NYT - Paul Krugman - 1928 and the Market Crash

[SouthAmerica]

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Yesterday, May 23, 2005, when I was reading Paul Krugman’s column in the New York Times: “America Wants Security,” I did realize that Paul Krugman, an economist that I respect and believe that he will receive the Economic Nobel Prize in the future, was endorsing on his column what I have been saying on my articles about the US economy in the last two years.

I have been writing about this subject for a long time, and this is the first time that I saw any economist writing about this subject in recent history, and it feels good to receive the endorsement, regarding what you have been saying, from an outstanding economist such as Mr. Paul Krugman. (Mr. Krugman said on his column that we can compare many of the events today with 1928, right before the beginning of the Great Depression.)

I believe that we are living today in a period right prior to the beginning of the next great worldwide depression, and I have posted a number of treads regarding that subject. When Americans elected George W. Bush in November of 2004, that event has sealed their faith – and as a result they are going to experience what feels like to live through a nasty economic depression.

During most of 2003, and 2004 I have been saying the following:

Around the time of the stock market crash of 1929, people needed very little money to buy stock on margin. Basically they borrowed most of the money to buy their stock. But today people need a lot more up front money to be able to buy stock on margin, and there is less exposure to risk than in the 1920’s.

One of the triggers of the stock market collapse of 1929 was margin call on stock purchased on credit, since in the 1920’s a lot of people were buying their stocks on credit with a small amount of upfront cash. Margin calls was a major problem during the stock market crash of 1929.

Today, the equivalent to margin calls in 1929 is "Derivatives." The Derivatives global market today, is estimated to be over 125 trillion US dollars.

This time around, "Derivatives" will be the trigger to a massive stock market collapse like the one that we had in 1929.

I have no doubt that the derivatives market today will become the trigger of a collapse in the stock market similar to what margin calls represented in the stock market collapse of the 1929.

Today, we are away overdue for a new stock market crash, and worldwide depression anyway. When we will have: The Big Meltdown?

The coming worldwide depression will be triggered by the collapse of the derivatives market, and we are closer than most people realized of a “Derivatives Market Tsunami.”

The first article that I wrote describing in detail the coming derivatives problem was published in November 2002 – “ The Big American Lie” – and I also said: “how to live in a world of illusion.”

On February 4, 2005 I did send the following article for publication in various newspapers and magazines from around the world. Eventually these various publications published the article on its original form, or they had to edit it to fit the space available on their specific publication. Here is a copy of the article on its original form:

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[SouthAmerica]

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I had to split article into 2 parts because of posting limitations.



Part - 1


February 4, 2005


“The United States and the First Great Depression of the New Millennium.”
By: RCA


Here we are one week away from the 2008 United States presidential election. What a ride Americans, and the rest of the world had in the second term of the Bush administration. Some people did not believe it was possible for George W. Bush to do a worse job on his second term, than he did in his first.

A number of events came together to form the perfect storm that pushed the globe into a worldwide depression. The current worldwide depression is getting worse by the day, and it is having a more profound impact than the depression of the 1930’s. Today, some mainstream economists have identified George W. Bush and his administration as the culprits responsible for setting the spark that caused the meltdown of the global economy.

The entire fiasco started in November of 2000, with the conclusion of the American presidential election, when the US Supreme Court selected George W. Bush as the new president of the United States. If there were a similar election in any country in Asia, South America, or in Africa, I am sure that the United States mainstream media would characterize the event as a “coup d'état.”


A Major Turning Point in US History.

The terrorist attack of September 11, 2001, had a profound impact in the United States. The attack did not destroy only some property, and over 3,000 human lives; it also destroyed the soul of the American system.

The Constitution of the United States with its Bill of Rights were the soul of the American system, and had served well the needs of the American people for over 220 years. But during the years of the Bush administration, I was sorry to see the American people allowing the destruction of such a great document in the name of fighting terrorism.

Benjamin Franklin, one of the founding fathers of the US nation, once said: "Those who would give up essential liberty, to purchase a little temporary safety, deserve neither liberty nor safety." But over time Americans forgot the teachings of this great American, and since September 11, 2001 the US government took many measures that destroyed the American soul—including the adoption of the US Patriot Act, and the formation of Homeland Security with its special powers.


Osama bin Laden - A New Living Legend.

Before September 11, 2001, most people had never heard of Osama bin Laden and Al-Qaeda. After 9/11 he became a legend, and a hero to the Arab world in a similar way that the revolutionary Ernesto Che Guevara (1928-1967) became a legend in the Americas.

