Monday, December 8, 2008

The Greater Depression?

I find myself offended by the constant media references to the US Great Depression of the 1930's.  It seems disrespectful to compare anything that is going on in the US today with those that suffered in the 30's.  Further, the sentimental baggage surrounding the GD just adds more noise to a chaotic situation.  

Finally, there are aspects of the GD that aren't talked about very much.  Everything I have heard about that period, of course, is second hand.  But one thing that doesn't get talked about much is that people with money did pretty well.  This was always followed by the comment that no one had any, or some other reference to hard times.  But, frankly, people with cash did well.  Anyone that kept a job and their pay level was better off.  A lot better off.  And smart enough to not flaunt it.

From the BLS, CPI:

              YOY Chg     Cumulative        Return on Cash
1930         -2.3
1931          -9.0                -11                        +12.4
1932          -9.9               -20                        +25.0
1933          -5.1               -24                         +31.5

A lot of wages were sticky and even though unemployment was very high, a lot of people still had jobs.  Those that kept their jobs and whose wages weren't cut had a 31% raise over this period.  Cash in a mattress had a 31.5% return.

The National Bank of Sealey was the hot investment of the time.  Some of the virtues of that generation -- avoid debt, avoid risk, save (hoard) cash, was an attachment to the winning strategy of the decade.  

For everyone waiting for deflation, remember that we have a Fed Chairman that has written extensively about doing anything to avoid deflation.  We have hedge fund guys running Treasury.  And we have people lined up to loan them money like people were begging for shares in the ipo of  The 10 year is at a 50 year low.  

This December, the Social Security COLA is 5.8%.  If we have 10% deflation, like the 30's, they get a 16% raise in real benefits.  Now some of this really needs to happen, since food and energy were ignored in the official CPI.  This is simply unmeasured inflation unwinding.  

Remember the Andy Hardy movies?

Dad was a judge.  A government employee.  And they always had a maid and a cook and seemed pretty prosperous.  Sure it was just the movies, but not much more of a distortion then the migrant photos.  

The point of this being that I don't see people on a fixed income getting a 30% increase in real benefits over the next three years.  I don't see hoarded cash earning 30%. 

I do see the Treasury borrowing money under 3% for 10 years and people are having a hard time counting the ways that we will employ fiscal stimulus.  I also see the Treasury being run like a hedge fund, with positive carry on all the bailed out assets, which have pretty decent haircuts.  Plus a lot of equity kickers.  

I don't want to be lending to the hedge fund of last resort.  

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