Resisting a Depression is a Dangerous Delusion

"The one sure way to prolong a depression is to resist it by trying to stand part, rather than to carry through the ultimately inevitable adjustment in as cool and orderly a way as possible — this is surely a dangerous delusion" — Walter Lippmann

"It is a delusion to think that a depression caused by credit can be resisted. All the panaceas, nostrums, and quacks invented by all the politicians in the world, can bu hold off the eventual day of reckoning, prologing the agony. It is far less painful to accept a stunning blow right on the chin than to suffer intolerably through a process of slow torture." — Robert L. Smitley

And you thought these quotes are from the news?

Well, think again.

Walter Lippman's quote is from September 8, 1931, Robert L. Smitley's from 1932.

They come from the first few pages of Popular Financial Delusions, by Robert L. Smitley, first published in 1933.

Is 2011 of the Greater Depression equivalent to 1932 of the Great Depression?

I mentioned the book The Great Depression: A Diary in a previous post, and I thought I would use some quotes from the book to show you what happened during the Great Depression, and just compare to what we are living now, during the Greater Depression:

• June 15, 1931 — For over a year now, people have been buying stocks at what they think are bargain prices
• June 30, 1931 — Magazines and newspapers are full of articles telling people to buy stocks, real estate, etc. at present bargain prices
• January 11, 1932 — Even those who invested in 1930 — after the crash — at what they considered bargain prices, now find their "bargains" selling at half price or lower.
• May 9, 1932 — Both stocks and commodity prices are back to 1899 level. Most [...] reinvested a year or more ago and now find stock prices have sagged to 1/3 of what they were when they thought they were buying bargains.
• August 8, 1932 — In the last 30 days, the stock market has given one of the most strenuous rallies in its history. [...] There is no tangible explanation for this [...]
• September 1, 1932 — The stock market on the contrary tripled its value during August in one of the quickest climbs ever witnessed.
• September 19, 1932 — After a rising stock market of six weeks which increased its values by 150% the market broke badly last week. [...] So far in the last 2 years the stock market has made 8 fake starts upwards and then eventually came back to record lows.

For some reason, Yahoo! and Google finance web sites do not show the 1930s data anymore, but I managed to find this other chart on StockCharts.com. Click for bigger image, and see where the Dow was in 1931, and compare it to the lows of 1932...

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Book Review: The Great Depression — A Diary

I read The Great Depression: A Diary by Daniel Roth more than a year ago, and ever since, I wanted to take some time to write about this "book". Since it just got released in paperback in the UK, I thought it would be a good opportunity to finally write this small review.

After the stock market crashed in 1929, Benjamin Roth was a young lawyer in Youngstown, Ohio. When he realized that these weren't ordinary times and that a terrible depression was underway, he decided he decided to write down his impressions in his diary. Luckily for us, Ben Roth was very much interested in the stock market, investment, real estate etc. — although probably that was due to the roaring twenties bubble economy.

This book is one of the most fascinating one about the Great Depression because it was written on a daily basis by someone who was living it. What's the most shocking is just how much all the events and actions of those days look like what was happening in our world while I was reading it.

You will discover many things that people have forgotten when history books got rewritten. Here are a few examples:

• You thought HELOCs, second mortgages, etc. were the invention of the 21st century? Think again, the real estate bubble of the 1920s was fueled by second, and even third, mortgages!
• Hoover didn't intervene in the early days of the depression. That you knew, right? But didn't you know that most Americans sided with his idea? It's only later on that he became a big interventionist, but that maybe you didn't know.
• Live what happens in Europe from a real world perspective: bankruptcy of Germany, hyperinflation, the rising tension between the countries, the beginning of the war, from an american perspective.
• Live again the Gold standard being dropped by one country after another, in an attempt to debase and inflate their way out of the global depression. Of course, this stupid and destructive Keynesian theory failed and made matters far worse.
• Take part in the debates between advocates of the gold standard — who Benjamin was — and the money printers, before Roosevelt decided to devalue and then stop convertibility of the dollar in gold. And even bi-metalism. Even tariffs and "sound currencies" were discussed, and it seems to me that the average person in those days was far more knowledgeable about the economy and the meaning of money than the average person today.
• Relieve also all the bank runs, bankruptcies, failures of major corporations
• Rediscover the communist threat inside the US — and probably one of the reasons why Hoover and Roosevelt were so much interventionist: it was the Zeitgeist...
• Massive monetary inflation, devaluations, stimulus which all failed miserably, as expected.

And believe me, I haven't told you anything yet. You MUST READ this book.

The only annoying bit in the book is that for some reason, James Ledbetter, a web columnist who's a big fan of Keynesian policies and big government managed to edit the book with Daniel Roth, the son of the author, and hence he's adding at every occasion some annoying comments showing how much he doesn't understand Benjamin Roth's libertarian points of view, and also how much he didn't learn from history nor the book he's actually editing...

Without spoiling anything, I was so much into the book that the editors note page 158 broke my heart and it took me a good 5 min to recover from the shocking news I had just read.

IF there was one book to read for this year, it would be The Great Depression: A Diary. I urge you to read it.

