# 2008 - The 2nd great depression since 1929?



## chatty (19 February 2008)

IS there a possibility that 2008 is going to be the beginning of the world 2nd great depression since black Tuesday in1929?

The scenario appears to be similar. European banks have lost billion of dollars, England is not doing well, Japan is having recession. 
China..-stock market can crash anytime as well.  Bad book for the whole banking system.

People just talk about slow growth and recession in 2008. I feel like we probably going to have the 2nd world great depression. High unemployment rate, high inflation,  high interest rate.etc.


----------



## MRC & Co (19 February 2008)

*Re: 2008.the 2nd great depression since 1929*

Personally, I think the world and economic environment has evolved a LOT since those days.

I cannot see it getting anywhere NEAR as bad!


----------



## BradK (19 February 2008)

You MUST be joking.


----------



## wayneL (19 February 2008)

The thing to remember is that economies are chaotic systems (in the physics sense). They are hard to predict. But you can model outcomes based on one or another economic theory.

Is a great depression possible soon? It most certainly it is!

Is it possible that there is no recession in the near future? That is also possible.

The trick for investors is to figure out the probabilities of each, and/or points in between and tailor their affairs for that outlook. 

The hard part is separating out the endowment effect on our current investments, from strictly logical modeling. Not easy.

But it certainly is possible, the setup is in place, the poisons are lurking in the mud. Let's hope "they" don't trigger it off by doing something stupid.


----------



## theasxgorilla (19 February 2008)

*Re: 2008.the 2nd great depression since 1929*



MRC & Co said:


> Personally, I think the world and economic environment has evolved a LOT since those days.
> 
> I cannot see it getting anywhere NEAR as bad!




I actually agree.  In spite of the spider web of derivatives amplifying the effects of money borrowed into existence by central banks I don't think the system needs to collapse entirely and clean out all of this alchemy just because of a credit crunch situation caused by poor lending practices.  Whether we morally agree with it is one thing...whether it can remain and function is something else.

It reminds me of the provoking dialogue in Syriania where a fictional oil tycoon's 2IC says to Jeffrey Wright's character, "Corruption? Corruption is government intrusion into market efficiencies in the form of regulations. That's Milton Friedman. He got a goddamn Nobel Prize. We have laws against it precisely so we can get away with it. Corruption is our protection. Corruption keeps us safe and warm. Corruption is why you and I are prancing around in here instead of fighting over scraps of meat out in the streets. Corruption is why we win."

I'm confident they'll corrupt into effect a recovery before things get too nasty.  The trick is not to be one of the weaker hands who get left holding the bag.

ASX.G


----------



## Kimosabi (19 February 2008)

chatty said:


> IS there a possibility that 2008 is going to be the beginning of the world 2nd great depression since black Tuesday in1929?
> 
> The scenario appears to be similar. European banks have lost billion of dollars, England is not doing well, Japan is having recession.
> China..-stock market can crash anytime as well. Bad book for the whole banking system.
> ...



Now the really big issue I have with the possibility of a 2nd Great Depression, is how can we have a Great Depression if our money is made out of "Thin Air", unless there is manipulation of the Monetary System to create another Great Depression, by the central bankers

According to the Third Part of Zeitgeist the Movie, the Great Depression was manipulated by the Federal Reserve to buy Businesses and competing Banks at penny's on the dollar.  Apparently the Federal Reserve withdrew much of the Money out of circulation, which excaserbated the Great Depression, thus making it so vicious.  They then they made it illegal to own Gold in the US, thus stealing the real wealth of the people to the central bankers, which was meant to be stored in Fort Knox, but hasn't been independantly audited since the 1950's.

Personally, the questionable events of 9/11(There still isn't any evidence that Bin Laden was behind the Atacks of 9/11, http://www.fbi.gov/wanted/terrorists/terbinladen.htm), plus nearly half of the supposed "Terrorists" were found to still be alive after 9/11, along with Building 7 collapsing like a controlled demolition, plus, plus, plus, followed by the period of insanely easy credit, that has created the biggest credit bubbles the world has ever seen, looks like a set up to me.

The question is, what is the central bankers agenda, or have they really lost control of the monetary system, which I seriously doubt because the money they create doesn't have any real value anyway.


----------



## Bill M (19 February 2008)

Personally I don't think we will get anything like 1929 again. But then again it is how you are prepared for it if it does happen. In 1929 shares dropped by 85% and dividends were reduced by 30%. I can still survive with the 30% dividend drop but my portfolio valuation might give me a heart attack.


----------



## brendan87 (19 February 2008)

Hi all.
I'm going to join the 'no' camp based on these *unique* characteristics of the Great Depression. This is not to say that we are not experiencing a unique turn of events today (eg. explosion of opaque derivatives, unprecedented housing slump) but the fact remains we understood little about macroeconomics and management thereof in the 1930's.