Osama bin Laden had fought against the Russians, and he had helped the Afghan people destroy, and discredit the Soviet war machine – in the Afghanistan War – soon after that the Soviet Empire collapsed. Many people also admired him for his daring planning and spectacular implementation of the September 11, 2001 attacks inside the United States. (That kind of event is supposed to happen only in Hollywood movies.)


When Actual Performance – Doesn’t Count

In November of 2004, the world was shocked to find out that the American people had re-elect George W. Bush. Among other things George W. Bush and his close circle of advisers had placed the United States on a very delicate international position when the United States attacked Iraq. The reasons given to the international community of why the United States had to go to war against Iraq, turned out to be completely wrong. After looking for two years, the Americans never found the “Weapons of Mass Destruction” that they claimed Saddam Hussein had at the time of the invasion in March of 2003.

Remember the American people (59 million Americans, about 27 percent of the total eligible voters in the US) voted to keep George W. Bush in power despite his terrible performance during his first term. They also gave him complete control of the American government with a Republican majority in the House of Representatives and in the Senate. That was history repeating itself, and it was the 1920’s all over again.

George W. Bush followed the footsteps of two other prior Republican presidents - Ronald Reagan, and of his father George H. W. Bush. The Ronald Reagan years established a new mindset for the Republican Party: the level of “Debt Doesn’t Matter,” and they thought the US government could get away with a reckless policy of large deficit spending with no end in sight.

During the years of the Bush administration - from 2001 to 2008 – the United States finances were completely out of control, and the United States had been borrowing around 89 percent of the savings of the entire world - year after year.

For anyone to understand what the US government was really doing in terms of its finances during the Bush administration, you had to study what happened in similar cases to corporations such as: Enron, WorldCom, and Global Crossing – massive administrative mismanagement, and deception.


The Money Pit.

To put the American fiasco in perspective, we have to put the spotlight on the United States government’s cumulative national debt. The cumulative US national debts were only $ 930 billion dollars as of December 31, 1980 - right before Ronald Reagan became president of the United States. Since then, the US national debt has increased to an estimated $ 13 trillion dollars as of September 30, 2008 – that figure does not include all the other US government unfunded outstanding liabilities conservatively estimated at US$ 70 trillion dollars.

Here is the detail of the additions to the US national debt by president:

Ronald Reagan (8 years in office) added to US debt $ 1.7 trillion dollars.
George Bush Senior (4 years in office) added to US debt $ 1.5 trillion dollars.
Bill Clinton (8 years in office) added to US debt $ 1.6 trillion dollars.
George Bush Junior (first term, 4 years in office) added to US debt $ 1.8 trillion dollars.
George Bush Junior (second term, 4 years in office) added to US debt $ 5 trillion dollars.

Since December 31, 1980 the Republican presidents added $ 10 trillion dollars to the cumulative US national debt, and the Democratic president added $ 1.6 trillion dollars.
The Republican administrations added 87 percent of the new US national debt, and the Democratic administration added only 13 percent of the new debt.

All Republican presidents starting with Ronald Reagan have had a complete disregard for sound long-term economic policy, and how their current policies would affect future generations. All these Republican presidents had one thing in common: they did run a very large credit card bill during their administrations, and they were leaving all these debt to future American generations to pay. Since December 31, 1980 the United States had only one fiscally responsible president - former president Bill Clinton - a democrat.

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[SouthAmerica]

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Continuation of article dated February 4, 2005


Part - 2


History Repeats Itself.

During George W. Bush’s presidential campaign for the 2004 election no one in the US mainstream media brought to the attention of the American people that: “the United States had a Republican president, and Republicans had a majority in the House of Representatives, and in the Senate during the years 1921 to 1930. And we all know the result of the Republican policies during these ten years - The Great Depression of the 1930’s.”

Today, looking back from our point of view in October 2008, we should not be surprised that Americans had learned nothing from their prior history. The Republicans policies and complete control of the US government from 2001 to 2008 resulted in a major meltdown of the US economy - and the first “Great Depression” of the new Millennium.

The Iraq war was completely out of control by December of 2004, and it was clear to the rest of the world that the Iraq war had become an all out civil war. The American army had become irrelevant, and served only as target practice for the insurgency in the Iraqi civil war – but the American casualties, and the costs of the war were pilling up sky high.


Death of the Last Superpower

The idea of the Soviet Union being a superpower died in Afghanistan in the late 1980’s. The idea that the USA was the lone superpower in the world died a fast death in Iraq in the years 2003 to 2006. By the end of 2004, it was clear to most people around the world that Iraq had immersed into a nasty civil war - and the Americans had lost another war - just as they had lost the Vietnam War in the 1970’s.

