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"The misplaced belief that the road to economic prosperity is
paved by near-term fiscal tightening, as espoused by our own Prime Minister
Stephen Harper and British Prime Minister David Cameron last week, shows we
have learned nothing from Herbert Hoover’s response to the Great
Depression. Just as during the current Great Contraction, in 1930, the U.S.
federal budget surplus had turned to a deficit that grew rapidly as the
economy contracted. Hoover recommended large tax increases, which were
approved by Congress in 1932, further exacerbating the rout…Yet, we are in danger of repeating the deflationary
policies that caused the 1929 stock market crash and the Great Depression."
Sherry Cooper, Bank of Montreal
The slam against President Hoover (Republican) is that he committed
two extremely large mistakes
- Hoover proposed, and a Democratic controlled
Congress enacted, a massive tax increase meant to balance the federal
budget – the deficit was approaching 60% - the financial stability
of America’s government was at stake
- Signed into law the Smoot-Hawley tariff in 1930
By the late 1920s income inequality was greater than in any other time
in U.S. history. When Black Tuesday shocked the world in late 1929, the top
one percent of Americans owned more than a third of the country’s
wealth - the poorest 20 percent owned four percent. An American middle class
did not exist, the disparity in incomes was unbelievable, a few Americans
were rich but the vast majority were poor, eking out
a subsistence living or living just above the poverty line. After the tax
increase most Americans still didn’t pay any federal income tax.
The Smoot–Hawley Tariff Act and retaliatory tariffs in other
countries did exacerbate the collapse in global trade, but foreign trade was
just a small part of overall US economic activity and originated from,
mostly, the agricultural and resource extraction (mining, logging) sectors.
In 1929 American exports were $5.2 billion, declining to $1.7 billion by 1933
- because prices had collapsed the physical volume of exports fell by only
half
Cause and Effect
During the 1920s, US factory output soared as technological
innovations and increased mechanization increased production. Wages however,
remained unchanged, there was no way constrained
demand could keep up with ever increasing supply. Eventually, the price of
goods for sale in American markets had to drop because there were more goods
than people could buy.
Farmers also faced a similar overproduction crisis but with the added
drag of soaring debt levels. The collapse of farm exports caused farmers to
default on their loans. The small rural banks used by farmers were the first
to suffer bank runs in the early years of the Great Depression. The Federal
Reserve is suppose to provide the liquidity when a
bank cannot meet its depositor’s demands for cash – if depositors
cannot withdraw their funds panic spreads throughout the system.
Neither a tax increase or Smoot-Hawley were the problem.
The extremely tight monetary policy enacted by the Fed of the day in
response to unfolding events is to blame. All the Fed had to do to turn the
US economy around was do what it was suppose to do
- be a lender of last resort and add to bank’s reserves by purchasing
government securities - this would have expanded the money supply.
“No bank should be more than one night’s train ride
from its Federal Reserve bank. In cases of a run on his bank, a banker could
gather up his commercial paper with maturities of thirty, sixty and ninety
days, catch the train and be at the Federal Reserve Bank by morning, discount
his notes and wire his bank that there was plenty of money to pay depositors.
To place Reserve banks more than a night’s train ride from the member
banks it served would make it impossible to meet one of the very needs for
which it was designed.” Sen. John Shafroth,
Colorado Democrat
The Federal Reserve failed in its responsibility, they sold bonds and
raised the discount rate, they reduced banks
liquidity when it should have been increased. By the time the first of the
three banking crisis’ was over hundreds of banks had closed, further
reducing the money supply.
By August 1931, commercial bank deposits had shrunk by seven percent -
more contraction in the money supply. Then, in September, the Fed responded
to the British leaving the gold standard with the biggest hike in the
discount rate to date.
Commercial banks stopped using the discount window and started
hoarding their cash, this cash hoard fooled the Fed
into thinking monetary policy was loose enough. By January 1932, bank
deposits had declined by another 15 percent and the money supply continued to
decline through June 1932.
In January 1933 the banking crisis caused by the Federal
Reserve’s mismanagement of the money supply entered its final phase.
Bank holidays - banks are not required to give depositors access to their
money - were declared across half of the US. The Fed again raised the
discount rate.
On March 4 the Federal Reserve Banks closed.
Only 15,000 out of a total of 25,000 commercial banks remained when
banks reopened in mid March - the money supply had
shrunk to one-third.
“I concluded the Reserve Board was indeed a weak reed for a
nation to lean on in time of trouble.” President Hoover
“During Hoover's administration the Democratic Party's chief
publicist and spinmeister, Charles Michelson (the
Federal Reserve Act passed Congress on December 23, 1913 - Democrats voted
"yea", Republicans voted "nay” – R. Mills),
orchestrated an unremitting barrage of disparagement of Hoover's
shortcomings: a foretaste of what a later generation would call "the
politics of personal destruction." Millions of bewildered Americans
looked for scapegoats, and Hoover became the target.
It was not the Great Depression; it was the "Hoover
Depression." Shantytowns of the homeless were named Hoovervilles.
The insides of trouser pockets were called "Hoover handkerchiefs."
Newspapers were "Hoover blankets." Armadillos were "Hoover
hogs." The "Hoover cart" was the remains of the old tin lizzie
being pulled by a mule - you couldn't afford to buy a new car and you
couldn't afford to buy gas for the old one.” George H. Nash
Perhaps the “Hoover Depression” is really the Great
Federal Reserve Depression?
Back To The Future
U.S. bank deposits continue to rise - since December 2007, domestic
deposits have jumped from $1.1 trillion to $8.1 trillion.
The second QE program ended in June. The stock market and commodities
started tanking while bond yields make new lows - the dollar became stronger
as liquidity started to dry up.
Was the Fed fooled again?
Today’s Fed gave a lot of QE money to the banks on the
expectation they would lend the money out, that didn’t happen. The
banks kept the money to fill up their coffers and make their ledgers look
good. Three mistakes were made in this decision by the Fed – money
creation is instant and it’ll show up, digitally, in less than a
heartbeat exactly where you want it – no more midnight train rides for
bank presidents – kind of calls the need for 12 Federal reserve banks
into question doesn’t it? The money should not of
been created at this time, not until it was needed and it never was, neither
for loans nor bank runs. The second mistake the Fed made is they misjudged
consumers – thinking they would take out loans and continue spending.
The savings rate has gone from a negative number to a positive 5% and
consumer spending is down.
The third mistake? The massive amount of money given to the banks
should of gone into job creation.
Conclusion
The saying “It’s better to burn out than fade away”
seems to apply too our current situation, or perhaps “It’s
better to maybe burn out tomorrow than blow up today” would fit
better? Austerity isn’t going to work. The condition of our fiat
economies calls for a massive, properly placed, global infusion of newly
created money. To do anything else - the only other option is to purge the
system - is to invite disaster.
The International Labour Organization and
the Organization for Economic Co-operation Development recently reported the
world’s major economies remain 20 million jobs short of pre-crisis
levels and warned that number could double next year.
We need confidence restored, people need jobs and consumer debt has to
be paid down. There will be no economic recovery without a recovery in jobs
leading the way.
So throw another few trillion dollars and Euros onto the fiat fueled inflation
bonfire.
Inflation means commodities. To this author, commodities mean junior
resource companies, after all, they are the ones who
actually own the world’s future supply of commodities. And they are on
sale….
Are junior resource companies, and the
leverage they offer to inflation, on your radar screen?
If not, maybe they should be.
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and
visit Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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