1) Deflation. The central banks of the world today fear deflation probably more than inflation due to the lessons learnt in the 1930's and after watching Japan's battle with deflation. Post 9-11 is hard proof that the US Fed will not permit deflation. Also - we understand much better the economics of monetary policy today. Real interest rates actually rose during the Great Depression - yet are running at close to 0 today (and did so in the post-9/11 recession too). Yet the authorities allowed money supply to contract significantly during the Great Depression. This is a stark contrast to the high money growth rates currently experienced in the world economy.

2) Gold Standard/Floating Exchange Rates. Personally, I would rename (2) as 'Poor/Misguided Policy and Regulation' because money supply had to be backed by gold in that era and at the time, the US Fed "maxed out" the credit it could provide with the gold reserves it had. To cut a long story short, there was a "run" on the Fed's gold reserves due to a flight to quality from back deposits. At one stage, they made holding gold privately a federal offence to try and stop the run of the Fed's gold and hence the money supply. This meant they couldn't 'print money' as Big Ben does today, which, in face of the huge falls in demand (= excess capacity) and prices experienced in the 1930's is a totally appropriate policy. So the 1930's saw a massive self-fulfilling contraction in money supply whereas today the authorities are freely able to 'drop money from helicopters' if they so wish - preventing the decay of deflation. 
While the Great Depression was the result of too much credit and asset price bubbles in the late 1920's (partially due to a lack of understanding of macroeconomics and policy), a similar situation to our current one, the unwinding of those imbalances was met by deflation - which makes it harder to pay back debt. Today, food/commodity price inflation is a given in the developed world (due to China/India/climate change etc etc) and monetary inflation is inevitable - meaning the medium-term pressure on the debtors to repay loans is lower.

Governments also raised tariffs (by about double in the US) to protect local production = sharp contraction of world trade. Remember that back then, Adam Smith's absolute advantage and later, competitive advantage were not accepted economic theory. Exchange rates were fixed/linked to gold in the Great Depression as well which reduced flexibility and the ability to absorb shocks. Remember that floating exchange rates are an automatic stabiliser against external shocks/internal demand shocks and the gold standard was a very rigid system that could not respond to the pricking of asset bubbles or the development of deflation.

Lack of faith in deposits on a widespread level caused the breakdown of the so-called 'money multiplier model' (MMM) which in layman's terms is "credit creation". It's a circle of credit creation where the central bank can tweak the relatively small "money base" (eg. reduce reserve requirments or buy back bonds from banks) which encourages banks to make loans, which are the deposited at other banks, which make more loans, more deposits, more loans etc etc until the initial change is "multipled" many times over. But due to lack of faith in deposits, consumers hoarded hard cash (plus, remember, due to deflation, the purchasing power of cash was increasing, so there was an incentive to hold cash.....very much unlike today!) so the deposit base never grew when loans were made and the money multiplier model quickly collapsed. 
Despite the worrying problems in the banking sector today, there is fundamental reasons to believe the MMM model will not collapse due to:
- a much better understanding of monetary policy and macroeconomics
- inherent inflation caused by commodity/food prices coupled with the impending outbreak of inflation due to the surging money supply (printing of money by the Fed). With a reasonable level of faith in consumer deposits, the mere existence on inflation would make it totally irrational to hoard hard cash.
- Federal deposit insurance (only started in 1934) and the reluctance to let a large bank/insurer fail ('implicit' guarantees in the banking system a la LTCM and Northern Rock)
The only event that could precipitate a collapse of the MMM could be the failure of a large American/European bank (which policy-makers would not allow to happen) and consequent loss of faith in deposits AND, importantly, deflation. 

Anyway, I wrote way more than I intended. I write not to understate the current problems and risks in the economy but to highlight the significant differences in the structure of the economy and understanding of economics itself between 1929 and 2008. While certainty not impossible, I think a repeat of the Great Depression will not happen and especially not in the current enviornment.


----------



## GreatPig (19 February 2008)

brendan87 said:


> the US Fed will not permit deflation.



The Fed may not be able to stop it. Ultimately deflation is caused by an excess of supply over demand, and there's a limit to how much lowering interest rates and increasing the money supply can bolster demand in the face of oversupply, falling corporate profits, and high asset prices. There will come a point where no one wants to use any of the extra money and cheaper credit that's available because there's nothing worth using it for, at least not within that economy. That's the problem Japan has faced.



> money supply had to be backed by gold in that era



According to Richard Duncan in his book The Dollar Crisis, the gold standard was dropped during WWI to help fund the war machine. That allowed the money supply to expand significantly, and after the war there was a much-increased credit base that fuelled the Roaring '20s. Gradually though the US accumulated a lot of gold as other countries did start to pay for their deficits with the US, and the Fed started tightening the money supply to try and reduce the liquidity. Apparently this did manage to reduce the credit base somewhat, but it was already too late. The combination of oversupply, falling corporate profits, and high asset prices mentioned above took their toll, and no amount of policy reversal by the Fed could save it.

GP


----------



## gfresh (19 February 2008)

I'll just add some simple comments.. 