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Book Review: Mean Markets and Lizard Brains

Since I'm reading about a book a week, in a variety of topics including economics, financial markets, financial instruments, behavioural finance, psychology, neuro-psychology, computer science, I thought it would be worthwhile to share the reviews of some these books from time to time with you.

I have already mentioned many books in my posts, but this way, they will have more impact... I will nonetheless try to keep the review short.

So to begin with my very first review, I will talk about Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality by Terry Burnham. Please note that there are two editions of this book, and that I'm dealing with the 2nd one, which is the most up to date.

The book description tells us the following:

Everyone from journalists to market pros are turning to behavioral finance to explain, analyze, and predict market direction. In contrast to old-school assumptions of cool-headed rationality, the new behavioral school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets. [...] In Mean Markets and Lizard Brains, Terry Burnham, an economist who has a proven ability to translate complex topics into everyday language, reveals the biological causes of irrationality. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices and sell at irrationally low prices. Most importantly, by incorporating the new science of irrationality, readers can position themselves to profit from financial markets that often seem downright mean. Mean Markets and Lizard Brains skillfully identifies the craziness that is part of human nature, helps us see it in ourselves, and then shows us how to profit from a world that doesn't always make sense.

Given that I am very much interested in the "lizard brain" and have read a lot about it, and that I am also very much interested in behavioural finance, I thought the book would be an interesting read, although I although considered that I might not learn anything new from it.

In the preface of the second edition, written in June 2008, the author explains how much he was right on all his predictions made in 2005, and that in order to make the second edition, he kept the original first edition text, and just added new comments at the end of each chapter.

The first part of the book (chapters 1 to 3) explain in details why people behave irrationally, and why the "efficient market hypothesis" is wrong in our real world.

These chapters were actually quite a good read and give a very good introduction to the world of behavioural finance. Unfortunately, Terry Burnham then starts talking about monetary policy, financial markets, and economics, and in my opinion he doesn't have any real understanding of any of these. There are many OMG moments, some of which I'm quoting here:

"As Professor Friedman has shown, the amount of money affects economic activiy. Thus a decrease in the amount of money would like harm the overall economy"

OMG: The strongest economic growth periods were all during a stable currency. The Friedmanites have been proven wrong 100 times by the real world, yet, ignorant parrots keep on repeating these nonsensical theories.

If such a currency is used [speaking about tangible currency] [...] then the ability to create money is taken out of the government's hand [...] the entire society would have less money.

OMG: He believes government printing money is a good idea...

Speaking about Japan, he tries to explain why deflation is bad:

[Our host in Tokyo] told us that every year she meets with her landlord to discuss the magnitude of the rent decrease for the following year. [...]

The second problem with deflation is that people really hate taking pay cuts.

Well, this is true, but hey, people love also decreasing rents right? You cannot have your eat your cake and have it as well. I'm guessing when people know that prices decline, they are more prone to also accept a pay cut. The right balance will be found. Burnham is not being rational here. Yet that's the topic of his book!

Then he goes on to explain how much Larry Summers is a great economist who defined the right rate of inflation for the economy to be prosperous and how much the Fed and the government are in control of inflation:

"U.S. inflation rates will be determined by the future decisions made by the Federal Reserve. A prediction of inflation must be based on future decisions of the monetary authorities."

These statements can be true in the case of Zimbabwe, were money is simply printed, but they are not true in the case of the US or the UE where the Central Banks exchange money for debt. Debt cannot grow for ever, as we have been reminded by the collapse of banks and sovereigns during the past couple of years.

Even better:

"The U.S. Monetary authorities did not create inflation."

IF not what have they been doing since 1913?

Extremely different outcomes suggest that people in power determine the inflation rate. [...] I side with those who believe that individuals in charge of the monetary policy determine the inflation rate.

Yet again, history (Great Depression and Greater Depression) prove that this is wrong. Yet he is parroting.

Silly investment advice then keep on coming. Here's the first one:

"Inflation protected bond is always at least as good as the standard bond and usually much better".

NO! If that was the case, nobody would buy anything but TIPS!

Here's the second, just a few lines later:

Company profits have a built-in inflation protection

Since when? Why? How?

Here's yet again an investment perl. He explains why treasuries are a good investment, why the total debt does not matter, and that you cannot lose money:

Because dollars can be created by the United States at no cost, the same would be true if the U.S. debt totaled $35 trillion or $350 trillion. So we still haven't figured out why anyone would be worried about the United States' debt to the world.

Just a few more before finishing:

Because Social Security currently has a surplus, combining it with other accounts makes the deficit look smaller.

[Speaking about the collapse of real estate prices] Japan [...] did not suffer an economic depression

 Chapter Nine is about Real Estate, and the subtitle is "Live in your Home, Make your Money at Work". I thought I would see some lucid analysis, specially given all the talk about lizard brains, irrationality, etc. But that subtitle is very misleading...

Is there a housing bubble? No.

Keep in mind that the book is written in 2008, after the collapse of the subprime market, etc. Yet, he goes on and on:

Can we say that housing was in a bubble and has the bubble now burst? I think not.

Concluding is very difficult. What do I think about this book? Chapters 1 to 3: I'd say 8/10. But then the rest, is 0/10 and is just misinformation and waste of time...

At several occasions, I pinched myself. Yet I do not believe that he is making jokes or that the whole book is just about fooling around. I think he is dead serious...