Running Errands

Mid-day on Friday afternoon I set out to run four errands that would take no more than an hour to accomplish. I left the house around 11 a.m. and returned three hours later. Knowing my professional vocation, several of the individuals that I encountered on the way wanted to talk about the stock market and the economy.

Unfortunately, the conversations started in almost identical fashion with the individual describing the plunge of 401k accounts and personal portfolios. In a matter of minutes, questions were asked about my own investment holdings and how I was weathering this financial storm.

I sympathetically replied to their plight and then confessed that our family investments had been in cash for nearly two years. In hearing my answer, the other parties leaned forward in their chairs with eyes and mouth wide open in a look that said, “You are joking, aren’t you?

“No”, I saw this calamity coming for several years.” I replied to their gazed looks.

In fact, I have written for several years about the approaching economic storm. Not coincidentally, many writers sounding the alarm bells, most notably Peter Schiff, the folks at the Von Mises Institute, and Ron Paul, came from a deep understanding of Austrian Economics.

What I said for the next few minutes could be described as an impromptu street corner lecture on Austrian Economic thought. The next few minutes were used to assure the engaged listener on the other side of the desk that despite what the politicians and heads of the Treasury and Federal Reserve were saying, the financial perils we face today are not unprecedented.

Then a brief note about the Panic of 1873 was followed by a myth-busting overview of the Great Depression. I emphatically drove home the point that the economic collapse witnessed almost eighty years ago was not due to a failure of capitalism. It was caused in the same manner as all boom-bust cycles; the Federal Reserve and easy money credit. Just like today, starting first with Hoover and then followed by FDR, government made the problem far worse by intervening into free markets by artificially propping up asset prices. Two UCLA economic professors recently confirmed what Murray Rothbard and followers of Austrian thought have known for a long time, which is the duration of the Great Depression was directly associated with government interference with the supposed imperfections of the free market. According to the study by Cole and Ohanian, the anti-competitive programs of Roosevelt alone prolonged the depression by seven years, which ended in 1943 according to the pair.

FDR and the Great Depression

For an in depth look at what caused the Great Depression, I would again strongly recommend Murray Rothbard’s America’s Great Depression, and for a clear understanding of how we got to where we are today an individual should read Peter Schiff’s Crash Proof.

My brief economic lesson concluded by reminding the individual that the de-leveraging necessary to rid ourselves of the credit excesses and bad debt cannot be stopped. The bailout policies instituted by the government are aimed at leading us down the same path from where we just came. But lenders are not going to be eager to extend credit to the same people that just stiffed them, and financially prudent individuals have no penchant to take on additional debt. The problem with all fashions of Keynesian or monetarist economics is that their theories are based on consumption as the key to economic growth. But as individuals, the road to economic security is savings, and so it is for 300 million others.

The next question begged of me was what I foresaw next for the stock market and the economy. The looks on their faces told me that they had already reached a less than rosy scenario.

I do not like to give specific investment advice to strangers or in a medium of public content. If our current economy and financial markets run parallel to the great de-leveraging experiences of the past, then it will surely be a long road toward recovery. From its peak in August of 1929 to the bottom in 1932, the Dow Jones Industrial Averages declined by nearly 90%. It took 24 years for the index of thirty stocks to reach the high point made in the summer of 1929.

The Nikkei Index reached a high water mark in 1989. The other night it dove beneath the lows made earlier in the decade. Nineteen years have passed and the Japanese Stock Index is still 80% below its zenith.

Before departing for the next stop, I made one final observation. The incessant printing of money that the Federal Reserve has taken in conjunction with the new obligations of the Treasury puts us in real danger of a hyperinflation environment. From the Weimar Republic in the 1920s to Iceland and Zimbabwe today, the creation of trillions of dollars in fiat currency has never resulted in anything but an unmitigated economic disaster. You can always avoid investment risks by staying in cash, but the ravages of inflation even make the safety of this alternative high-risk.

The pain for those highly indebted and perhaps for individuals invested heavily in equities cannot be avoided. Unfortunately, the interventions now taking place by the federal government ensures that the financial harm will be shared by everyone, even the most prudent.

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