Great Depression, Ominous Political Headwinds and the S&P 500 22 comments
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Contrary to what numerous Middle East analysts are concluding, the crisis in the Gulf economies is not all about oil and gas. “Hundred of trading companies domiciled in Dubai, Abu Dhabi and Muscat are in danger of closing down since the legal and semi-legal trade with Iran has come to a standstill,” the manager of a Gulf-based consumer-goods exporter told a conference of investors in the emirate of Sharjah last weekend. “Demand for food, utility and luxury items in Iran has plummeted by 80% in 2008, and many products have simply been banned by officials manning Iranian ports.”
The global recession is buffeting a range of political headwinds, which will translate into protectionism, and anti-free-market legislation and subsidies, in the months ahead. But, when planning stimulus and rescue packages, are regulators, central bankers and Washington lawmakers incorporating the lessons of the early-1930s into their calculations? Scholars, led by Fed Chairman Ben Bernanke, are drawing on the lessons of the Great Depression to make their case for aggressive monetary and economic intervention. But have they accounted for the fact that the collapse of asset valuations and debt-related agreements may have caused the Second World War in the first place?
Without the Great Depression, it is difficult to visualize the sharp rise in the popularity of the Nazi Party. In May 1928, the Nazis held a mere 12 seats (2.5%) in the Reichstag; by March 1933, shortly before Adolf Hitler tore up the elite Weimar Constitution, that number had risen to 288, or 44% of the German parliament. The German Left, which controlled 41% of the Reichstag in September 1930, was totally wiped up by 1934 as industrial workers and unemployed Germans were convinced by the economic policies of the Nazi Party in ever-increasing numbers.
Arguably, the global map today is different, and a third world war is not on the cards by any means. But it is important to grasp the fact that the shape of the global economy in the years following 1929 fundamentally altered the process of capital accumulation (into a version of state capitalism) in Germany, a process which culminated in the frontal assault on Jewish properties on the night of November 9, 1938 (Kristallnacht, or the Night of Broken Glass).
It is the potential changes in the treatment of domestic and foreign capital in the developing world which will exert a powerful impact on equity markets (DIA, QQQQ, SPY) through 2010. Legislation and other measures cementing such changes will inevitably result in periodic market sell-offs, since certain guiding premises driving the $8 trillion-plus government intervention will stand substantively damaged.
Besides Iran, there are other highlight examples which traders need to post on their radar screens. Worsening economic conditions in Latin America, which are resulting in the expansion of socialist concepts, are already a real threat to American assets in Venezuela, Bolivia, Nicaragua and Ecuador. Pakistan’s failure to improve the plight of its citizens (with respect to food prices, health care and civic services) threatens the entire region (particularly India) with more disruptive terrorism, even near-war conditions at some point this year. And, as domestic economies deteriorate, we will witness the further consolidation of state capitalism in Russia and China; what this consolidation means for western capital is still an open question.
This is not the forum to dwell on the political consequences of the dire economic outlook for 2009. What should concern us is the manner in which forthcoming political events in the emerging markets will affect (a) assets and earnings of those constituents of the S&P500 who are exposed internationally and (b) the viability of the Obama Stimulus Plan. Both factors must influence domestic equity prices.
Because, as far as monetary actions and financial rescues are concerned, there is one primary distinction between the Great Depression-era and today: the global economy is much more intertwined and much more complex now than it was in 1929. History is indeed repeating itself, but not in like manner. Students of the Great Depression need to be aware of that fact.
Disclosure: Author holds short positions in QQQQ and SPY
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This article has 22 comments:
Basic economics suggest that a disparity between standards of living cannot persist between interconnected societies that have similar capability and productivity. The standard of living disparity between the West and Asia was possible when their economies were disconnected, and there was disparity in their capabilities. With globalization and the shrinking disparity in capability, the standards of living must converge. How this paradox will be resolved, possibly within the next decade or two, is still unclear, and may well create political problems, not just economic ones.
On Jan 07 09:16 AM prudentinvestor wrote:
> Rakesh, I agree that the global economic order is shaky, and the
> connection between economics and politics creates unknowns.
