, but their source of income will be lost. The men who cut the trees will be out of work, as the logs are no longer needed. The sellers of the logs will lose their jobs. The purveyors of fuel and repairs for the trucks, chainsaws, and equipment used for logging will lose some, or most of their income. The employees of the plant will not lose their jobs immediately, because there are thousands of logs on the property already, awaiting the manufacturing process, but sales have slowed, and you can bet they are worried. All of these people in the chain of employment are affected, and doubtless their purchases will be curtailed. There are already a lot of trucks for sale around here. Many unnecessary purchases will stop, due to lack of income, while payments continue for homes, vehicles, and consumer goods. Others will be very careful, due to the possible loss of future income. Many of these have lost a lot of their savings in the stock market. Will this tiny segment of America cause a depression with their lower purchasing of goods? Of course not, but the chain has begun in every part of the economy, here and overseas.

Is there a single community or city in America that does not have a similar situation? The reaction chain begun at LP, is a local example, but that chain began everywhere when new consumer goods and home sales decreased due to losses in the market. When homes, furnishings, and other consumer goods sales are down, a few of the manufacturers, builders and sellers of those homes and goods lose their jobs, and also cease purchases of luxuries such as cars and vacations. The Heilig-Meyers furniture chain has already closed many stores due to low sales. One of them is in the nearby town of Delta, where many of the LP suppliers and employees live. Those employees lost their jobs, and the owner of the large building will receive no rent. He probably will decease buying consumer goods, as will those ex-employees. The chain of a few lost jobs, all around America, has cost Ford a 14% decline in sales, necessitating a layoff of auto factory workers. Chrysler is far worse, and may be in deep trouble. When auto factory workers and sales people work fewer hours, sell less, and their income is diminished, they will conclude or decrease purchasing goods "not really needed." The manufacturers of "not really needed" goods suffer, and lay off employees, such as at Delta's Heilig-Meyers. Truckers and railroaders who deliver goods have layoffs, as do the refinery workers, mechanics, tire manufacturers, truck manufacturers, and all employees in the chain of delivery, making them purchase less or none of the "not really needed" consumer goods. Every one of the over hundred million losers in the market decline are watching their purchases, and worrying. This is the cause of a depression, and nothing Alan Greenspan can do will stop it. FDR, during the 1930's depression tried every trick in his book, from uttering his famous "The only thing we have to fear is fear itself," speech, to a gaggle of make work projects, handouts, and various gee gaws, which merely increased the federal debt, and began the welfare state. That depression wasn't over till FDR got us into WW II, in total violation of his campaign promises, but that is another story.

Once a chain of financial losses happens, such as the stock market balloon bursting, people simply stop or slow "not needed" buying, attempt to recover their losses, and maintain their lives…literally. In 1929, there were no credit cards, whereas today there are hundreds of billions of dollars in credit card debt, charging unbelievable interest rates, many times in excess of 20%. This negates the fact that supposedly the margins of stock purchases are 50% now, vs. 90% in 1929, because a lot of stock was purchased with credit card cash advances. When you owe, you don't buy what you can do without. When your income and savings are slashed, or cease to exist, you make do with what you have. The 1930's depression was a simple chain of events, which was triggered by the stock market crash of 1929. Quite possibly, the semi crash of the 1990's and 2000 is the beginning of another depression. What will cause LP locally to re-hire, or Heilig-Meyers to re-open? An increase in consumption. What will cause an increase in consumption? A reverse chain of events, similar to the chain that caused the slowdown and depression. A recovery chain is almost impossible to forge, because the chain that took the economy down keeps enlarging itself, until every single corporation, business, and household is affected. The chain that starts with a severe market decline, when over 50% of the citizenry have invested in that market…is unavoidable. The Japanese stock market has gone from over 39,000 to 13,000, and the Japanese economy has been depressed for close to a decade. Japanese banks loaning yen at no interest at all haven't spurred a recovery, and Japanese corporations have tumbled like jackstraws in the winter winds. Tokyo land used to be the most valuable in the world, selling by the square foot. No longer. The chain in Japan occurred, as it seems to have started in America, and no one in Japan has figured a way out. FDR and all his gimcracks couldn't bring America out of the 1930's depression until a world war began. Many knowledgeable historians insist Roosevelt got us into it deliberately. If that is true, 360,000 dead American soldiers and a 50% decrease in the value of the dollar is a heavy price to pay. Will we eventually be gotten into a war in the Middle-East to end a depression?