I notice increasingly these sorts of comments being thrown around by alarmists who are probably looking to profit from gold, and benefiting from shorting the market with all the gloom and doom scenarios. Because of the current situation, people are more likely to listen to what would have been simply laughed at a few years ago. So you do have to be a bit careful, however I would agree that on some indicators they could have merit. It's silly to completely ignore any such negative news, simply as you might not want to hear it. 

The world has experienced similar financial crisis back in the 70's, early 80's, late 80's, and late 90's without serious depressions (waits for somebody to throw in Japan) - however people do have a short memory, and each time economies, and world economies have recovered. Maybe "this time it's different", but you can equally say "maybe it's not" with some valid reasons. 

I do think the US may be in store for a large recession as it (arguably) may lose it's place in world power - and such changes are usually accompanied by times of great hardship (take Britain and the end of the British Empire), but that may be offset by other world economies as they grow to take the place.. and we have quite a few there. These things also take years and years, maybe even decades - so the process may be a drawn out one.


----------



## numbercruncher (19 February 2008)

Second Depression ?

Nothings impossible is it 

A realestate crash in the US or UK a year ago or so was probably deemed impossible.

Australian banks needing 50pc gains to reach their formers highs would of a year ago been labled Impossible.

Et cetera Et cetera Et cetera

He who expects the unexpected is best positioned to survive or indeed thrive from the unexpected


----------



## GreatPig (19 February 2008)

gfresh said:


> alarmists who are probably looking to profit from gold



Gold would probably drop in a deflationary depression as well.

GP


----------



## Tysonboss1 (19 February 2008)

wayneL said:


> The thing to remember is that economies are chaotic systems (in the physics sense). They are hard to predict. But you can model outcomes based on one or another economic theory.
> 
> Is a great depression possible soon? It most certainly it is!
> 
> ...




Agreed,...

The world economy is so dynamic and the infomation age has brought faster movement of capital, so in one respect it has brought stability but on the other hand money can be ripped out from under certain areas much faster.


----------



## explod (19 February 2008)

GreatPig said:


> Gold would probably drop in a deflationary depression as well.
> 
> GP




Could you qualify that statement by setting out a reason.   

My be an obvious answer but to those of us who may be a bit slow this could be an important point.


----------



## brendan87 (19 February 2008)

GreatPig, you're right about the gold standard being abandoned in WW1 - but it was only Britain that abandoned it in 1914. Subsequently, it was taken up again in 1925.

However the US maintained a gold standard (the rate changed many times) of convertability for US dollars until alot later, 1975 infact.

It was also in 1914 that the US adopted a gold standard to back the other side of the Fed's balance sheet (not just the currency they issued) - under a provision in the Federal Reserve Act which passed on 23/12/1913. It mandated that the US Fed holds gold to the value fo 40% of its outstanding loans. This is the equivalent of a 'reserve ratio'/'required reserve ratio'/capital ratio in modern banking and was designed in order to provide a disincentive for the US Fed to increase money supply too quickly and stoke inflation. I'm sorry for not fully explaining what I meant about a gold standard, as there are different types and meanings.


----------



## KIWIKARLOS (19 February 2008)

People keep saying the FED is creating money out of thin air but thats hogwash. Gold , shells, silver, diamonds and money all relate directly back to work. Work in the power sense it either buys you man "work" power or it buys you electric power, steam power etc. The fed isn't printing thin air its printing massive amounts of IOU's for work. The problem is they don't export energy by way of oil etc and the human work force can't repay the IOU's alone.

China has another problem it has too much supply of work force by way of human work. So what can it do either accept these US IOU's or have half its population sitting there doing nothing relising that the country really isn't that great and getting revolutionary thoughts :

The thing is though one barrel of oil = 18000 man hours of work. The US controls over half the worlds oil. It doesn't matter that china has a massive amount of cheap labour the US has even bigger amounts of even cheaper labour. The US will come out of this and I bet they start taking control of more oil resources around the world. They are pushing China out of Africa, they are working on Venezula, Iran's oil is looking mighty tasty.

He who controls the oil controls the world it's as simple as that. The US is going nowhere and I wouldn't be surprised if this whole thing was somewhat planned by the administration. It could be seen as economic war against rising powers Russia and China. They will have to re-evaluate the Yuan, and now Kosovo is independant the divid and conquer stratagy looks to be going the US way. They know the only way to take down Russia and China is from the inside out.


----------



## julius (19 February 2008)

*this thread is a classic*


----------



## GreatPig (19 February 2008)

explod said:


> Could you qualify that statement by setting out a reason



Because gold is seen as "real" money, and demand increases when it looks like the purchasing power of the currency is falling - ie. inflation.

During deflation, asset prices are getting cheaper relative to the currency, so the value of cash is not falling (although the currency can fall relative to other currencies due to floating exchange rates, but that would lead to inflation again in that country if it imported a lot). As gold may already be another over-priced asset, it could fall as well.