>
> Basic economics suggest that a disparity between standards of living
> cannot persist between interconnected societies that have similar
> capability and productivity. The standard of living disparity between
> the West and Asia was possible when their economies were disconnected,
> and there was disparity in their capabilities. With globalization
> and the shrinking disparity in capability, the standards of living
> must converge. How this paradox will be resolved, possibly within
> the next decade or two, is still unclear, and may well create political
> problems, not just economic ones.
On Jan 07 09:21 AM Debt Junkie Scum wrote:
> I think Putin and Russia are the wild card for starting Wars. The
> man is a despot and will use any means to hold the masses. Ukraine
> could be his target, split the country in two. I think China will
> be the wild card for an economic collapse/depression. Those two going
> down together makes for a stronger Dollar.
History has lessons, for sure. For example: Western powers tend to lose land wars in central asia. Hyperinflation occurs when governments print too much money to finance themselves. Desperately poor people tend to make poor political decisions that worsen their plight. Free societies produce the best standard of living and economic growth.
However, if we overextend these basic lessons into claims that history will repeat, we error by attempting to shove all the world's complexity into an overly simplistic model. Economists mostly agree on what caused the great depression, so the fed won't likely make that mistake again, despite the similar initial situation (probably different mistakes, with different outcomes). Similarly, Barak Obama's administration will not be like Carter's, or LBJ's, or FDR's, or Lincoln's. We must be careful with the lessons of history, or else we end up believing in an inaccurrate view of the future, saying silly things, and always running around like chicken little (because historic disasters get more attention than historic successes).
I agree that 2009 will be punctuated with political instability, petty wars, commodities feuds (oil, gas, etc.), and country border tensions. Such things will all come from other countries. So whereas the market dislocations in 2008 came from the US the much worse political instabilities come from other countries. Will we blame them for that? No. Why, because they won't really care.
Don't lay all the problems at the US doorstep. It just is not right. This is a global crisis now caused by disparities in savings, productivity, wealth, and regulation (or lack of it). Sadly European banks are just as bad as US banks. Asian economies are worse than the US economies (they just are more used to 50% stock market declines than the US).
If the blame game begins between countries the recession unravels into the great D.
While it is clear that the Depression hastened the rise of the Nazi party, it is equally clear that it (or something much like it) was coming regardless -- Nazism was a result of atheistic Hegelian-Marxist philosophies taking hold, not of poor economic conditions, which merely served to increase its palatability. If you look around the world today, you will see those same Hegelian-Marxist philosophies have taken hold in many other places, as entailed by notions that the individual is there for the good of the state, rather than vice-versa. And if there is no God and no intrinsic, infinite value to each and every life, including those who are perhaps deemed "inferior" by way of genetics, disability, or age...then we are free to choose who is of benefit to society...or is just a cost that can be eliminated. Here in the U.S. we already do this -- we call it a "woman's freedom to choose". Not unexpectedly, there has been an economic cost -- over 35 million potential workers, taxpayers, and home buyers were not born as a result.
Wake up people.
Government has in the past used advertising successfully to educate the public.
Capatalism/Republics as a government model does right itself. America has gone through 3 major depressions all caused by government collusion with the banking system, all tied into excess leverage where officials that legislated into there own pockets.
The current operating political system that has also occured in the past as mentioned can be classified as Fascist/Fuedalist NOT capatalist.
Term limits should be considered by the citizenship for the House of Representatives. For that to happen business people will have to help educate the public as to why it is so important. Since we modeled much of our American government on the Romans, we should learn from there success when there empire was riddled with corruption. They established term limits for the Senate and extended there empire another 300 years. I know I am generalizing on that point. The ability to continue expansion was the other big factor, with 'energy' of there day being slaves through conquest. America has to and can solve it's own energy problems without fiscal slavery backed up by a mighty military. The will do to so is another matter.
On Jan 07 08:35 AM bosun.j wrote:
> What is evident is the American form of capitalism is bankrupt in
> every sense of the word. An abject failure.
