A Warning From the Great Depression

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3.28 million.

That is the total number of unemployment claims Americans filed last week — nearly five times the prior record of 695,000, from October 1982.

“We’ve known this number was coming for a week and a half,” laments Tom Gimbel, who captains a Chicago employment agency, adding:

It doesn’t surprise me at all. When you see a city like Las Vegas get shut down, I don’t know what other options there were than seeing a number like this.

A fellow must take his comforts where he can find them these days. And precious few are on offer.

But if it is consolation you seek, here you have it: Some economists had forecast as many as 7 million claims.

Here is additional cheer, however transient: The stock market had itself another day at the races today.

Stimulus, at Last!

The Dow Jones recaptured another 1,351 points. The S&P gained 154, the Nasdaq 413.

Today’s stock market surge follows last evening’s Senate passage of a $2 trillion relief package. It is the largest ever in United States history. The vote was unanimous.

The bill includes, per CNBC:

One-time direct payments to individuals, stronger unemployment insurance, loans and grants to businesses and more health care resources for hospitals, states and municipalities. It includes requirements that insurance providers cover preventive services for COVID-19.

Qualified individuals will receive cash payments of $1,200. Couples will receive $2,400… with an additional $500 for each child.

A Lobbyist’s Dream

883 pages in length, we can only imagine the skullduggery and chicanery within, the sweet venoms the lobbyists put in.

But who has time to read all 883 pages while American life dangles by a strand? And who can say no?

The legislation next goes to the House of Representatives for the rubber stamp — which it will assuredly receive tomorrow morning when the vote is scheduled.

Then it jumps to the White House for the presidential signature. Mr. Trump has pledged to sign it “immediately.”

Treasury Secretary Mnuchin said today the checks will mail within three weeks.

But as we have questioned previously… what will they accomplish?

Say’s Law

The issue at hand is not one of demand. It is one of supply. And a shuttered-in economy produces little.

Filling an idle man’s pocket with fabricated money does not increase supply. It merely increases the bid for existing supplies.

Let us not forget Say’s law — that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

One man produces bread. Another produces shoes.

The cobbler who requires bread for his dinner appears before the baker. And the baker who must clad his feet appears before the baker.

They may transact in money… but money merely throws an illusory veil across their transactions.

Ultimately the baker purchases his shoes with the bread he has baked. And the cobbler purchases his bread with the shoes he has cobbled.

Concludes Monsieur Say:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found that one kind of commodity has been exchanged for another.

The Government Attempts to Outlaw Say’s Law

Assume now a free economy in which supply and demand are allowed their unfettered reign. Assume an economy — that is — that does not presently exist.

You can expect supply and demand to come to terms, to come into rough equilibrium.

If there is less demand, prices will fall to meet it.

But when the government prints money with no production to match it… it attempts to outlaw Say’s law.

Consider the thought experiment of another 18th-century thinker David Hume…

Imagine a benevolent fairy slips money into all the nation’s pockets overnight. And so the money supply doubles at a stroke.

Is this nation doubly rich?

Alas, it is not. The money supply has been doubled, yes. But no additional goods have entered existence.

The new money will simply chase existing goods. We can therefore expect prices to approximately double.

The Real Source of Wealth

Explains the late economist Murray Rothbard:

What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its newfound wealth, prices will, very roughly, double — or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods.

There you have the wisdom of classical economics. But then came the Great Depression, and out it went…

Out from under every rock slithered the cranks, chiselers, dreamers, something-for-nothing and wine-from-water men…

All promising salvation, all offering their quack medicines.

And they all found their way to Washington…

Destroying Food While People Starved

The farmers were in a bad way, they argued. These sad sacks could not fetch enough money for their produce or their livestock. And so they needed a hand up.

A program was therefore required to raise prices. The brain trust then in operation hatched a beautiful scheme. What was it?

To set fire to the crops and murder the livestock.

To be clear, they did not butcher the animals to bring to market — but precisely the opposite — to keep them off the market.

Ponder for one moment the reality of it:

While millions starved, entire crops were set ablaze. And millions of animals went into the ground… rather than growling bellies… all to raise the price of farm products.

What of the impoverished nonfarmers required to pay more for their basic sustenance? How would higher food prices benefit them? Or the overall economy? Might the money people saved on food allow them additional purchases from other industries?

The men with the grand pensees did not say… or did not care for the answers.

The same lunacy was brought to bear on other industries…

A Reign of Terror

Production above mandated levels was not permitted. Nor were prices permitted to fall beneath predetermined levels.

If a man flouted the rules… woe to him.

One man, a New Jersey tailor, was convicted and clapped into prison. What was this hellcat’s “crime”?

He pressed a suit for 35 cents. Law required the job be done for 40 cents.

Meantime, New York’s garment industry endured a mighty terror, explains 1930s journalist John Flynn:

The code-enforcement police roamed through the garment district like storm-troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing a pair of pants at night.

(We acknowledge economist Thomas DiLorenzo for the source material.)

Examples abound. Here is the central lesson:

At a time when lower prices and greater production were most needed… lower prices and greater production were violently suppressed.

This was the economic wisdom of the day. And now in this, our own time of economic crisis…

A fresh roster of cranks, chiselers, dreamers, something-for-nothing and wine-from-water men will afflict us anew.

1930s Redux

They would treat us to another New Deal — green in color — to haul us up.

Modern Monetary Theory is our salvation, they will croon.

Medicare for All will be the promised cure for the next pandemic.

