Is the U.S. Heading into the next "Roaring 20's" or "Great Depression"?

March 3, 2011 - PRLog -- The average 12 month CD is paying .75%. I just looked at 2 year corporate bond yields and the best I could find was 2.4%. Right now, fixed income investors are really seeing their interest payments go down. The US government bond crashed (interest rates went up) in the 4th quarter of 2010 but it didn’t cause interest rates to go up for CDs and corporates. With commodities up 28.9% over the last 12 months this kind of trend does not bode well for fixed income investors. Now, if interest rates would start going up then that would eventually give fixed income investors some relief.

I recently read an interesting research article about how the US government handled the 1920-1921 depression. During this depression the US government did the exact opposite of what it is doing today. During the 1920-1921 depression the US had the following going on:
•   High inflation (20%)
•   High debt
•   Unemployment rate of 11.7% at its worst

To counter act the above economic problems the US government did the following:
•   Raised the discount rate to a record 7% by June of 1920
•   Reduced its spending by 65% from 1919 to 1920 from $18 billion to $6 billion. By 1922 the US government budget had dropped to a little over $3 billion.

The US Government was obviously tight with their monetary policy during the 1920 depression. Can you imagine the government taking this stance during our current recession?
So what happened in the US after these government moves?:
•   The CPI fell 16% from June of 1920 until June of 1921. Awesome!
•   Unemployment fell to 6.7% within 1 year and was down to 2.4% by 1923.
•   Roaring Twenties – best economic decade ever!

It makes perfect sense, what the government did during the 1920 depression. It follows Biblical wisdom. If you are in financial trouble you don’t spend and borrow more and print money out of thin air. In fact, that is probably the worst thing a government can do. But during the Great Depression the government did exactly that and here is what happened:
•   Deflation only reached 11%, unlike the wonderfully healthy 16% from the 1920 depression.
•   Unemployment went to 25%
•   Worst economic decade in the history of America.

During the Great Depression the US government took a very loose monetary stance with money supply much like they are doing now. What are some aspects of today’s economic environment here in the US?
•   Mortgage debt is reported to be 5 times the level of 20 years ago today. But home prices are only about 2 times the value they were, on average, in 1989.
•   Shadow Stats has real unemployment at 22%.
•   The Dow is down 80%, in gold terms, since 1999.
•   The S&P 500 is lower than it was in March of 2000. 11 years = 0%.
•   Yet optimism toward the US stock market is staggering as the dividend yield for the S&P 500 is only 1.76%. This is near historic lows.

God only knows exactly what will happen in this country following this last recession. The government’s actions have been less than wise but the LORD is exceedingly gracious and merciful. We may have a terrible decade like the 1930s. We may have 2 awful decades like the Japanese. It is doubtful that we will experience a time like the roaring twenties because we have not dealt with the current economic problems wisely and prudently, as we did in 1920. This is why I continue to recommend avoiding a buy and hold investing strategy of US stocks.


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