UK has problems with bad mortgage paper because American Banksters and their hucksters sold them a massive load of bovine excrement.
On Jan 07 12:02 PM constructe wrote:
> Although the world blames the US for the economic recession, please
> be reminded that the mortgage meltdown was happening in the UK as
> well. Although the US demand and liquidity crisis has hit the globe,
> it is only because the US has given a disproportionate amount of
> growth to other countries and has been the liquidity provider to
> the world for ages. I hear no one thanking us for that.
>
> I agree that 2009 will be punctuated with political instability,
> petty wars, commodities feuds (oil, gas, etc.), and country border
> tensions. Such things will all come from other countries. So whereas
> the market dislocations in 2008 came from the US the much worse political
> instabilities come from other countries. Will we blame them for that?
> No. Why, because they won't really care.
>
> Don't lay all the problems at the US doorstep. It just is not right.
> This is a global crisis now caused by disparities in savings, productivity,
> wealth, and regulation (or lack of it). Sadly European banks are
> just as bad as US banks. Asian economies are worse than the US economies
> (they just are more used to 50% stock market declines than the US).
>
>
> If the blame game begins between countries the recession unravels
> into the great D.
The liquidity provider during the recent debt run up has been the Chinese. They have been taking American money and lending it back to America at what was $2 BILLION a DAY!!!!
Yet more flag waving American exceptionalism!!
On Jan 07 12:02 PM constructe wrote:
the US has given a disproportionate amount of
> growth to other countries and has been the liquidity provider to
> the world for ages. I hear no one thanking us for that.
>
Many "possible " if not probable events could make much of it of lesser relative importance however.
Just some points (greatly abbreviated) to ponder: Based on all known data and perpectives (that is available in a practical and useable sense), What are the probabilities that :
1.A major thermonuclear event will take place in the next 40 or so years?
2. The Straits of Hormuz will be blocked and unnavigable for a protracted period of time?
3.Terrorists actions will completely block a major port some where in the world?
4. A wide spread plague (or major similar event ) is caused by terrorists or occurs "naturally"?
Does anyone out there have some probability numbers on these?
Everyone is right of course, history never repeats exactly, > it can't..
On Jan 07 12:48 PM Socialism cannot compete! wrote:
> "Without the Great Depression, it is difficult to visualize the sharp
> rise in the popularity of the Nazi Party."
>
> While it is clear that the Depression hastened the rise of the Nazi
> party, it is equally clear that it (or something much like it) was
> coming regardless -- Nazism was a result of atheistic Hegelian-Marxist
> philosophies taking hold, not of poor economic conditions, which
> merely served to increase its palatability. If you look around the
> world today, you will see those same Hegelian-Marxist philosophies
> have taken hold in many other places, as entailed by notions that
> the individual is there for the good of the state, rather than vice-versa.
> And if there is no God and no intrinsic, infinite value to each and
> every life, including those who are perhaps deemed "inferior" by
> way of genetics, disability, or age...then we are free to choose
> who is of benefit to society...or is just a cost that can be eliminated.
> Here in the U.S. we already do this -- we call it a "woman's freedom
> to choose". Not unexpectedly, there has been an economic cost --
> over 35 million potential workers, taxpayers, and home buyers were
> not born as a result.
>
> Wake up people.
Our Democracy is our #1 asset. It provides the liberties which drive innovation and creativity. I am sorry but all i see is one huge shift from dependency to one of provider.
The Great Depression begat Marxism, which begat Nazism, which begat a woman's right to choose, which begat more tough economic times.
What am I missing?
You clearly hit a nerve with your article!
Obviously, politics, religion, culture and history (have I missed anything?) are important and often trump economics, which is based on simple, common sense rules for trading goods and services with other people and countries.
I have to dispute some of your facts, however.
First, Germany was only a democracy for a short time after World War I and this democracy was imposed by the victorious powers. Germany had only known totalitarian governments before that.
So it isn't accurate to say that the people chose Nazism (fascism) over communism/socialism because of the Great Depression.
