What would a "modern" depression look like?

[fourthirtysix]

Presuming that there is a significant downturn in the U.S. economy, I wonder what a modern day depression would look like?

There are no shortage of extremist scenarios with panic in the streets and the collapse of western civilization, but somehow I find that hard to swallow. I can't easily see all banks closing, power stations shutting down and people trading little gold coins and bullion for goods.

But I do wonder how a depression would manifest itself in the information age. With the rest of the world in decent shape, even if Europe and Asia took a hit, wouldn't they just swoop in and buy up extremely cheap US assets from people without jobs and needing money?

So I ask, has anyone have any guesses at what a true modern depression (or hyperinflation, for that matter) would look like? What would people use for trade if confidence in the dollar collapsed? I just don't see people running around trading gold coins and bullion. How would their lifestyles change, besides the obvious less frequent TV purchases and nights eating out?

Although nobody knows the future, I do think it would be interesting to hear peoples' views, and perhaps some commentary from the itulip contributors, on how such scenarios might play out.

[Jim Nickerson]

Re: What would a "modern" depression look like?

436,

I believe thinking about a depression is worthwhile. Until recently I had never given it a moment's thought. I bought a book by Warren Brussee "The Second Great Depression, starting 2007 ending 2020" after I heard him interviewed by Jim Puplava at financialsense.com. That was some months ago. You could probably track that down.

Perhaps most people who post here may generally disregard the prospects of a real depression, but who actually knows. I think Brussee argued for a deflationary depression, which gets a lot of argument here.

The things that stuck in my mind were Brussee's advice, if a depression comes and if you are someone who figures out how not to lose all your wealth, that you would best assume the guise of one who is as poor as everyone else will be--you know, like don't look too good nor talk to wise, and don't be seen buying things that no one else can afford. Home safety could be an issue from robbers, and there is importance to being able to maintain insurance on those things you could not afford to see destroyed. The other thing that stuck in my mind is that during a prolonged period such as Brussee theorizes, people will stop having children because they cannot imagine bringing new lives into such morass. There was a lot in Brussee's book that did not appeal to me, but the thought he had given to the issue and took the time to write and publish I found interesting, being I had never given it any thought.

I think this is a worthwhile thread, and hopefully will bring forth some opinions that are more worthy than mine--and no doubt about trying to perserve one's wealth. I suppose a depression could arise in both inflationary and deflationary enviroments and the things necessary to protect oneself would be different depending upon what actually might occur. There is something in me that recoils in me when everyone sees an outcome as likely being just one way, and that way seems to be bad inflation and if you believe what you read here, not hyperinflation, and not bad deflation.

[spunky]

Re: What would a "modern" depression look like?

Good topic:

Well , I am just not sure it could really happen in the sense of a true depression. Modern monetary policy worldwide makes this alot less likely.
I worry about this:

1) Inflation ( more of a steady inflation than hyper inflation ), as a worker my dollar buys less and less.

2) Regional middle eastern conflict that spreads, or ends up with nukes involved. This scenario sets up the most likely means to a true depression or hyperinflation

3) Dollar is used less and less as a store of value, worlds currency, and no one wants to take on US debt.

What do you do ???

1) Own your own physcial gold/silver

2) Secure your own food/water stores

3) Home defense/ weapons/ good dog


Thanks for this board; nice to getta hang around some kindred spirits; tis lonely being a Libertarian goldbug :cool:


Modern depression , mabye 3 quarters with - growth, inflation of, > 7 % , unemployment over 12 % ?????

[renewable]

Re: What would a "modern" depression look like?

nice points, spunky. I'd add:

4) Offgrid enegy supply - small solar/wind microgeneration system

[jk]

Re: What would a "modern" depression look like?

there are a lot of countercyclical flywheels to keep the system going: unemployemnt insurance, social security, medicare will all keep pumping money into the system. the federal budget will go further into deficit as tax receipts will drop even if spending doesn't increase. and do you think there's a chance spending won't increase? government expenditures on defense, office supplies, bridges to nowhere will continue unabated and put money into the system. the fed will monetize. it's hard to see deflation really taking hold without a collapse of the financial system.

inflationary depression- look at argentina. high unemployment, high prices for people with pesos, low prices for people with dollars.

[fourthirtysix]

Re: What would a "modern" depression look like?

It's interesting, the more I read, the more there seems to be agreement that a "old-style" depression would not happen in the US. Instead, as jk pointed out, corrections manifest themselves more through inflation.

Two things I'd love to get comments on. 1) Japan just went through 15 years of deflation, but not so much depression. If it happened there, why couldn't it happen in the US? 2) I'll post a snippet of an article from several years ago:

---

Deflation is a collapse of a debt pyramid when it becomes "excessive" and debtors cannot fulfil their debt obligations. This creates a self-feeding downward spiral of debt repudiation leading to recession or worse. The debts could be said to have been settled by the bankruptcy of the debtors.

deflationary collapse requires two special factors to be present:

1. A strong or desirable currency that people are content to hold;
2. An inability by monetary authorities to create new money at will.