Possibly a simplistic view, but that's my thoughts anyway. 

GP


----------



## motorway (19 February 2008)

The USA stock markets boomed through the 1920's because it was the only
game that was worth investing in...

Money from all over the world poured in to buy Stocks 
and They had their "New Age"  Stocks as well .... Radio etc

How many coutries ever got out of recession caused by the fall out and carnage from WW1 ?  If I remember the statistics right .. Australia was in a sort of recession all throught the 1920's..

The effects of WW1 and the 1920's  Made everything revolve around the USA

NOW IT is not just about the USA anymore

Speculative funds flow to all sorts of other destinations
and USA stock markets are not in Bubbles..





> Let’s address the China factor. In 1921,
> the U.S. and British stock markets registered
> important corrective lows. The U.S.
> market made an eight year hyperbolic run
> ...




That said The USA will not go away
They will be a large factor
and they are so profit driven
That unlike  Japan  They will do what ever it takes 
to move forward...

And a multi engined world economy
will provide plenty of opportunities ( It is not even just about China ! )


motorway


----------



## korrupt_1 (19 February 2008)

chatty said:


> High unemployment rate




last ABS result showed that unemployment rate was falling... more people are working now... 

http://www.abs.gov.au/AUSSTATS/abs@...362607CA0519045ACA25712B000D0425?OpenDocument


----------



## explod (19 February 2008)

GreatPig said:


> Because gold is seen as "real" money, and demand increases when it looks like the purchasing power of the currency is falling - ie. inflation.
> 
> During deflation, asset prices are getting cheaper relative to the currency, so the value of cash is not falling (although the currency can fall relative to other currencies due to floating exchange rates, but that would lead to inflation again in that country if it imported a lot). As gold may already be another over-priced asset, it could fall as well.
> 
> ...




I suppose the next question is "What is real money?"  a piece of paper is a promise of exchange, for labour, goods etc.    Uncertain times make the value uncertain.   The volatility in currency exchange rates is making people concerned at these promise notes.    Gold may well not go up but its tangible value is a certainty.   Some banks in the world have restricted withdrawals so more and growing concern here too.

Inflation adjusted, gold is way under its old values of 1980 and the 30s so I suppose some people are going to punt it up and because it is a mere .005% of circulating, (so called) value out there, it is probably a very sound one irregardless of which way money value flates.

Possibly simplistic also.


----------



## GreatPig (19 February 2008)

explod said:


> What is real money? ... Gold may well not go up but its tangible value is a certainty



The way I see it, real money is only something that people agree has value, and can retain that value because it can't easily be created and is long-lasting.

Gold has little intrinsic value as a product other than it looks good in jewellery - and I think often only then because it looks expensive due to the perceived value of gold (ie. I don't like gold jewellery). It has some use in industry, but not as much as silver for example, so other than its perceived value, it's really just a blob of junk.

But if you want to have something other than a barter system, then you need to settle on something as a form of currency, and gold has the desirable properties of scarcity, inertness, the inability to create more (despite the alchemist's best attempts), and some practical issues like being malleable and easy to cast into different shapes and sizes, etc.

Personally I have no desire for gold other than for the reason that it's deemed to have value, and is believed to hold that value in an inflationary environment. If it wasn't for that, I'd have no use for it at all, except perhaps in my pebble garden.

Cheers,
GP


----------



## KIWIKARLOS (19 February 2008)

Gold is just as useless as paper money. If cr@p hits the fan I would much rather have $900 dollars worth of petrol than $900 worth of gold. I guarentee if you put the petrol to good use you would make more money than you would on your gold. 

Gold is virtually useless as a material for everyday things. That said though all this is in the context of a depression  two thousand years of human history still says that gold will hold some bewildering value in the eyes of man


----------



## Buddy (19 February 2008)

KIWIKARLOS said:


> The thing is though one barrel of oil = 18000 man hours of work. The US controls over half the worlds oil. It doesn't matter that china has a massive amount of cheap labour the US has even bigger amounts of even cheaper labour. .....................




Kiwi,
I take your point about the value of oil (ie Energy). Maybe in the future, photovoltaic cell will be worth more than gold. Ha, they just about are now,  . However, can you explain the background, and how you calculate that 1 bbl oil = 18,000 manhours?


----------



## dogwithflees1983 (19 February 2008)

If the great man Warren Buffet is not a fan of gold (becuase as previously stated it adds no value & just sits there!) either am I !!


----------



## Kimosabi (19 February 2008)

dogwithflees1983 said:


> If the great man Warren Buffet is not a fan of gold (becuase as previously stated it adds no value & just sits there!) either am I !!



Mr Buffett is one of the Globalist elite and I think the real reason he doesn't like gold is that they can't print more gold when they need it like they can with paper money...


----------



## wayneL (19 February 2008)

KIWIKARLOS said:


> People keep saying the FED is creating money out of thin air but thats hogwash.




