The house of cards

Screen Shot 2016 12 05 at 4 08 18 PMWith unemployment below half of what it was at the peak of the great recession, and the American economy growing slowly but steadily since the Great Recession, most people feel that a repeat of the Great Depression of the 1930’s has been avoided.

The Great Depression had some key elements that were in danger of happening again in the Great Recession. The stock market crash of October 1929 and that October 2008 had similar effects on the American economy. Stage two of the great depression was the collapse of the banks, and the Federal Reserve’s drastic Quantitative Easing (QE) strategy averted a bank crash in 2009/10.

The collapse of the banks in 1933 contributed directly to the third stage, a massive loss of purchasing power, as consumers lost their savings and their jobs.

But the slow recovery from the Great Recession is in part caused by businesses that have cut back on investment. The reason: they’re scared that the crises has not been averted. Why?

The value of businesses on the World’s stock exchanges are the an estimate of their future earnings calculated as a lump sum today. With all the variables, it’s a complex calculation. At the heart of the calculation is the expected return rate (discount rate), and that is key figure that QE has changed downwards. That has increased the value of stocks worldwide.

Using a simple example of a $100 annuity forever: at a 10% return rate is worth $1,000. At 5% it’s worth $2,000.

The world’s stock market values are at historical highs relative to earnings, confirming that the discount rate has been lowered. But when the discount rate increases again, those values will drop. So care needs to be taken in dealing with factors that will affect the return rate.

The people with their fingers on that button are the decision makers at the Federal Reserve.

That’s if they’re still there. Donald Trump has set his sights on the Federal Reserve.

The fourth step of the Great Depression was the Smoot-Hawley Tariff of 1930. That act’s tariffs decimated international trade, and precipitated reciprocal barriers from America’s trading partners, causing further damage to the economy. Trump intends repeating that mistake.

And the fifth factor, the devastating drought of 1930, is the last step that Trump is trying to repeat, albeit with limited control. His refusal to support the Paris accord is a credible attempt to affect weather change for the worse.

It was the depression, not America, that was great in the 1930. Trump seems determined to repeat the mistakes and tip the house of cards.

And the people who will suffer most, as in the Great Depression, will be the poor.

More at:
Did the Smoot-Hawley Tariff Cause the Great Depression?
Fed-bashing Trump has chance to remake central bank
Top Five Causes of the Great Depression
Trump transition memo: Trade reform begins Day 1
Unemployment Rates by President, 1948-2016