The Coming Of The Second Great Depression

Here’s a quote from an insightful interview with Warren Brussee, author of The Second Great Depression. Read the entire interview when you get a chance.

If people had been saving, some cushion could have been found through reducing the savings amount. But people have had a negative savings rate for the last 24 months. People have been living on the edge, and there is no cushion. The economy has been carried by the money that housing put into the economy. With that source gone, and with people now beginning to have to repay their loans, we are going to be driven into a deep recession, followed by a probable depression.

Chicken Smith View:

Another brief re-cap of some of the major events that will prompt the next depression:

1. 2000 – 2003 In an effort to avoid a recession, due to several quarters of negative GDP, the Fed lowers the Federal Funds Rates from 6.5% in May 2000 down to 1% in June 2003.

2. 2001 – 2005 Housing market soars as demand for homes exceeds supply. New homes are built. A huge sub-prime mortgage sub-sector of consumers purchase homes that they otherwise wouldn’t qualify for by taking out adjustable rate mortgages (ARMs).

3. 2002 – 2006 Consumers cash out on their rising property values by taking out equity mortgages to pay for travel and non-durable goods.

4. 2003 – 2005 A huge surge in the economy results from all the spending prompted by the cash out. Excessive spending causes Americans to deplete their savings and assume more debt. Inflation begins.

5. 2004 – 2005 In an effort to reduce the inflationary effects of the economic boom caused by the housing market and the increase in consumer spending, the Fed begins to raise the Federal Funds Rate. The rate goes from 1% in 2004 up to 5.25% in June 2005.

6. 2006 – 2007 The housing market reaches its peak and begins its downward path as interest rates rise and most demand has been met. Home builders all but stop new construction. Housing related businesses begin to see unemployment due to lower sales. ARMs begin to reset and homeowners experience sticker shock as their mortgages rise by as much as 50%.

7. 2007 – 2010 The American economy goes into a depression due to the domino effect that the housing market has on the rest of the economy.

I believe the Fed interest rate adjustments were just a band-aid on what would have been normal cycle recession and we simply delayed it and made it worse. We are now facing a major depression precipitated by the fact that we no longer have any savings and now-a-days every Tom, Dick and Harry have money in the stock market. It’s no longer something the informed investor does, rather something anyone with an internet connection can participate in.

The Dow Jones Industrial Average recently rose to 13,000 in seven weeks, when it took more than seven years to reach 12,000. Capital spending is down and companies are buying up their own stock. Consumer spending is only temporarily up right now, as that will take a big hit once everyone wakes up. The price of consumer goods as well as food staples such as corn and milk are going up, that in turn, raises the price of all sorts of products that come from those prodcuts and food prices usually don’t come back down.

The best advice I can offer is to save your money, but don’t keep it in a volatile place (ie, not the stock market), have some tangible assets (ie, a home that’s already paid for, maybe gold, maybe a bio-fuel car, or solar panels), and have a plan to ride out a downturn in the economy (ie, a backyard vegetable garden, maybe some canned goods).

If history is any indicator, things should get better. I say should because there are other factors that will come into play here that have not been part of previous recessions and the Great Depression, factors such as the devaluation of the dollar, foreign ownership of US companies and US debt, and a general disdain for all things American in some parts of the world. So even if our dollar is cheap, world-wide interest in some of our products has been diminishing, so there may not be an increase in our exports due to our devalued dollar.

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