How much lower will the stock market go, and how much additional capital will be wiped out? No one knows. The human mind works very independently, and while some may be influenced by government propaganda and fed interest rate cuts, most humans react to facts staring them in the face, and affecting their daily lives. Facts such as the loss of a job, investments, savings, or source of income. These hard facts translate into the beginning of a chain, which may lead to a depression. Every community has a factory or business that has been shorn of its profits by the 55% decrease in the NASDAQ. There is no city or village that has not felt the loss of jobs, a plant, or savings. These losses always transmute into less buying, and less buying can autopilot an economy into a chain of decline that begins minutely, feeding on itself, until it consumes an entire nation or world. Daily, we hear of another corporate giant with falling or non-existent profits, dragging their stock down. Some stocks have declined by over 90%. How can profits be realized, when sales are falling, and inventory and manufacturing capacity have risen to intolerable levels, at huge cost or debt? There is not a single sector of the economy that will not participate in the 55% NASDAQ and 11% Dow decline. Over a hundred million citizens have watched their hopes for wealth and security evaporate right before their incredulous eyes on MSNBC screens. Hoopla, propaganda, or Greenspan's convoluted utterances won't change their losses and resultant mental determination to recover, or at least survive, by not buying things. "Not buying" are the links in the chain. "Fearing fear" is hogwash; a non sequitur, and FDR knew it. The fear comes from watching one's nest egg break like Humpty Dumpty's falling off that wall. Can anyone put it back together again?

If the chain of events leading to depression indeed has started, no one that I know of, knows how to stop its escalation. Government may try, as it probably will, by seriously increasing the money supply, euphemistically known as, "adding liquidity." If this happens, the prices of everything will rise in direct proportion to the increase in the currency supply. This is known as inflation, regardless of what bubblehead economists and bureaucrats may say. I am of the Austrian school of economics down to my toes, and Mises has never been proven wrong. Values won't increase; only the prices in currencies. If this happens, it will wipe out the savings of more millions, as happened in Germany in 1924. If inflation rages due to currency supply increases, everything you own will be cost more in dollars. In other words, the dollars will be worth less, and if history repeats itself, as it is wont to do, those two words will meld into "worthless." My advice is keep that mortgage if you have one. Pay it off in fixed dollar amounts with decreasing value dollars, assuming you have the ability to pay it. Save surplus assets not in dollar denominated devices, such as savings accounts, CD's or paper instruments. Save surplus assets in tangible, compact, fungible, easily disposed of, universally recognized things, such as gold and silver. These will go up automatically, as will other tangibles, but these are easily stored and liquidated. Gold and silver have been actual money for thousands of years and owe nothing. They in themselves possess value, whereas pieces of paper with ink on them are only as good as the purveyors of that paper, and if it is a government's paper, beware! Deeds and titles have tangible things in back of them such as cars and homes. Paper currency and treasuries have nothing but the, "full faith and credit of the U.S. government." No comment on that one, but you can imagine.

Unfortunately, once the chain leading to a depression begins, it self perpetuates as more lose their jobs, more businesses fail; more corporations have no profits, and their stocks plunge. If there is indeed a "PPT" in D.C. (plunge prevention team) it has failed. It had to fail. No one can manage or control human behavior, and as facts in every household make themselves known, common sense takes hold. Economics, basically, can be defined in two succinct words, and that is "PEOPLE ACT." They act to improve or preserve their security, home, family, and position. When people act, they act for their own best interest, and that means economizing when times get rough, savings evaporate, income disappears, or other economic disorders happen. This, of course, foments the very chain of events, which no one has yet figured out how to stop. One can only hope that this chain hasn't inescapably started. When confidence is lost, a trillion dollars is lost, profits are lost, and jobs are lost, how can it be stopped? I must confess, I don't know. Just protect yourself, and hope for the best.

Please note that I did not use the word "money" in the above, where "currency" would suffice. To me, "money" connotes value. True "money," is gold and silver, not pieces of paper with ink on them, which historically have eventually been useful only in the bathroom or as fire starter material.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.
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