The American population was very angry with George W. Bush, and members of congress had started impeachment proceedings to get him, and his vice president Dick Cheney out of office. These men had caused massive damage to American prestige and credibility all around the world, by starting the Iraq war against United Nations approval, and also against accepted principles of international law. What was the most hurtful thing for the American people was that the Iraqi fiasco had been broadcasted live to the rest of the world, and signaled the end of the line for the last superpower.


The First Great Depression of the New Millennium.

During the second term of George W. Bush’s presidency, finally all the American mismanagement and mistakes did catch up with the American economy, and a number of trends merged into a perfect storm causing the final meltdown of the US economy.

The American economy went through a downward spiraling out of control implosion. Massive US government budget and trade deficits forced the Federal Reserve Bank to raise interest rates to try to stop the steep decline of the US dollar in world markets against other currencies.

Soon after September 11, 2001 the US dollar started sinking in world markets like the Titanic. The Economist had a Special Report regarding the US dollar on its December 2004 issue – “The disappearing dollar.” The article said: the decline of the US dollar in the last 3 years makes the United States responsible for the biggest international monetary default in the history of the world. The US dollar had declined by 67 percent versus the euro from US$ 0.82 in November 2001 to US$ 1.37 in December 2004.

The world lost its confidence in the US economy because they realized that the US economy was over leveraged, and would not have the necessary cash flow to pay its bills in the future. The US economy was outsourcing its good paying jobs by the millions to other countries - in the last four years the US economy had exported over 10 million jobs. A flood of US corporations started reincorporating in tax havens to avoid paying US corporate taxes.

To compound the US economic problems, US corporations started repudiating the benefit payments of their pension and health plans. Everybody wanted to pass their pension responsibility to the US government – the trend started with the steel industry, then the airline industry, the major auto manufacturers, and after that, every company with a substantial pension plan. The US government had no choice other than to swallow approximately US$ 600 billion in new pension liabilities.

After a number of new terrorist attacks inside the United States, the market dynamic of all these events combined to cause a major institutional collapse in the derivatives market, and that started a domino effect in the entire financial system causing a massive meltdown.

Panic among the major holders of US dollar also contributed to the stampede like we had never seen before - and at the end, Chernobyl looked like nothing when compared with the final meltdown of the US dollar, and US economy during the summer of 2006.

Copyright © 2005 All rights reserved.
By: RCA
Author / Economist


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[tomcole]

Just more anti-Bush bashing by left wingers and the press.

 

[snooptrader]

Quote from tomcole:

Just more anti-Bush bashing by left wingers and the press.

LOL - from a guy who says this on another thread:

"Getting a mistress is a fun way to spend time and money too."

Spoken like a true conservative, tomcole.

PS - now you can go to the standard fallback and start bashing Clinton!!!

 

[murray t turtle]

South America;
Thats mighty convenient blaming one statesman/nation;
personal responsibility may be a helpful area for you to study,
especially since crash of 29 had good opportunities for polar bears.

And 1930's had some great uptrends;
however those time periods were only good for those able to admit they were wrong/cut loss.

 

[jem]

The problem for this article is that its thesis may be incorrect.

The crash of the stock market of 1929 may not have been the cause of the depression.

Therefore a derivitatives crater might not be the cause of a worldwide depression.

One major difference between now and then -- inventory control.

Just in Time is such a large difference between now and then that I question any comparison that does not addres the difference.

 

[drsteph]

More economic science fiction.

More likely than a global economic implosion (which, by the way, the US & China would probably weather just fine but would cause massive disruption in the EC & Japan) is going to be a long period of stagnating yields in equities, bonds and cash markets.

Instead of a dramatic flame-out, the application of derivatives and the resultant liquidity it has created will serve to temper moves. What is easier? Selling $500 USD at 3pm in the NY market or moving $1bln USD in options?

The graying of the world will cause a greying of the markets. Slow, steady, boring returns on the order of 3-4% will be the norm.

Maybe we should consider the next 15 years the end of the era of volatility?

 

[SouthAmerica]

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I have been a columnist for various newspapers and magazines for many years, and my articles are published on a regular basis in the United States, Brazil, and the major Arab newspaper in the Middle East.

In the last six years I wrote, and published at least ten articles about: why Brazil should adopt the euro as its new currency.

