Key Indicators of a New Depression
Neeraj Chaudhary
Euro Pacific Capital, Inc.
Posted Jun 4, 2010
With the mainstream media focusing on
the country's leveling unemployment rate, improving retail sales,
and nascent housing recovery, one might think that the US government
has successfully navigated the economy through recession and
growth has returned. But I will argue that a look under the proverbial
hood reveals a very different picture. I believe the data shows
that the US economy is badly damaged, and a modern-day depression
has begun. In fact, just as World War I was originally called
The Great War (and was retroactively renamed after World War
II), Peter Schiff has said that one day the world will refer
to the 1929-41 era as Great Depression I, and the current period
as Great Depression II.
For starters, look at unemployment. During Great Depression I,
unemployment broke 25%. If government statistics are taken at
face value, the current unemployment rate is 9.9%, but a closer
look reveals that the broadest measure of unemployment is currently
at 20% - and rising. So, today's numbers are in the same ballpark
as the '30s even though the federal government is using unprecedented
measures to keep the economy afloat. Remember, in Great Depression
I, FDR never ran a deficit nearly as large as President Obama's.
Moreover, the Federal Reserve of the 1930s still had a gold standard
with which to contend, while today's Fed has increased the monetary
base with impunity. Yet even with all that intervention, unemployment
figures still indicate that we have entered depression territory.
What is demoralizing to an unemployed person is not simply being
let go, it is being unable to find a new job for an extended
period of time. And this is where Great Depression II really
rears its ugly head. According to the US federal government's
own data, the median duration of unemployment is now over five
months - and rising. This is the highest it's been since the
BLS started compiling this statistic in 1965. As workers start
to go this long without jobs, they eat into their savings. Eventually
- and especially in a country with a savings rate as low as ours
and debt as high as ours - they run out of cushion and hit the
street. Formerly middle-class people have to make decisions never
thought possible: do I eat in a shelter or go hungry in my home?
It's no surprise, then, that about 40 million people - or one
out of every eight Americans - are receiving food stamps in Great
Depression II. During the height of Great Depression I, the rate
was just one out of thirty-five Americans. Even with the stimulus
programs, Great Depression II is actually worse on this measure
than Great Depression I - and the USDA estimates that the program
could grow by another 50%. Soon, out of ten people you know,
one may depend on federal assistance for daily survival.
Despite tax credits that have created a rush of purchases this
spring, housing is in just as bad shape. During Great Depression
I, home prices dropped some 15% from their pre-depression peak
(achieved in 1925). In Great Depression II, housing is down at
least 30% from the pre-depression peak (achieved in 2005), with
some markets down more than 50%.
So, many of the people expected to keep making mortgage payments
as they eat tuna fish to stay alive will be paying double their
home's resale value. This is a tremendous incentive to walk away,
with disastrous consequences for the country's social fabric
in these trying times. Empty homes breed crime and vandalism,
encouraging more to flee in a negative feedback loop. Moreover,
the many 'walkaways' may create a class of Americans with ruined
credit - right when many employers have started checking credit
scores before hiring.
Even more worrisome, the present drop in home prices is against
a backdrop of price inflation. In Great Depression I, our grandparents
may have lost value in their home, but everyday goods (milk,
diapers, automobiles, etc.) got cheaper at the same time. That
made their savings 'cushion' deeper when they needed it most.
Today, as home equity (now our main store of savings) declines,
prices for consumer goods are rising. It's a tight squeeze indeed.
From jobs to food to the roofs over our heads, the current period
of economic turmoil is at least as bad as the First Great Depression,
whether or not the financial media wishes to acknowledge it.
The main difference is that unlike in the '30s, the US dollar
is now the world's fiat reserve currency, so we are able to push
our problems overseas for awhile. The plight of the rural Chinese
is really our plight - we are living lavishly on the wealth they
create. Were they to quit this dastardly arrangement, the full
effects of Great Depression II would be felt in America.
By contrast, in Great Depression I, the US was on the gold standard
like everyone else, which forced us to live within our means.
This, in turn, made it easier to recognize that the economy was
in decline and changes had to be made.
Unfortunately, because of the responses of the Administration
and the Federal Reserve, which I believe to be deeply misguided,
I remain concerned that Great Depression II could develop into
something far more devastating than its predecessor, something
that other countries in the world have experienced but was thought
impossible in the United States: a hyperinflationary depression.
As bad as the current downturn has been, inflation would make
it immeasurably worse. It would require an honest accounting
of the problems we face today to avert the disaster we see coming
tomorrow.
###
Jun 3, 2010
Neeraj Chaudhary
Investment
Consultant
Euro Pacific Capital, Inc.
website: www.europac.net
email: nchaudhary@europac.net
Neeraj Chaudhary is an Investment Consultant with Euro Pacific Capital. Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
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