In fact, the Nazi party destroyed the socialist and communist parties in Germany by imprisoning and often simply liquidating (murdering) them along with other liberals, Jews, homosexuals, and other left wing liberal undesirables.
Most people don't know that Hitler maintained that his main purpose was to rid Germany and Europe of Jewish based socialism and communism and 'race poisoning' (which included gypsies, Jews and Slavs) and that he did not want to fight with either Britain or America both of which he considered racially similar to Germany.
Hitler did, however, state that he wanted to purify America of its African Americans, Mexicans and Native American populations,etc. but that is another story. He was ambiguous about Asians in America because of his alliance with Japan but most people think he would have stabbed Japan in the back once he achieved world domination and would have enslaved Asians also.
Hitler and the Nazis (fascists) hated Russia because they hated communism and they also considered the Slavic peoples to be subhuman (sub Aryan) and only worthy of being slaves to Aryans.
They planned to liquidate as many Slavs and possible along with Jews, etc. and about one third of all people killed in German concentration camps were gypsies, Slavs, homosexuals and socialist/communists.
I might add that America faces a much greater threat from fascism today than from socialism, which barely exists here (post office, public school system, Tennessee Valley Authority, etc.) oldamericancentury.org...
The word Nazi is an abbreviation of Nationalsozialismus which obviously means national socialism but Germany was not socialist under the Nazis but fascist. www.secularhumanism.or...
In fact American firms operated in Germany and were only taken over (in the sense of directed but not owned by the German government) during the war. It is well-known that American car makers based in Germany built the tanks that allowed Hitler to invade Poland in 1939, for example.
The irony is that, in America the same companies built the tanks that fought those tanks they built for Germany during the war!
The story of American upper class appeasement and admiration of Hitler and even collaboration with Nazis, is an interesting one but controversial, of course. I'll leave that for historians to debate: www.amazon.com/George-...
Dear carey_jim: Yes, the appeasement of Hitler should be left for another forum, another time. But just to clarify---and the article format is obviously limited in this regard--my view is that the "rapid" erosion of economic conditions caught the German Left off guard, thus allowing the Nazi Party to consolidate its hold. I agree with you in the sense that the Great Depression did not, by itself, cause fascism; only the underlying conditions towards that end. Many thanks for your observation. - Rakesh
On Jan 08 01:25 PM carey_jim wrote:
> Rakesh:
>
> You clearly hit a nerve with your article!
>
> Obviously, politics, religion, culture and history (have I missed
> anything?) are important and often trump economics, which is based
> on simple, common sense rules for trading goods and services with
> other people and countries.
>
> I have to dispute some of your facts, however.
>
> First, Germany was only a democracy for a short time after World
> War I and this democracy was imposed by the victorious powers. Germany
> had only known totalitarian governments before that.
>
> So it isn't accurate to say that the people chose Nazism (fascism)
> over communism/socialism because of the Great Depression.
>
> In fact, the Nazi party destroyed the socialist and communist parties
> in Germany by imprisoning and often simply liquidating (murdering)
> them along with other liberals, Jews, homosexuals, and other left
> wing liberal undesirables.
>
> Most people don't know that Hitler maintained that his main purpose
> was to rid Germany and Europe of Jewish based socialism and communism
> and 'race poisoning' (which included gypsies, Jews and Slavs) and
> that he did not want to fight with either Britain or America both
> of which he considered racially similar to Germany.
>
> Hitler did, however, state that he wanted to purify America of its
> African Americans, Mexicans and Native American populations,etc.
> but that is another story. He was ambiguous about Asians in America
> because of his alliance with Japan but most people think he would
> have stabbed Japan in the back once he achieved world domination
> and would have enslaved Asians also.
>
> Hitler and the Nazis (fascists) hated Russia because they hated communism
> and they also considered the Slavic peoples to be subhuman (sub Aryan)
> and only worthy of being slaves to Aryans.
>
> They planned to liquidate as many Slavs and possible along with Jews,
> etc. and about one third of all people killed in German concentration
> camps were gypsies, Slavs, homosexuals and socialist/communists.
