Originally posted by @Joe Splitrock:
@Babek Sandhar reading your post, I feel like you are trying to force fit a narrative here. I don't see these as "uncanny similarities". Some of the things in your list are not even factors that lead to the Great Depression, at least not major factors that are recognized by modern analysis.
You are implying that you predicted a market correction, but the market correction here is not the result of cumulative factors. It is the result of fear based on global shut down due to a virus. It is due to forward looking concerns over the impact of high unemployment and low consumer spending for multiple months.
The stock market crash of 1929 always appears as the leading cause of the Great Depression, but it was the ripple effects that did more damage. The crash caused a run on the banks. There was no deposit insurance back then and federal policy basically let the banks fail. Not only did people lose their life savings, but they also lost all access to credit. As a result, consumer spending dropped, which led to overall economic trouble and massive unemployment. Unemployment insurance was not in existence, so people had no income when they lost their jobs. That just resulted in even less spending and more job loss.
Of course many things have changed since then. We now have FDIC to protect savings accounts. We have bank liquidity requirements and stress tests. We have unemployment insurance to pay people for up to 26+ weeks. The modern mortgage system with Fannie Mae and Freddie Mac was created during the Great Depression as a way to offload debt from banks.
My point is so much as changed and the underlying factors are completely different. I am not saying we won't have major economic problems, but I don't the see the direct comparison. It is an interesting discussion.
These are actually amazing points you made Joe. I'll make an attempt to respond to all your points (very good ones).
I do not think what I expect to happen is anywhere near to what we've seen so far in markets. I agree, right now this is a correction and we can very well move up from here (many could have seen this coming covid or not). I acknowledge that I may absolutely be wrong, as I also thought it would begin in late 2018. A correction is more like what we saw in 2016, 2018, and where we are now. Right now we are in "correction" territory.
However, this is where things get very murky. The coronavirus was an unexpected anomaly that has put the world at a standstill. I believe that something much worse is to come as a ripple effect to the Coronavirus. You've the case that the stock market crash did not do as much damage as the aftermath in the great depression and I'll make the case that there will be a ripple effect from the effects of covid-19.
The case I am making is coronavirus could be that same catalyst the stock market crash was in 1929. We are seeing so much liquidity leave the system, that the Feds have been forced to inject 2T into the market and cut rates to 0 (how many of us thought we'd never see these rates again). If you pay attention to stocks, they are actually instilling circuit breakers so there can't be massive sell offs in the stock market. Why would corona virus has this type of an effect on the market where we had to cut interest rates a whole 1% and inject 2T into our system? Also if nothing was wrong in the first place remember all those rate hikes we had been doing in 2017-2018, why did we suddenly start cutting rates again?
Very simply put, the US is in a difficult position where if they raise rates, debt becomes harder and more expensive to pay off. Many defaults will occur on variable interest rate loans and either restructures on debt is needed (refinancing) or defaults. So instead their only option is to find a way to print their way out of it or monetize their debt by lowering rates because higher rates would cause massive deflation (like the great depression). This is why we have been lowering rates and printing money, to prevent this exact event from occuring. It's the only way we can keep markets propped up and growth continuing. Had the concerns been inflationary then we would be raising rates to tame inflation (see the 1970s period to understand what was happening in the world then & check out the Volcker shock to understand how it ended).
The central banks have been trying so hard to prevent deflation (it seems hard to believe as stock markets and real estate are at all time highs).
I find the stress tests of the banking systems quite weak. Ask yourself this, if these banks were so safe, why were they on the brink of failure in 2008 to the point they needed massive bailouts all around? Sure CDOs played a big role, but do we not have the same thing in Mutual Index funds (crap and good stocks mixed together in a fund and sold to a third party)? The amount of money in index funds will bleed out the system. Michael Burry who predicted the housing bubble is talking about this as well. Here's a link if you are interested in reading this
Are our debt levels not higher than before? GDP - Debt? The recklessness of banks put us in this spot in the first place so I don't buy that argument at all. Here's an in depth article talking about these failures of stress tests released by Stanford.
The factors above were not causes but rather similarities we saw in both economies during each respective time period. This isn't to say this is the cause, but rather this is the effect of such effects. The mass psychology of humanity forces us to act in similar patterns this has been noted throughout history (dating back to the Romans).
You made a great point with the stock market crash not really being the cause of the great depression but rather it was the after effects. The stock market crashed forcing many into debt and poverty because they had everything invested in "debt." Is that not what we are seeing right now? Helocs, household debt, consumer debt, and national debt is at all time highs. How easy is it to get a house putting less than 5% down? Very easy.
However, it's important to keep in mind what we have seen over the past several decades.
We have seen historically low interest rates, over several years and near 0 rates over the last 10 years. We've seen essentially massive growth in the stock market since 1987 and as we climb higher it's only psychologically reasonable we begin to see higher and higher levels of volatility (like we are seeing right now).
In terms of bank runs, we have a system that is on the verge of a liquidity crisis. Look at costco lines for basic essential goods, now imagine what will happen when they say banks are going to close because of this virus? I'm not saying this will happen, but in major metro areas where majority of wealth lies, we can easily see bank runs again.
What happened after 2008? How hard was credit after this crisis? Is this not possible again? If so why? As I said stress tests holds no merit, but rather an indicator to keep consumer confidence up. Did people not lose their life savings in 2008? Did Freddie & Fannie not require enormous bailouts to stay afloat. Money isn't free and this will either come down on tax payers or higher prices for everyday goods. High unemployment and low consumer spending = deflation. This is exactly why I consider this as a Great Depression 2.0. Liquidity Crisis force people to take cash stash it and wait anticipating lower prices. This is exactly what you explained, so I honestly feel you have answered your question with your response.
But I agree with you here, our central bank has the policy and tools to change the outcome as there is no peg to the gld std and we can print our way out of this as long as the dollar serves as a safe haven asset and I think we have quite some time left before that changes. Here's another academic article out of Stanford (just read the abstract and conclusion since this is quite long, I've read many shorter explanations but this coming out of Stanford is most credible) explaining this shortage in dollars in more detail. I think this will serve as a problem to the upcoming liquidity crisis and hence the extreme predictions I have.
Just from what I have seen in the last 3 weeks and the volatility in the stock market, this is so scary the amount of volatility we are seeing. It's really not a good sign which has increased my urgency to get this message across ASAP.
I actually loved your answer and you made some great points as I said. I respect the hell out of your knowledge.