Hsawgoh! I have three words that disprove that! FRACTIONAL RESERVE BANKING.


----------



## 2BAD4U (19 February 2008)

Kimosabi said:


> Personally, the questionable events of 9/11(There still isn't any evidence that Bin Laden was behind the Atacks of 9/11, http://www.fbi.gov/wanted/terrorists/terbinladen.htm), plus nearly half of the supposed "Terrorists" were found to still be alive after 9/11, along with Building 7 collapsing like a controlled demolition, plus, plus, plus, followed by the period of insanely easy credit, that has created the biggest credit bubbles the world has ever seen, looks like a set up to me.




And the government have put tracking devices in all our fillings as kids and every full moon I can hear SBS radio through my teeth.


----------



## explod (19 February 2008)

GreatPig said:


> The way I see it, real money is only something that people agree has value, and can retain that value because it can't easily be created and is long-lasting.
> 
> Gold has little intrinsic value as a product other than it looks good in jewellery - and I think often only then because it looks expensive due to the perceived value of gold (ie. I don't like gold jewellery). It has some use in industry, but not as much as silver for example, so other than its perceived value, it's really just a blob of junk.
> 
> ...




Could not agree with you more.  But due to its history, the greed of mankind, its falling production and being such a finite part of the market, it is a very sound investment vehicle at the moment.  That is all that counts with me.


----------



## ithatheekret (19 February 2008)

dogwithflees1983 said:


> If the great man Warren Buffet is not a fan of gold (becuase as previously stated it adds no value & just sits there!) either am I !!




But he likes silver ........ with a little disinformation added for some twist .

At present it's [POG] just sitting there . But it's sitting better than a lot of it's surrounding neighbours .


I bet he'd like it back at 252 for a swoop on , he's just gone into bread and butter bond insurance , nice safe earnings .

The so-called anti gold foundations have one problem , it's a tangible asset to most Asians democratically that out numbers the nayers .......... about 300 - 1


----------



## MRC & Co (19 February 2008)

korrupt_1 said:


> last ABS result showed that unemployment rate was falling... more people are working now...
> 
> http://www.abs.gov.au/AUSSTATS/abs@...362607CA0519045ACA25712B000D0425?OpenDocument




But what happened to labour force participation?  Or the under-employment rate?  Remember, there is a LOT more to the "unemployment rate" than meets the eye.  The statistics dont actually tell that much IMO.


----------



## numbercruncher (19 February 2008)

MRC & Co said:


> But what happened to labour force participation?  Or the under-employment rate?  Remember, there is a LOT more to the "unemployment rate" than meets the eye.  The statistics dont actually tell that much IMO.




Exactly, one thing I noticed on the stats was in that quarter the total number of recorded unemployed only dropped by 2000 but the number employed grew by 20,000 -

And going forward we have more people retiring than entering the workforce, its only Immigration that assumably covers the shortfall.



> increased by 26,800 to 10,631,000. Full-time employment *decreased* by 7,800 to *7,587,600 *and part-time employment increased by 34,600 to 3,043,400.




One in Three Australians employed full time


----------



## robots (19 February 2008)

hello,

must be  a lot doing it easy if part-time worker nos any indication

thankyou

robots


----------



## dalek (19 February 2008)

numbercruncher said:


> Exactly,
> And going forward we have more people retiring than entering the workforce, its only Immigration that assumably covers the shortfall.
> One in Three Australians employed full time




I think you may find retirees re-entering the workforce a big contributor to those numbers.
I know they are the prefered staffing option for some major retailers.


----------



## blablabla (19 February 2008)

Another great depression is less likely to happen than some other sort of  economic meltdown.

If something terrible is easily foreseeable then surely the leaders of the world would take appropriate action to avoid it. Nope, for example the current subprime crisis was forecast well in advance by many eminent economists. Only two possible conclusions can be drawn. Either the leaders of America chose this route to the currrent disaster as being preferable to whatever other routes were available over the last few years, or the leaders of America haven't got much of a clue about complex issues. I'll let you form your own opinion, either way things do not look good.

If the future is going to be different then it could become better than it is now. Let's hope so. Otherwise move to a rural area so you can live off the land if a calamity does occur.


----------



## GreatPig (20 February 2008)

blablabla said:


> Only two possible conclusions can be drawn. Either the leaders of America chose this route to the currrent disaster as being preferable to whatever other routes were available over the last few years, or the leaders of America haven't got much of a clue about complex issues.



There is a third possibility: the leaders of America were unable to do anything about it because there was no viable solution ("viable" not necessarily meaning "possible", but they are politicians who need to get re-elected and need campaign funding for that).

GP


----------



## wayneL (20 February 2008)

GreatPig said:


> There is a third possibility: the leaders of America were unable to do anything about it because there was no viable solution ("viable" not necessarily meaning "possible", but they are politicians who need to get re-elected and need campaign funding for that).
> 
> GP



Bingo.


----------



## Uncle Festivus (20 February 2008)

blablabla said:


> If the future is going to be different then it could become better than it is now. Let's hope so. Otherwise move to a rural area so you can live off the land if a calamity does occur.




I see it as a cleansing period where all the unrestrained excesses of the last 37 years are brought back to a sustainable level, from a consumerist and moral point of view. The fact is, we/the world are consuming at an unsustainable pace, with China actually bringing the problem to the fore at a faster pace than would have been just through the normal pace of 'westernised'  growth. 

If you plan for it you are prepared for it.


----------



## ozambersand (20 March 2008)

A while ago I came across a paper by John Simon called "Three Australian Asset-priced Bubbles" which mentions the 1929 episode and more detail on the 1987 crash. In the discussion paper by David Merrett that followed, he described the real estate asset bubble in the 1890's:



> The rapid growth in credit fuelled the Melbourne ‘bubble'. The growth of the share market, comprised of more listed companies, and with higher daily turnover was another important contributory factor. Asset prices were marked to market on a daily basis and reported in the press. The gains of holding securities were there for all to see. Transaction costs of trading financial securities were, as John noted, lower than dealing in real property or other physical assets. The market looked relatively safe, risk could be diversified and you could cash out in a liquid market. Market-makers were important catalysts. Company promoters and share brokers assured investors and clients that this game of pass-the-parcel would never end. The expanded financial and securities markets leveraged the ‘bubble' going up and coming down. There was a new dimension to the end of a ‘bubble', a secondary impact as the financial institutions struggled as the customers speculations turned to losses and defaults. The route between the breaking of the land boom in 1889 and the banking collapses of 1893 is long and tortuous, but there is a strong causal link.
> The liquidations and reconstructions of many Australian banks depressed the real economy for many years.



These papers were presented at an RBA conference back in *2003* which looked at Asset Prices and Monetary Policy.

http://www.rba.gov.au/PublicationsAndResearch/Conferences/2003/

Other papers at the conference dealt with issues such as: "How Should Monetary Policy Respond to Asset-price Bubbles?" by David Gruen, Michael Plumb and Andrew Stone.

As I understand it, the usual way of dealing with a suspected asset price bubble is to slowly lower and raise interest rates in response to changes and hope the knowledge that this will happen is enough of a deterant to it happening (incidentally Bernanke is on record of being more pro-active in this regard). The last paper mentioned discusses circumstances when monetary policy should actively try to burst the bubble. (If you can get past the equations!)

One discussion paper points out the dangers:


> ...the focus should be on the ability of central banks to assess whether developments in credit and asset markets are materially increasing macroeconomic and financial system risk. In my opinion such assessments, while difficult, are not impossible. Knowing the answer to the bubble question would obviously be helpful, but it is not essential. It seems perfectly reasonable to argue that one is agnostic as to whether asset prices have become overvalued after an extended period of credit and asset-price increases, and at the same time, argue that the level of risk in the system has increased. History provides us with too many examples in which credit and asset-price booms, often accompanied by high levels of investment, have ended in severe economic contractions. *While clearly not all booms end in this way, the record of the past century or so strongly suggests that these developments can materially increase the risk of something going wrong.*



 (My emphasis)
It noted that there have been other asset prices bubbles that did not lead to doom and gloom after but David Merrett added:


> The key reason would seem to have been the modest expansion of credit for a very long time after the bank crashes of the 1890s. A chastened banking system behaved very conservatively, while many of the non-bank financial institutions that had underwritten speculation in the 1880s had perished.



This conservatism lasted for some time for different reasons until the 1980's when he says:


> Conditions for a ‘perfect storm' were brewing through the 1980s and 1990s. Once again, there was a sea change in the strength of the permissive factors that played such a decisive part in the 1880s. There was a massive increase in credit, especially after financial deregulation. The crude measure of the assets of financial institutions, excluding the central bank, to GDP rose from 107 per cent in 1981 to 160 per cent by 1987. Since World War II more and more firms incorporated and listed on stock exchanges. Households and financial institutions, particularly life offices and pension funds, acquired shares as part of their portfolios. The ratio of the market value of listed equities to GDP rose from 22 per cent in 1976/77 to 70 per cent in 1986/87.
> Bull markets in other countries provided a strong demonstration effect to local investors. Firms took advantage of favourable sentiment to issue fresh capital.



His prediction about the result of another crash was:


> If this ‘bubble' is of the same order of magnitude as the Melbourne land boom of the 1880s, will its end be as catastrophic? I suspect that it will not, largely because of policy instruments available today. Falling asset prices will reduce household balance sheet totals and net wealth. How many households are so heavily geared that a drop in price will result in bankruptcy? Will the reduction in wealth spill over into lower consumption expenditures that will feed through to the real economy? If that were to happen the weapons of both monetary and fiscal policy can be deployed. Moreover, there was no lender of last resort facility in the earlier episode. Contagion spread across fringe financial institutions and finally to the banks. Nearly all of those that ‘suspended' and reconstructed were solvent. The current regulatory regime enforces higher prudential standards than were exhibited in the late 19th century. Further, the Reserve Bank can act as a lender of last resort if that is necessary.



The common factor in all bubbles seem to be a sudden increase in the availability of credit and ways credit can be gained and applied. As far as a depression coming? Remember these papers were written back in 2003 and the scenario then was that they didn't think a "burst bubble" today would lead to a depression of the magnitude of the 1890's or the 1920's however you can almost "bank" on their being a decrease in householder's "net wealth".


----------



## ozambersand (20 March 2008)

Number cruncher quoted:


> One in Three Australians employed full time



This trend I believe has contributed to the whole problem. By shifting a large part of the workforce from guaranteed fulltime employment to part time, the short term effect might have been improved balance sheets of the companies involved (hence higher profits and higher share price  )
However the final effect has been more people not having the certainty of employment to qualify for lower interest mortgages , hence low docs, hence sub-prime problems......!
Perhaps the answer is a gradual return to full time jobs with a likelihood of still having that job in fifteen years time!


----------



## aussietanker (10 May 2008)

This is a great thread ... i have really enjoyed reading thru it .... but have realized that i don't understand as much as i thought about world trade etc ....



KIWIKARLOS said:


> *The US controls over half the worlds oil*. It doesn't matter that china has a massive amount of cheap labour the US has even bigger amounts of even cheaper labour. The US will come out of this and I bet they start taking control of more oil resources around the world. They are pushing China out of Africa, they are working on Venezula, Iran's oil is looking mighty tasty.
> 
> He who controls the oil controls the world it's as simple as that. The US is going nowhere and I wouldn't be surprised if this whole thing was somewhat planned by the administration. It could be seen as economic war against rising powers Russia and China. They will have to re-evaluate the Yuan, and now Kosovo is independant the divid and conquer stratagy looks to be going the US way. They know the only way to take down Russia and China is from the inside out.




i'm a bit confused by this statement  ...... but then again, i'm easily confused at the best of times  ...... 

so can someone please explain what this means .... i realize that there is (some) oil in australia, the north sea, south america and texas .... but i thought that the majority of the worlds oil is owned and controlled by the arabian countries such as kuwait etc ...... and that they are the ones that "set the prices" etc ..... 

also, i dont think that it's too hard to see that there is a huge change occuring with a "balance of (trade) power" changing from the west to the east ..... 

however.... i wouldn't give up on the USA too early ..... 

and while i might get shot down in huge flames for suggesting this .... i also suspect that the current mindset in/of the usa is quite a bit different from the mindset of the british during the "collapse" of the british empire .... i think that many in the usa are very aware of this "transition" ... and are poised to take full economic advantage of it ... i suspect that for a number of reasons, at the time of the collapse of the "empire" the brits saw their economic and political influence as almost "god given" .... and just didn't see the rest of the world - esp the "colonies" as capable of "taking over the baton"  ..... 

just a thought  .... Ok ... shoot me now : 

great thread - love it 

regards
A|T


----------



## wavepicker (10 May 2008)

Yes Great thread.

My 2c worth: ANYTHING IS POSSIBLE AT ANY TIME


----------



## chatty (18 September 2008)

just want to have some discussion about this thread i posted few months ago. I still incline to believe that the world is heading the 2nd great depression and this time will be a lot worst than that in 1929.

I am wondering what type of investment should be moste secure under this environment and how do we survive under this situation.

My first guess would be gold.


----------



## dhukka (18 September 2008)

chatty said:


> just want to have some discussion about this thread i posted few months ago. I still incline to believe that the world is heading the 2nd great depression and this time will be a lot worst than that in 1929.
> 
> I am wondering what type of investment should be moste secure under this environment and how do we survive under this situation.
> 
> My first guess would be gold.




In what sense do you think it will be worse than the great depression. Unemployment in excess of *25%*? Bread lines and soup kitchens on every city street corner?


----------



## nioka (18 September 2008)

chatty said:


> just want to have some discussion about this thread i posted few months ago. I still incline to believe that the world is heading the 2nd great depression and this time will be a lot worst than that in 1929.
> 
> I am wondering what type of investment should be moste secure under this environment and how do we survive under this situation.
> 
> My first guess would be gold.




 Depression? what depression? I can't see a depression. What I see is a lot of people with mental depression because the value of their shares are falling. It is the money system that got out of control by reckless borrowers that is depressed.
 There are no swaggies walking the roads, there has been nobody knock on my door and offer to chop wood for a bit of flour and a few tea leaves. There are no long queues outside factories full of people wanting a job, any sort of job. The banks are still open, the pay cheques are arriving on time, inflation is at a reasonable rate, and money has much the same value, related to hours of work and the cost of living today as it had yesterday.
 Anyone who thinks this is a depression will be hard put to survive if we ever get another. It is all in the mind.


----------



## chatty (18 September 2008)

For me I don't see the diffrence between the situation today and what happended in 1929.

