2020—2022 versus 1929—1932


by Alasdair Macleod, GoldMoney:

Current levels of equity markets are not only divorced from their underlying economic and business realities but are repeating the madness of crowds that led to the Wall Street crash of 1929—1932. The obvious difference is in the money: gold-backed dollars then compared with unbacked fiat today.

We can now begin to see how markets and monetary events are likely to develop in the coming months and this article provides a rough sketch of them. Obviously, the financial asset bubble will be burst by rising interest rates, the consequence of rising prices for consumer essentials. Fiat currencies will then embark on a path towards worthlessness because the monetary authorities around the world will redouble their efforts to prevent interest rates rising, bond yields rising with them, and equity values from collapsing; all by sacrificing their currencies.

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The ghost of Irving Fisher’s debt-deflation theory will soon be uppermost in central bankers’ minds, preventing them from following anything other than a radically inflationary course regardless of the consequences.

Current views that tapering must be initiated to manage the situation miss the point. More QE and even direct purchases of bonds and equities are what will happen, policies that will certainly fail.

Anyone seeking to survive these unfolding conditions will be well advised to put aside some sound money — physical gold and silver.


In the past I have compared the current market situation with 1929, when the US stockmarket suffered a major collapse that October. With memories short today, many will have even forgotten that between 12 February and 23 March last year the Dow Jones Industrial Index fell 38.4% top to bottom in less than six weeks, paralleling the 66% fall between 4 September and 13 November 1929 on an eerily similar timescale. Figure 1 shows the Dow of ninety years ago superimposed on top of that of today, shifted so that November 1929 coincides with March last year.

The principal difference is in the money. For this reason, Figure 1 adjusts today’s Dow by the gold price. In 1929-33, no such adjustment was required since the dollar was on a freely exchangeable gold standard at $20.67 to the ounce. But adjusting it by the gold price today tells us that measured in sound money the Dow peaked in April 2019. And following the initial rally after the crash in March 2020, a rise in the gold price has not been sufficient to suppress the Dow on a gold adjusted basis.

There are two possibilities: either the mid-bear market rally in the US stockmarket is lasting much longer than that between November 1929 and 21 April 1930, or the rise in the gold price has not yet been enough to counter the effect of monetary inflation. We can all have views on which is true. But one thing is certain: given zero interest rates, gathering price inflation and therefore the prospect of rising interest rates, evolving factors driving markets can only be strongly negative. When it comes this time round the fall in the Dow will almost certainly be catastrophic both in gold and nominal dollar terms. And the difference from 1929—32 is the massive expansion of money and credit that has been feeding into inflated financial assets.

As the background to stockmarket trends, there is enough circumstantial evidence for us to assume that the world is on the brink of a major financial catastrophe. The list of negatives is growing. It started with the US repo market blow-up in September 2019, followed by the Dow losing 35% in nominal points between 10 February and 23 March 2020 (as pointed out above) before the Fed stepped in to rescue the stock market by cutting the funds rate to the zero bound and reinstating QE to the unprecedented extent of $120bn every month, along with several other market-enhancing measures. They worked. At least, that is, if you ignore the costs and consequences.

Long before those mad-March days of last year, the Fed had been in crisis management mode — in fact ever since the Lehman failure. Backed by the goodwill of markets, whose participants still wish to avoid disaster as least as much as the Fed, the Fed succeeded. It prevented the excesses in residential property financing in the late 2000s from turning into a more general rout. But the cost has been a wobbly highwire act ever since, with investors observing central banks threatening at times with losing their precarious balance and falling into a yawning chasm of financial chaos.

With an investment establishment still wishing to believe in gravity-defying factors, such as good old fundamentals and the human right to let others to pay the price for their own follies, economic reality has been completely smothered. The Fed’s prestigitation has been achieved by printing money, increasing its balance sheet from $847bn the month that Lehman failed to $6,042bn today, an increase of over six times.

The Fed got away with its “extraordinary measures” in the wake of the Lehman crisis and along with the other major central banks found that through their careful management several succeeding crises were averted. And when covid came along and the world went into lockdown, the acceleration of monetary inflation to pay for it all was the obvious solution because its principal effect — rising prices — was under control.

Well, that’s not quite true beyond the purely statistical sense. It is more truthful to say the CPI statistic had been tamed to the point of irrelevance. Proof of this statistical legerdemain is there for anyone who cares to look for it, because the eximious John Williams of Shadowstats.com continues to produce the unexpurgated 1980 version, stripped naked from the subsequent adjustments in method deployed by the Bureau of Labor Statistics, all of which just happen to adjust price increases out of their inflation numbers. Williams’s estimates of price inflation, typically in the five to ten per cent range for the last ten years but now well above that, were confirmed by the Chapwood index, before covid stopped its statistical collection.

While Wall Street has been making whoopee on the back of increased money and credit, Main Street has been suffering. The only offset has been the availability of artificially cheapened finance. The liar loans of the noughties may not be back in actuality, but they certainly are in spirit as an artificial lifestyle support.

But the lesson for the bulls is that the days of claiming that inflation is confined to 2% or so are ending. The near doubling of the Fed’s monetary base from the time of the repo crisis in September 2019 has also seen an explosion in commodity prices. Figure 2 illustrates the point, with the up arrow showing the point where commodity prices turned higher, taking their cue from the precise moment of the Fed’s abandonment of all monetary restraint.

As well as rising commodity prices, Covid messed up global logistics, which still won’t be sorted until sometime next year, according to the experts. There is no leeway in inventories, due to the ubiquity of just-in-time product management. And as if to rub salt in these wounds, encouraged by more generous benefits the unemployed have become unexpectedly workshy.

The result is a material post-lockdown abyss between spending, all financed by expanding government deficits, and the availability of goods and services. Prices are not only rising due to all these factors but will continue to do so. But central banks are claiming price rises are only transitory and by next year supply chains will be working again, the balances between production and consumption will normalise and we will be back to its goal-sought 2% price inflation. But even Keynesian high priests are now warning price rises are likely to be sticky at the least, and as for the MMT crowd (remember them?) they have gone to ground.

Those of us who have taken the trouble to study the theories of money and credit know that the future is devolving into one of two choices for the authorities. The first is to continue with the policies of extend and pretend and watch the dollar and every other fiat currency suffer in terms of their purchasing power. Alternatively, central banks and governments must refuse to inflate the quantity of money any further and cut their spending to the bone. And they must permit both banks and businesses, when they fail, to do so.

Unfortunately, central banks only have a mandate for the former, and cannot stand back and let private sector actors sort it all out.

The Fed’s fast-approaching dilemma

We can be sure that, privately, growing numbers of the Fed’s FOMC realise it was a mistake to turn a blind eye to the inflation problem. And in the UK, Andy Haldane is leaving his post as chief economist to the Bank of England, while going on the record saying in effect that inflation is the elephant in the room. Lord Mervyn King, ex-Governor of the BoE was instrumental in a House of Lords report criticising the Bank’s inflationary QE policies.

The problem fast approaching all major central banks is that a rise in interest rates will be brought forward by their misjudgement on price inflation, a development which will directly challenge the policy of deploying QE to support financial markets and sustain confidence in the economy. And with the end of zero official interest rates, to continue support for financial assets requires an increase in quantitative easing to compensate. In other words, the money being fed to investing institutions will have to be supplemented to prevent risk assets falling in value.

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