Doug Casey Compares the 1930s and Today

Anyone who understands free market economics knows the current system based on Keynesian economics is heading for some sort of catastrophic economic depression. The two unknowns are “when” and “how” does it play out? Does it end in hyperinflationary “crack-up boom” or in the form of a 1930s-style deflationary implosion.

To try to get a handle on which direction the Inflation/Deflation scale is tipping at any one time, I put together my IDW, which measures broad based stock indexes, long-dated U.S. Treasuries, and key commodities like copper, oil, silver, gold, and the Rogers Raw Materials fund. 

We certainly had sort of a crack-up boom that ended in 2008-09. Since then massive amounts of money creation have, not surprisingly, failed to deliver any kind of economic escape velocity that would enable repayment of debt with cheaper dollars. In fact, debt has increasingly outstripped GDP growth. As you can see from my IDW, it is flirting with a breakout above both the five-year and three-year averages, suggesting a possible breakout to the upside despite rather gloomy global economic growth. Could this be a “lethal escape velocity,” one in which prices rise but incomes don’t, leading to a hyperinflationary depression?

Doug pointed out that “the economic generals” are still fighting the last war, that being the 1930s. But this time there are differences that point many markets in the opposite direction from the 1930s. Casey recently wrote an article titled, “Comparing the 1930s and Today,” and he makes a very strong case for a hyperinflationary depression as the most likely path toward economic destruction for those unprepared, because of severe important differences from the 1930s, such as the following:

  • Corporate Bankruptcy – In the 1930s, companies with commercial failure—companies not able to compete in the market—were expected to go bankrupt. Bankruptcies led to lower prices and a stronger dollar. In the current environment, as we saw in 2008-09, failed enterprises are encouraged to continue in business, leading to massive inefficiencies. Higher cost production and workers paid to produce such products are the outcome. Result? Inflationary!
  • Unemployment – In the 1930s there was little in the way of a safety blanket for unemployed people and so there was constant competition for jobs, leading to lower and lower labor costs, which in turn resulted in an ever-decreasing price for higher quality products. By contrast today, workers when unemployed have a long period of unemployment compensation from government and with various other welfare systems in place they do not feel the same urgency as the unemployed in the 1930s, who were not afraid to get their hands dirty to put food on the table rather than be on the government dole. Now, an ever-increasing number of state governments are passing higher minimum wage laws. Result? Inflation and greater unemployment!
  • Welfare – In the 1930s there was a very strong stigma attached to “living on the dole.” People were ashamed to get something for nothing. And so they continued to do whatever they had to do to feed their families. By contrast today, most Americans feel they are entitled to having whatever they need for survival and they expect it from the government; or the elected officials who dare to speak economic truth are tossed out of office. As Doug said in his piece, this time there won’t be any breadlines because with food stamps from the government, the unemployed will be (they are now) in line at the checkout stand like gainfully employed folks.
  • Regulations – During the 1930s, at the start of the depression there were not many regulations in the S., but President Roosevelt started implementing many that prolonged the depression. Now there are many, many more regulations than during the 1930s that add to the cost of production. There is some hope that President Trump will massively reduce regulations, but talk is easy. Getting regulations in place that result in massive numbers of unemployed government employees and run counter to Washington lobbyists may be nearly impossible, even for Trump. But if it isn’t done quickly, the massive regulations in place block any chances of non inflationary growth. Result of regulation? Inflation.
  • Taxes – During the 1930s the average income was $2,335 in “real” dollars, as opposed to the fake currency we have to use now. With an income of $2,335, Americans had to pay 1/10 of 1% or $2.335. By the end of the Great Depression, Roosevelt was able to raise the tax rate on average Americans to 16.56%, which along with many other regulations helped prolong the decade-long event. But compared to our tax rate today, our grandparents paid “peanuts.” Today, if you live in a high-tax state, like New York where I live, you are paying about 50% of your income to state, local, and federal. Plus you pay any number of other sales taxes and taxes for all manner of services, like cable and Internet. The result of higher taxes? At first blush you may think it’s deflationary, and it would be if government spent exactly what it takes in. But in fact when the government impoverishes its citizens and at the same time provides welfare, the end result is inflationary. Not only does government run deficits to pay for welfare, but also, high taxes restrict production by reducing labor availability. Of course, corporate taxes have the same effect by reducing jobs and thus supply of goods and services, therefore sending prices higher. 

The Bottom Line 

During the 1930s, prices dropped dramatically because banks went bust and the money supply was decreased dramatically. In addition, as noted above, the supply of labor willing to work for whatever they could get to feed their families increased supply, thus having the impact of lowering prices. Also, the dollar was interchangeable into gold at the start of the Great Depression, until 1933 when Roosevelt confiscated the yellow metal from American citizens, after which time he re-priced it from $20.67 to $35. That effectively increased the U.S. money supply but the global monetary system was still based on gold. As such, money expansion was limited. All of these factors provided the environment for a massive deflationary depression.

By contrast, in 2017 there is no restriction on the supply of money, as there is no gold standard in place to hold it back. And as we noted, various government programs have discouraged labor from seeking jobs. In fact, the political movement is to demand higher pay for less work and that is inflationary. The die seems to be cast for a massive run up in all manner of prices, which, by the way, will only be exacerbated to the extent Trump’s protectionist plans are passed into law.

During the 1930s, gold mining companies did extremely well in the U.S. and Canada even as the Dow was losing 90% of its value. The main thing we will want to keep our eyes on is “real” interest rates, which impact the price of gold and the “real” price of gold as measured against other commodities. As long as the real price of gold remains strong and as long as government doesn’t force gold mining companies to pay such high wages that drive them out of business, gold mining should perform very well. But of course, as with McDonald’s hamburgers, Bernie Sanders’s influence to get minimum wages increased is causing the hamburger chain to start using machines rather than people to take your money and give you your Big Mac. And I’m thinking already about the mechanization being planned by Dr. Quinton Hennigh to mine the underground portion of the Beaton’s Creek gold mineralization. That technology is already being used to mine a copper deposit of similar dimensions in Poland. Already technology is leading to a lot of unemployment but given socialistic mentality of virtually all nations, the unemployed enabled to continue consuming as if they were employed. And those payments too are paid for from printing press money. Indeed, the next major problem may well be hyperinflation. And to the extent interest rates rise and the yield curve steepens, bank lending could start to grow very rapidly, adding even more gasoline on to the inflationary fires. The Fed arrogantly thinks it can always control inflation. I’m not a believer. These are no doubt topics we will be talking to you about for some time to come. Meanwhile, I would encourage you to read Doug’s entire article, which you can access via a link on the home page.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.