This is just the beginning and the world is so much integrated. US has been consuming the world resources for years by printing out money.

The world will need to write-this off.

Commodity price will start to fall.  Australian Banks also rely on off-shore funding. With this financial crisis, no one wants to lend money and they also do not have the capacity to do so with every $1 you loss on bad debt it means you are squeeze and can't lend $10 out to the borrower.  What will happen when all off-shore creditors start to call their loans back from Australia? Because they need funds deperately to fix the issue in their countries.


Unemployment in AUstralia will increase eventually --->http://www.tldm.org/News11/GreatDepressionOf2008.htm


----------



## chatty (18 September 2008)

you may want to read this.

http://www.brookesnews.com/081509ausrecession.html

Well if there is no depression that would be good.
I just want to prepare for the worse case scenario.
some kind of risk management.


----------



## ozambersand (19 September 2008)

nioka said:


> There are no swaggies walking the roads, there has been nobody knock on my door and offer to chop wood for a bit of flour and a few tea leaves. There are no long queues outside factories full of people wanting a job, any sort of job. The banks are still open, the pay cheques are arriving on time, inflation is at a reasonable rate, and money has much the same value, related to hours of work and the cost of living today as it had yesterday.



Yet............
While it may not get as bad, can you state with utter conviction that what has happened to date won't lead to at least a scaled down version of the above happening in the next couple of years?
It's not an immediate process. First there is the speculator building company that goes broke because they can't sell all the new houses that they started and has borrowed too much in the first place. Then the tradesmen who go broke because they didn't get paid for all the goods they supplied to the houses that did get built. Then it's the turn of the retail stores that previously supplied goods to all the tradespeople. Then the workers who worked in these stores who now don't have a job and the process goes on.
Unfortunately, the ones who are most affected in the downturns aren't the ones who used excess credit in the first place who caused the problem.


----------



## nioka (19 September 2008)

ozambersand said:


> Yet............
> While it may not get as bad, can you state with utter conviction that what has happened to date won't lead to at least a scaled down version of the above happening in the next couple of years?




YES.


----------



## wayneL (19 September 2008)

nioka said:


> YES.




Delusional.

While not predicting it will, or even probable, but... definitely possible.


----------



## Glen48 (19 September 2008)

The next lot of retail sales figures for this month will be a disaster, last month was worse than the RBA thought the Stats we get are about 6 weeks old. MQG is on the brink as Allan Moss has sold most of his shares, houses prices are the highest in the World per income about 9 time PA earnings were it should be 2-3 . IF MQG go down and when you look at how soon these things happen eg USA one day there are rumours the next night the no longer exist... who knows your guess is as good as any expert.
all this is driven by Greed nothing else and commonsense goes out the window just like the last depressions eg the Tulips, South Seas etc.
Keep an eye on Patrick.net to see what is going down.
But there are buys out there the money just floats on to the next bubble.


----------



## wayneL (20 September 2008)

ozambersand said:


> Yet............
> While it may not get as bad, can you state with utter conviction that what has happened to date won't lead to at least a scaled down version of the above happening in the next couple of years?





nioka said:


> YES.



I wouldn't be so sure.

Tent cities in LA:


----------



## wayneL (20 September 2008)

wayneL said:


> ozambersand said:
> 
> 
> > Yet............
> ...




http://www.telegraph.co.uk/news/wor...es-of-homeless-on-the-rise-across-the-US.html


----------



## Aussiejeff (20 September 2008)

wayneL said:


> http://www.telegraph.co.uk/news/wor...es-of-homeless-on-the-rise-across-the-US.html




WOW!! I'd love to profit from this. Which US companies make, distribute and/or sell these tents? Looks like a great growth industry to me. I WANT IN!!! 


aj


----------



## Glen48 (20 September 2008)

The next retail sales figures will show a drop in sales.. the last lot they expected .5% growth and got-.2%
How do we know the figures are correct and how many have a 9 to 5 job?


----------



## nioka (20 September 2008)

Aussiejeff said:


> WOW!! I'd love to profit from this. Which US companies make, distribute and/or sell these tents? Looks like a great growth industry to me. I WANT IN!!!
> 
> 
> aj




 They'll be made in china and be retailed by Big W.????????????????? (Then used once, handed to a charity and handed out to the homeless)


----------



## chatty (13 March 2009)

It's been a while since I first started this thread. I still have an idea that the world is going to have the 2nd great depression since 1929.

Te governments aorund the world have been printing money like crazy and this does not seem to work.

Deflation period at the moment and it will continue for sometimes. Job loss will kee rising due the the contraction in th demand for goods and services.

Things will get worse before it gets better. Then, after this deflationary period when people feel more comfortable and start spending, business start new investments, the bank start to lend more money.  All this printing money will come back to bite us with high inflation.

I am  starting to think I should grow my fruit and veg and have some chooks in the backyard. I don't have any gardening skill though  Don't know where to learn how to grow my veg and fruit from.


----------