All war with the ancient and iron laws of economics that time has proven valid.

Yet as in the 1930s… a fearful and desperate America may yet embrace them.

Regards

Brian Maher
Managing editor, The Daily Reckoning

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Brace Yourselves: A Crash Is Coming

This post Brace Yourselves: A Crash Is Coming appeared first on Daily Reckoning.

I know we are in the midst of a joyous time of year, but that doesn’t mean the world has stopped turning. And the start of 2019 brings us to a critical moment. We’re on the brink of the third wave crash.

Let’s take a gander at recent history: First, there was the 1980’s savings and loan crisis. Then, in 1987, the stock market crashed, and the Dow Jones index lost 23% of its value. The next major event was the dotcom bubble and subsequent crash from 1999 to 2000. And the most recent event was the global financial crisis in 2007-08, which was triggered by the subprime mortgage crisis and collapse of the U.S. housing bubble. I’m leaving out a few smaller ones in between, but those are the true highlights (or lowlights, really) of the crash cycle in the past forty years.

Essentially, the economic cycle is longest period of tranquility took place during the 1990s when the economy went an entire decade without a down cycle. That was a rare—and glorious—decade.

As you can see, it’s been 10 years since the last major event—if history repeats itself, we’re due for a crash. And soon. That is if we’re not already seeing the needle headed toward the bubble.

Let’s examine the evidence: Both the Dow Jones Industrial Average and the S&P 500 are up for their worst December performance since 1931, when stocks were battered during the Great Depression.

December is typically a very positive month for markets. The Dow has only fallen during 25 Decembers going back to 1931.

The S&P 500 averages a 1.6 percent gain for December, making it typically the best month for the market, according to the Stock Trader’s Almanac.

Bitcoin, the highly volatile cryptocurrency, has created a complete frenzy in recent weeks. Last year at this time, Bitcoin saw a 1600% increase in value. That being said, Bitcoin’s bubble literally popped and millennials, like generations before them, just got a painful lesson about speculation. Also, in the news there’s talk of housing bubbles and auto loan bubbles forming left and right.

Do you know what bubbles always do? Pop!

Preparing for The Pop

I’m not trying to end the year on a note of doom and gloom. We don’t know when this bubble will burst, but we can certainly start preparing for it. How? It all comes down to financial education.

You see, it all begins with understanding that money doesn’t make you rich. Your financial IQ is what makes you rich. I guarantee that if you give the same $100,000 to a person with a low financial IQ and a person with a high financial IQ, you’ll see an immense difference in how they spend and grow that same money.

Central to the difference between those with low and high financial IQs is a simple but profound literacy: the ability to understand a financial statement—an income statement and balance sheet.

balance sheet

Strangely, accounting classes teach how to read an income statement and balance sheet separately. But, it’s actually the understanding of the relationship between them that’s crucial. After all, how can you tell what an asset or liability really is without the income column or the expense column? Understanding the relationship between the two allows you to easily see the direction of your cash flow so you can effortlessly determine if something is making you money or not.

Bottom line: If something is making money, it’s an asset. If not, it’s a liability. The reason most people with low financial IQs suffer money-wise is that they purchase liabilities and mistakenly list them under the asset column.

Cash Flow is the Only Way to Go

It’s this simple insight that explains why those with a low financial IQ are still poor even when they make a six-figure income. They have no clue how to move their money into assets that make them more money. And cash flow is king.

Because financial subjects have a way of turning unnecessarily complicated, let’s keep the concepts simple and use diagrams for added clarity. If you can understand the following diagrams, you have a better chance of acquiring great wealth.

Cash flow patterns

cash flow pattern

An asset is something that puts money in your pocket. This is the cash-flow pattern of an asset:

A liability is something that takes money out of your pocket. This is the cash-flow pattern of a liability:

cash flow pattern

The Confusing Part

Now, confusion can happen because accepted methods of accounting allow for the listing of both assets and liabilities under the asset column.

To explain this, look at this diagram:

cash flow pattern

In this diagram, we have a $100,000 house where someone has put $20,000 cash down and now has an $80,000 mortgage. Confusing indeed! How do you know if this house is an asset or a liability? Is the house an asset just because it is listed under the asset column?

The answer is, of course, no. In order to know for sure, you would need to refer to the income statement to see if it was an asset or a liability.

To illustrate this, let’s look at a diagram that depicts the house as a liability:

cash flow pattern

You can tell it is a liability because it’s only line items are under the expense column. Nothing is in the income column.

Next, let’s look at a diagram with the addition of a line that reads “rental income” and “net rental income”—the key word being “net.” Do you see how that addition to the financial statement changes that house from a liability to an asset?

cash flow pattern

Put simply, if the rental income of the house, minus the expenses of the house, equal positive net rental income, then the house is an asset. If not, it’s a liability.

Did you find this lesson profound? It’s essentially the basis for building all great wealth. Going back to my earlier comment, a person with a high financial IQ and $100,000 would be able to know how to invest it in assets that are true assets—ones that put more money back in the pocket each month. The person with the low financial IQ would spend that same money on liabilities but wouldn’t be able to diagnose what was wrong. Instead, they would try and work harder to make more money—a vicious cycle we call the Rat Race.

Back to The Bubble

Understanding the relationship between the income statement and the balance sheet allows you to quickly understand if an investment is an asset or a liability—and this understanding will allow you to make the right investment every time. While you can’t control how the economy behaves or when this unavoidable bubble will occur, you can absolutely control your ongoing education and financial prowess to minimize its impact.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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