The Bold and the Delusional

Bidenomics, trans markets and the lessons from the 1929 crash...

(Source: Getty Images)

Bill Bonner, reckoning today from Poitou, France...

“You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

~ Ben Bernanke at a conference honoring Milton Friedman in 2002, explaining that the Fed learned from Friedman to increase the money supply to avoid bank failures

The Fed has increased its key rate from ‘zero’ to 5% º the biggest, fastest “tightening” in history. Those higher interest rates caused the 2^nd, 3^rd, and 4^th largest bank failures in US history. The federal government rescued bank depositors, effectively backstopping the whole banking system. Since then, the economy has not gone into a much-anticipated recession….and the stock market has not followed through on its long-overdue correction. To the contrary, The Wall Street Journal reports:

Investors are Feeling Bold Again   

Tech stocks are rising maniacally spilling into meme stocks. The cryptoverse is enjoying a resurgence. The market looks a lot like it did in 2021--right before stocks entered a deep slump."

What’s the secret? Joe Biden modestly claims it is he. “Bidenomics,” he says, has kept the job offers and stock bids coming. And in a way, he is right. Remember, it is either ‘inflate or die;’ Bidenomics keeps the money coming.  

The Financial Times explains:

…the US has started to look exceptional in a bad way. Once typical, it is now the biggest deficit spender in the developed world. During the pandemic, the US budget deficit tripled to more than 10 per cent of gross domestic product, more than double the peak in other developed economies. In coming years, the US deficit is expected to average close to 6 per cent of GDP — well above its historic norm, and a full six times the average in other developed economies. 

How did the US steer so deeply into the red? Most countries have ended the spending programmes that were launched to ease the pain of pandemic-induced lockdowns. But all the $6.7tn in new spending from the Biden administration came after 2020 was over. Most of it had nothing to do with pandemic relief.

Trans Markets

Let’s put it in perspective. We are in a ‘transition period’…between one primary trend and another. From extremely low interest rates…we believe we are headed to higher ones. From overvalued stocks, bonds and real estate…we expect prices to fall (in real terms) for many years to come.

But in a transition phase, things are never so clear. There are dips and there are bounces. They don’t tell you which is which.

After stocks crashed in October 1929, for example, investors were puzzled.  Was that it? Was it over? Was it time to pick up the pieces and go back into the stock market? Many thought so. And what followed was a series of bounces, rallies, and sell-offs…leaving investors with a serious feeling of disappointment and disorientation.

The first reaction, from November 1929 to April 1930, lifted spirits greatly.  Investors thought the worst was clearly behind them. With nearly 50% gains in their pockets already, they thought they saw much more to come.

But the bounce turned out to be a dud. After a 17% loss for 1929, stocks lost another 33% in 1930.

Another Bounce

And then there was another bounce…and another…and another…all the way to the bottom of the staircase. Michael Batnick reports on what happened in 1932:

Even after losing 17, 34 and 53% over the previous three years, in the four months from March 8 to July 8, the Dow lost 53.6% of its value! The most insane bear market rally of all time followed in the summer as the Dow Industrials gained 93% in just two months. Over this eight week period, Rails tripled and the Utilities doubled.

But the bear market wasn’t over. After the summer fireworks came more autumn showers…stocks went back down and by the end of 1932, the Dow was down nearly 90%. Warner Bros., the Apple of the time, lost 98% of its value.

Our guess is that we are at the very beginning of a similar debacle. Back then, however, the feds had no ‘inflate or die’ choice. They couldn’t inflate, because the dollar was tied to gold; it couldn’t be ‘printed.’ It had to be earned. This left ‘die’ as the only option. Which is what happened. The Bubble of ’29 died.  

The death of the Roaring Twenties probably would have gone without much notice, but the feds intervened. Boom to bust…bust to boom…that is just the way a free, healthy economy works. The feds sought to correct the correction by laying on heavy rules and regulations, including measures to prevent much-needed price cuts. The result was to turn a routine correction into a Great Depression.

Then, rather than admit their own role in the Great Depression, economists argued that the Depression was caused by a sin of omission, not commission. Specifically, Milton Friedman claimed that the Hoover and Roosevelt administrations made a mistake. They were too timid; they should have put more money into the system and backstopped the banks then the way the Biden Administration just did.

And now that we have a new, more flexible money system…and both political parties in favor of more spending…

… they won’t make that mistake again.

This time, they will make a much worse mistake. Stay tuned for more on Bidenomics.

Regards,

Bill Bonner