>
>
> I might add that America faces a much greater threat from fascism
> today than from socialism, which barely exists here (post office,
> public school system, Tennessee Valley Authority, etc.) oldamericancentury.org...
>
>
> The word Nazi is an abbreviation of Nationalsozialismus which obviously
> means national socialism but Germany was not socialist under the
> Nazis but fascist. www.secularhumanism.or...
>
>
> In fact American firms operated in Germany and were only taken over
> (in the sense of directed but not owned by the German government)
> during the war. It is well-known that American car makers based in
> Germany built the tanks that allowed Hitler to invade Poland in 1939,
> for example.
>
> The irony is that, in America the same companies built the tanks
> that fought those tanks they built for Germany during the war! <br/>
>
> The story of American upper class appeasement and admiration of Hitler
> and even collaboration with Nazis, is an interesting one but controversial,
> of course. I'll leave that for historians to debate: www.amazon.com/George-...;s=books&qid=1...
>
As for the article, good work, Rakesh. Economic hardship increases tension and stress in all but the most primitive of societies, so if the global spread of economic woes continues to disrupt other countries, we can expect unrest and other repercussions to mount.
Decades of easy, cheap, unlimited credit is turning out to be an experiment gone wrong. The laws of natural consequences will now determine the outcome. Not some petty little bailout plan.
On Jan 08 07:16 PM axelrod608 wrote:
> Carey jim - good post. The generally held overview of world history
> in the US is, er. sketchy. And only relatively accurate.
>
> As for the article, good work, Rakesh. Economic hardship increases
> tension and stress in all but the most primitive of societies, so
> if the global spread of economic woes continues to disrupt other
> countries, we can expect unrest and other repercussions to mount.
>
>
> Decades of easy, cheap, unlimited credit is turning out to be an
> experiment gone wrong. The laws of natural consequences will now
> determine the outcome. Not some petty little bailout plan.
Germany had a very small liberal-democratic movement which was only kept alive by foreign interests such as those of Britain and the United States.
Most Germans of that period were either socialist or royalist (traditionalists) and intellectuals sided, I think, mostly (at least 55%-45%) with the socialists.
In order to destroy the communists and socialists, who would certainly have ended their power, the aristocrats and wealthy businessmen made a Faustian bargain with Hitler in the early 1930s from which Germany never recovered.
The sad and sobering fact is that under Hitler's Nazi government, Germany did not suffer during the Great Depression and in fact prospered.
This was due to the totalitarian control of business by the Nazi party, combined with the Nazi seizure of the valuable possessions taken away from Germany by the victors or World War I.
The Nazis took back the confiscated Rheinland and Konigsberg and added the Sudenland, Austria (Hitler's country of origin) and parts of Poland (not to mention France, of course.)
I think fascism in Germany was 'caused' (dangerous word) by the Faustian bargain of the former German aristocratic and business powers with the Nazi party. This bargain was made in order to crush the communist masses who were rising from below and threatening to seize the property and power of the ruling class.
German history has relevance today because if America suffers another dislocation of the size of the Great Depression, the same kind of uprising from the underclass and poor might start again and the same kind of Faustian (fascist) bargain between the rich and poor might be tried again.
However, to end on a positive note, Germany got Hitler and America got Roosevelt.
And, in in the present, I think the intelligent former professor of American Constitutional law, Barack Obama, is the antithesis of Hitler and a man who has the capacity of 'renewing the American dream.'
Besides, as Mark Twain said, history doesn't repeat itself but it rhymes.
Maybe Obama will give us a new historical rap :)
On Jan 08 03:32 PM Rakesh Saxena wrote:
>
> Dear carey_jim: Yes, the appeasement of Hitler should be left for
> another forum, another time. But just to clarify---and the article
> format is obviously limited in this regard--my view is that the "rapid"
> erosion of economic conditions caught the German Left off guard,
> thus allowing the Nazi Party to consolidate its hold. I agree with
> you in the sense that the Great Depression did not, by itself, cause
> fascism; only the underlying conditions towards that end. Many thanks
> for your observation. - Rakesh
>
> On Jan 08 01:25 PM carey_jim wrote: