STOCK MARKET WATCH -- Thursday, 19 January 2012

[happyslug]

101. Think March 1930 to March 1933

Bernanke in 2004 described what happen between March 1930 and March 1933:

The impact that the experience of the Depression has had on views about the role of the government in the economy is easily understood when we recall the sheer magnitude of that economic downturn. During the major contraction phase of the Depression, between 1929 and 1933, real output in the United States fell nearly 30 percent. During the same period, according to retrospective studies, the unemployment rate rose from about 3 percent to nearly 25 percent, and many of those lucky enough to have a job were able to work only part-time. For comparison, between 1973 and 1975, in what was perhaps the most severe U.S. recession of the World War II era, real output fell 3.4 percent and the unemployment rate rose from about 4 percent to about 9 percent. Other features of the 1929-33 decline included a sharp deflation--prices fell at a rate of nearly 10 percent per year during the early 1930s--as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households. The economy improved after Franklin D. Roosevelt's inauguration in March 1933, but unemployment remained in the double digits for the rest of the decade, full recovery arriving only with the advent of World War II. Moreover, as I will discuss later, the Depression was international in scope, affecting most countries around the world not only the United States.

http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm

How did FDR end the above decline? First he closed the banks and had Congress set up insurance for their deposits. Second he devalued the value of the Dollar by 75% (US Dollars in term of gold went from $20 an ounce to $35 an ounce, in affect any PAPER Assets lost over 42% of their value by that devaluation). Real assets had already dropped in value by over 40% (and would continue to drop for a few more years, bottoming out in 1938 devalued up to 90% of their 1929 value). FDR then expanded various job programs to get the economy going (and introduced Social Security to take care of those people over 65, giving them money to live on when they could no longer work).

As part of the Social Security Act, Congress provided for a National Unemployment Insurance Program (and the funding for it) AND improvements in Funding (Which would last till Welfare Reform of the 1990s made substantial changes in the program, through it should be noted unlike Unemployment and Social Security, which were 100% Federally funded, Welfare was and remains a 50% match with the state, i.e. for every dollar a State pays for Welfare the Federal Government will match with another Dollar and then only to families with Children, Adults without children never were eligible for any Welfare funded by the Federal Government. And lets not forget the Bonus Army Bonus money, authorized by Congress over FDR's Veto.

This one - two punch ended the deflation but notice it required a massive transfer of money from the 1% to the 99%. From March 1930 to March 1933 Hoover and the GOP opposed such a transfer in assets and tried every thing else to stop the deflation except what actually worked, massive transfer of financial assets from the 1% to the 99%.

In many ways, we are in a similar period to the period from March 1930 to March 1933. One of the reason it has seem longer is the Social Programs from the New Deal are kicking in and preventing further decay among the assets of the 99% (No run on banks do to Federal Deposit Insurance, no elderly starving in the Streets to to Social Security, and no adult dying do to the one FINANCIAL improvement done in the 1960s under LBJ's Great Society Program, The Food Stamp program (The rest of the Great Society Programs was improvements in access to various needs of low income people, housing, medical care and even legal advice have also helped, but the biggest help to most people has been the FINANCIAL assistance and that is all New Deal EXCEPT for Food Stamps).

Bernanke is trying to duplicate what FDR did with the devaluation of the Dollar, but Bernanke does NOT understand that the key was devaluation in real terms of the Assets of the 1% was what is needed. Given that the Dollar had NOT been pegged to Gold since 1971, the only way to devalue the dollar is through massive inflation. The present Congress is opposed to the spending needed to produce that inflation thus we are stuck in a pre- New Deal type situation. Slow and Steady Deflation of real assets, financial assets hold their value at lease in dollar terms and that conflict in assets values HAS to be addressed. Real assets has to increase in dollar terms AND Financial Assets DECLINE in value in real terms (via massive inflation).

FDR solution of devaluing the Dollars in term of Gold can NOT help us today, for Dollars are NOT valued in terms of gold, thus that leaves inflation. Congress is as fearful of inflation today as it was in the early 1930s thus refusing to spend what is needed to get that inflation started.