Why This Sucker Is Going Down... Again...Echoes of 1929

Why This Sucker Is Going Down... Again | Zero Hedge:



"Instead, what happened was that the reckless expansion of bank credit during the years prior to the 1929 crash was liquidated because it couldn’t be serviced or repaid. 



Total loans outstanding had grown from $15 billion to $40 billion during the proceeding decade and one-half, but much of it had gone into margin loans on Wall Street, real estate speculation and massive over-investment in US export and capital goods industries that collapsed once Wall Street financing of foreign customers dried up after the crash.

So the money supply measured as M1 shrunk by about 30% during the three years after the crash because bad loans were being liquidated and bank deposits extinguished. There was no disappearance of that Keynesian ether called “aggregate demand”. Rather, it was that the phony wealth of the prior credit boom which inexorably evaporated.

Needless to say, the events in the fall of 2008 had nothing to do with what actually occurred after the 1929 crash. Back then the US was the world’s powerhouse exporter and creditor, but like in China today the apparent prosperity of the times depended upon vendor finance.

That is, with the help of the Federal Reserve, the US banking system and bond market had advanced the equivalent of $2 trillion in today’s economic scale to foreign customers of US farmers and manufacturers.

When the stock market bubble collapsed in October 1929, however, the Wall Street market in foreign debt went stone cold, triggering a cascade of worldwide defaults. By early 1933, the booming foreign debt market of the 1920s had become the subprime mortgage market of its day—-with debt prices sinking to less than ten cents on the dollar.

In short order, Warren Buffett’s famous metaphor about naked swimmers being exposed when the tide goes out was well demonstrated; it transpired that US export customers had been borrowing new money in order to pay interest on their accumulating debts, but without access to new credits they had no option but to drastically curtail new orders.

Accordingly, US exports collapsed by 80% during the three years after the 1929 peak, leaving US industry stranded in excess capacity and overloaded with working inventories of raw materials, intermediate goods and finished products.

The latter, for example, dropped from $40 billion to $18 billion and capital spending dropped by 75% during 1930-1933. Likewise, with the collapse of the stock market and the easy credit boom, sales of durable goods like autos, washing machines and radios dropped by upwards of 70%.



 In short, the Great Depression was not an avoidable mistake of the Fed during 1930-1933 as Bernanke falsely demonstrated when he xeroxed Milton Friedman’s erroneous history of the 1930s; it was the economic consequence of the unsustainable 1916-1929 credit and financial bubble that had been fostered by the Fed."



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