Those pre-conditions were present in the 1930's when the convertibility of the dollar into gold ensured that the dollar was money that people could trust and were content to hold. The constraint of gold convertibility prevented the authorities from creating dollars at will and boosting Government spending.

Those two special pre-conditions for deflation are not present today. We have fiat currencies that are nothing but pieces of paper that people are becoming increasingly reluctant to hold. Furthermore, the Federal Reserve Governors keep reminding us that we live in the era of the electronic printing press. They can instantly create any amount of new money whenever it is required - and they have already indicated that they would do so if this became necessary to avert deflation. They have the tools and they will use them. The odds are heavily stacked against a deflationary outcome.

http://www.gold-eagle.com/editorials...eld042704.html

---

So it seems like what's coming is a US recession with disinflation, followed by lots of inflation driven by money printing and perhaps a devalued dollar, housing prices take a mild fall in nominal terms, but the true fall is due to inflation while the prices stay flat to down. Is this picture consistent with the data coming out?

If so, my guess would be some things would skyrocket in price (oil, gas, imports, appliances, cars, education, healthcare) while bubbled assets would fall (housing, ?)

I wonder, if inflation goes up, would the fed raise interest rates to protect the dollar and thereby crush the economy, or hold them steady and let the economy run but the dollar devalue? A devalued dollar would have implications of angry chinese/japanese bond holders and then who would lend to the US to finance the defecit?

[jk]

Re: What would a "modern" depression look like?

I wonder, if inflation goes up, would the fed raise interest rates to protect the dollar and thereby crush the economy, or hold them steady and let the economy run but the dollar devalue? A devalued dollar would have implications of angry chinese/japanese bond holders and then who would lend to the US to finance the defecit?

i don't know the details of japan's deflation very well. i think part of the problem was that they didn't let the yen devalue, plus they are a nation of savers with demographics graying much faster than ours. but perhaps others can chime in on japan.

i don't believe the fed would defend the dollar and watch the economy shrivel. foreign cb's have non-profit motives for their purchases of u.s. bonds, and they will indeed not profit.

[sixpack]

Re: What would a "modern" depression look like?

I'm not sure this is really the right question to ask and why talk of 'depressions'.
The world doesnt stop in a recession - they tend to happen at the edges or stem from certain segments of an economy. John Mauldin at investorsoversight's sentiments I believe.
There are lots of things that people continue to buy (and sell) but the speculators (even investors are speculators) have to change their tune and what they think their best guestimate/fantasy land is going to look like.

The better question is how to protect your wealth surely ? Sorry if this detracts from your post / intentions.
And to respond to the wealth protection question perhaps you have to decide what kind of a downturn you foresee.
This assumes you expect a significant downturn which this site does without exception.
Today's GDP of 1.6% still shows a strong consumer, some strong business spending, and importantly, serious housing downturns still not impacting other expenditure (sure we may be waiting for lagging indicators and perhaps have been supported by falling gas prices).

Big Al reckons the worst of housing is behind us (god knows how he came up with that, but he's neither ignorant nor stupid)
Ms Whitney's CIBC article on this site suggests that the housing impact will land on a 10% segment of the US population - perhaps significant but not an earth-shattering destruction of the chrysler building, let alone the world economy.

And I still await a contribution that actually deals with her analysis because I would suggest that her professional assessment contradicts the very negative (though very well articulated) views of this site without denying something of a slowdown/mild recession - I agree Bull markets dont start from these levels and the stock mkt rise is typical of a 'no-more-interest-rate-rises' stage of the cycle and is susceptible to being kicked if something like housing rears its ugly head.

Additionally, I might suggest that more of our focus needs to go to the Asia situation. Sounds obvious but is often passed by in commentary; but there is already a middle class in India (the world's largest democracy) the size of the US population. Middle class means has a certain level of disposable income relative to their domestic prices.
China is changing focus to also enhance domestic consumption. Do you really expect base industrial material prices to fall with rising Asian domestic growth ? The world will be driven by what happens there far more than what happens elsewhere - G7 is pathetic at long term strong growth : russia aside. They're dancing in the streets in Europe because gdp growth got above 2% for crying out aloud !

Japan still exports 1/3 more to the US than to China, but that won't be true in 5 or 6 years. In fact I would stick my neck out and say that the US currency will be broadly supported (doesnt mean it wont have some downward pressure - say 10% or so?) until China is more important to Japan (exports) than the US.

The productive world currently cannot yet afford to abandon it's irresponsible currency of choice the US dollar. Hence the range bound trading that occurs in currencies and the Yen being prevented from getting too strong from its current levels - they are an exporter and through necessity the world's largest creditor. Strong home currency doesnt help an exporter. Lot's of liquidity ultimately heading stateside keeps your US customer buying and its firms in business.

As an aside, there is significant argument that Japan never really deflated - sure their asset & product prices went down, but Money supply continued to increase the whole time and the currency lost its strength which is handy if you are an exporting nation. They just stopped spending at home (instead they came and made their cars in the UK and saved/replaced an old cancer ridden dying car industry here).

The downturn - back to dealing with the downturn.
If it's just US housing and banks losing some money (the Whitney scenario) then I might guess at slowdowns, defensive investments etc etc.

If, as contributors here suggest, there is a frailty in the leverage backing (ie derivatives unwinding or worse, that can't be unwound - yikes!) then is there anything that won't suffer ? You could argue that even the gold price is supported by these products. And what's the point of a US treasury bond when the dollar falls 40% ? Hence, you might want to keep a close eye on Japanese interest rates if they rise and Japanese money supply if it falls.
I find it hard to guess at investments that would be sheltered in this scenario of currency devaluation and asset price corrections/bank defaults. Perhaps Asian or South American property ? Swiss banks ?

Geo stuff:
You may want to be careful talking about bunkering up with cans of spaghetti and camo outfits - you woudnt want us international readers to regard the mid-west Joe as something of an over-reacting crank ;-) , however there are massive geo issues afoot which I'm sure have not escaped you but I would like to present my longer term and possibly wild assessment albeit from limited reading.

Iran's Shia will become the dominant power in the middle east - the US cannot create an Israel in Iraq without Iran's [Shia] cooperation (which it won't get if you hadnt noticed) and cannot get away with making Iraq a nuclear power without a stable democracy (somewhere around my chances of bedding a gorgeous blonde this week !).

Iran is however nuclear, and we (US & our own idiot Blair) have removed Messrs Hussein and Co. who would have become a nuclear power and arguably would thus have been the balancing of the region. Yes, admittedly a fairly tense problematic balance, but with a low probability of them attacking each other -again (Kuwait went back on their promise to give Saddam some of their oil wells last time he went to war with Iran to get rid of the Shia dominance, so that incentive to attack has clearly gone).

From here, Iran's Shia domination of Iraq is likely, and arguably the region on the basis that say what they like, the US cannot stay there indefinitely.

Then you have Israel in trouble and considerable threat to the Sunni dominated Arab/Oil states, perhaps with the US military camped out in their supposedly friendly Oil states who you notice keep buying their (& UK) military hardware under 'close cooperative agreements'.

So bunkering down considerations come down to how you see the middle east playing out, not how the economy goes.
this is longer than I intended and perhaps a long way from your post but I just think there are very big things to discuss out there other than depression :-). Responses very much welcomed. I'm happy to be told I'm a rambling idiot, or better still, to be corrected.

[Jim Nickerson]

Re: What would a "modern" depression look like?

Sixpack,

Nice, thoughtful response, keep it up.

[Jim Nickerson]

Re: What would a "modern" depression look like?

Sixpack,

You mentioned Greenspans comments about the housing downturn, and Ms. Whitney's comments, etc. as examples that contradict dire consequences ahead. If one is reading, there are a number of people who do not appear to be seeing gloom and doom just around the corner. I've noted a couple in the last 2-3 days in other threads.

I personally am not capable of discerning who is right and who is wrong in the issue of where the markets are going. I am more capable of recognizing the markets are not behaving poorly, i.e. they have been going up 4+ months, with today being an exception, but after 7-8 days up for the SPX, something had to at least give temporarily.

For seemingly some people to be saying "look at how bad things are, how can you keep going up" is similar to someone whipping my ass with me saying while spitting out blood and teeth, "you can't do this."

I think you made some excellent points, Sixpack, that people should not discount because they are counter to what they believe ought to be occurring.

[spunky]

Re: What would a "modern" depression look like?

Sixpack:
I will just list some responses to this thread in outline fashion as I have horrible grammar:

1) No bunkering down here. Being self sufficent and able to protect ones self / property and assets and not relying on the government , it used to be that way in alot of america. Americans have become to dependent on the government and to dependent on technology. Oh and americans used to save money also; some of us still do !!!!!


2) I can agree with the chinese part and the value of the american dollar to them. They have to much vested in it to let it tank or to set a mass devaluation off .

3) I dont agree with your comments on the Indian economy, from what I have read they have a long way to to bring even 1/3 of their population out of poverty, let alone reaching middle class . Of course they are going to be a user of commodities. I am from the Jim Rogers school of thought on that one. I would place mine in Ruppa or Yuan before Rubles. Russia will revert to its old ways before any meaningful change will occur.

Geo-political stuff; I am not going to touch it, or how gold will tank if the US economy does :confused:

This is a hypothectical thread Sixpack . I dont see a depression happening either, but a recession, followed by continued inflation .