In September 2002, various newspapers and magazine published one of mine articles – “Countdown to Armageddon” (The editor of the magazine changed the original title of the article to Countdown to Armageddon): The article was 14-pages long, but I will quote the following from that article:


…The Soviet Union Collapse

In the summer of 1986 I was present at a dinner party in my mother's house, and she had about twelve guests at that diner. Among their friends, who were present that evening, there were two couples who came to the United States from Rumania, and they had been living in the U.S. since the early 1970's.

Sometime during the evening the conversation turned to politics and economics. Then I told the people at the diner table that from all the information I had been reading about the Soviet Union for a while, I had come to the conclusion that there was a very good probability that the Soviet Union was in the process of going broke.

Remember this was in 1986, Ronald Reagan was telling everyone about the potential dangers and threats from the Soviet Evil Empire. Our friend from Rumania told me in an emphatic voice "Fifty years from now the Soviets still will be one of the major powers in the world. I lived under Soviet rule, and I know how powerful they are."

I never forgot that evening because I became the joke of that dinner. I was the only person in the world to believe that the Soviet Union was going bankrupt. That evening, everyone had a good laugh at my expense. They thought I was out of my mind—the Soviet Union going broke, what a silly idea. Where does this guy get these crazy ideas?

When the Soviet Union collapsed in 1989-1990 nobody was laughing at me any longer. About a month ago I went to a party to commemorate the 50th wedding anniversary of that Rumanian friend. I reminded him of that party in 1986. He told me that he still can't believe to this day what happened to the Soviet Union. The Soviets had made such a big impression on him that after all these years, he still is in shock from the Soviet Union's demise.


The Crash of 2000.

I am on record. On September 27, 1999, I wrote the following information:

"The Dow Jones Index increased from 72 in 1920 to 360 in October 1929 when the stock market crashed. Then four years later the Dow Jones had declined to 60; a decline of 80 percent from its high point in October 1929.

The Japanese market index increased from 4,350 in December 1975 to 38,916 in December 1989 when the Japanese bubble burst. Then by 1998 the Nikkei sunk as low as 13,000. From 1990 to 1998 the Japanese stock market declined by more than 70 percent.

The Dow Jones index increased from 780 in 1982 to the current 11,000 level in September 1999. The Dow Jones has increased by 14 times in 17 years. Not Bad!!!

But when we compare this increase with the 12 percent average increase per year for the Dow Jones over the long term, then we know that we are close to the exploding point of the bubble.

During the summer of 1929, many fools thought the increase of the Dow would go up forever. We will have a reality check in the near future. If you want further evidence for the coming crash, just check the historical average market P/E ratios with the average market P/E ratios of the Japanese stock market before the crash in December 1989, and the current American market average P/E ratio.

Market crashes give smart people the opportunity to find many bargains. It is just a matter of having cash on hand to pick up the bargains."

I received various emails at that time, calling me a doom n' gloom monger and saying that I was sadly deluded. I wonder how much money these people (who did not believe my stock market predictions) lost in the market since September 27, 1999. The Dow Jones started heading South in January 2000 and the NASDAQ started its dive in March 2000. Many trillions of dollars have gone up in smoke in the American stock market since January 2000.

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[SteveD]

I certainly don't mean to attack you but:

The end of the US has been predicted by first the work ethic of the strong German post WWII, now look at them.. In a survival recession and going down.

Next the Japanese were going to buy up the US real estate market!! Oh my God. They left the US and have never really recovered after more than 20 years.

As we write this the EU is facing a possible falling apart of the entire structure.

Dooms day articles from Paul Krugeman and his other socialist rantings are just a way for a small minded little weasel to be noticed. He would prefer a good Democrat like Jimmy Carter that gave us a 21% prime interest rate, LOL.

Ronald Reagan was well aware of the vulnerability of Russia. That was one reason for the big military spending spree of that
time.

People from other countries simply do not understand Americans and the underlying strength of our economy.

One of our strongest is that we are the ultimate consumer of everything produced around the world.

Think for a minute if the US BANNED the sale of Toyota"s products in the US!! Think if the Federal Reserve system refused to accept Frence bonds as payment or collertal!! Or didn't allow Air France to land in any US controlled airport??

A lot of the structure of the economy pre 1929 have been changed by FDIC, FNMA, and other regulations that prevent some of the practices of that era.

And, most importantly, we are the only country (save UK) where countries, companies and individuals know they can invest their funds and know they will get them back when they ask. This has been true for over 200 years!!

No other country has this safety factor. The reason the world buys our financial paper is for risk free investing. They know they will get the principal back when needed!!

SteveD