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February 23rd, 2009
Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 22nd February, 2009.
Over the past two months we've explained why we think a great depression is on the cards. We are not 'doom-and-gloomers' who relish the prospect of an economic debacle; in fact, we very much hope that our depression prediction proves to be way off the mark. Our analysis of the economic situation is simply heading where logic takes it.
This is a case where we would like to be proven wrong and are diligently looking for reasons why we could be wrong. Unfortunately, at this stage we haven't come across a good counter-argument. The consensus seems to be that things won't get anywhere near as bad over the next few years as they were during the 1930s because, well, because they just can't. Our retort is that the economic situation is far more precarious today than it was during the months following the 1929 stock market crash, so why is it so hard to believe that another "great depression" lies in store? To support our view we cite the following:
So, what are we missing? Why don't the above points suggest that another great depression is a high-probability outcome?
We suspect that those who believe a great depression to be almost out of the question will attempt to substantiate their optimistic view by noting that according to the official GDP number the US economy only shrank by 1% (around 4% annualised) during the final quarter of last year. Our first reaction to such an argument is that given the plunges in house prices, auto sales, employment and the PMI (Purchasing Management Index), as well as the virtual collapse of the banking industry, you would have to be very gullible to believe that the US economy only shrank by 1% last quarter. In any case, if we are currently at the equivalent of Q1-1930 then there should currently be MINIMAL evidence of depression in the official statistics. Note, for instance, that the US economy appeared to be doing so well during the first few months of 1930 that President Hoover declared the downturn to be over in April of that year. If anything, the surprise over the past couple of months has been the almost total ABSENCE of economic recovery signs. Our view has been that there would be an economic 'false dawn' during the first half of this year followed by a resumption of the deterioration, so the relentless weakness is a little disconcerting. It is also worth noting that GDP numbers will tend to understate changes in the overall economy. The reason, as discussed in previous commentaries, is that despite its name the GDP calculation yields an estimate of NET output, not gross output. Specifically, it fails to count the intermediate stages of production and thus weights consumption spending -- the most stable part of the economy -- at more than double its true weighting.
We suspect that those who believe a great depression to be a very remote possibility will also point to the inflationary policies of central banks, in which case they should explain exactly how counterfeiting money could make an economy stronger. In a recent article entitled "Printing Like Mad", Frank Shostak explains that creating money out of nothing can only make things worse. Where is the logical flaw in Shostak's argument?
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Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.