Can the Government Stop
Another Great Depression?
The following article is excerpted from a
recent issue Elliott Wave International’s Financial Forecast.
Elliott Wave International (EWI) is offering
the full 10-page issue, entitled “The Most Important Investment Report You’ll
Read in 2009,” free for a limited time. In addition to the following market
commentary, it includes independent forecasts of stocks, bonds, metals, the U.S.
dollar and economic trends.
Visit EWI to download the full report, free.
By Steve Hochberg and Pete Kendall
Editors of The Elliott Wave Financial Forecast
As Conquer the Crash so boldly counseled,
prosperity entails managing one’s finances and livelihood so as to be in tune
with a 1930s’ style deflationary depression. But conventional wisdom disagrees.
“There’s no comparison” to the Great Depression, says the world’s leading
financial authority, U.S. Federal Reserve Chairman Ben Bernanke: “I’ve written
books about the Depression. We didn’t have the social safety net that we have
today. So let’s put that out of our minds.” He cites as evidence a 25%
unemployment rate, a one-third decline in U.S. GDP and a 90% decline in stock
prices, all of which occurred during the 1930s’ depression.
Unfortunately, what Bernanke’s managed to do
is put one important word out of his mind—yet. Like the rest of the “this is no
depression” camp, he fails to note that his cited figures are the extreme
readings of that era. Bernanke also ignores the critical fact that today’s bear
market is actually ahead of where the stock market was at the same point during
the 1929-1932 decline and that the economy is lurching lower in a manner
suggesting strongly that it will have little trouble keeping pace with the
economic contraction of the 1930s (see Economy & Deflation section below).
Another common refrain is that, in contrast
to the early 1930s, there are now competent financial authorities doing
everything in their power to unlock the credit markets and reignite the bull
market in equities. It’s certainly true that the Fed is doing everything in its
power, and even some things that aren’t, to reel in the crisis. The U.S.
Treasury is doing likewise. By Bianco Research’s tally, the potential total of
U.S. bailouts is closing in on $9 trillion. But these efforts are every bit as
impotent as Conquer the Crash and the September issue of The Elliott Wave
Financial Forecast suggested that they would be. Here’s the key quote from the
September EWFF: “The bailouts keep coming at lower lows, signaling further
declines ahead.” Incredibly to most people, since this quote appeared the Dow
has declined by another 30% and various government financial wizards have put
forward even bolder yet more haphazard “rescue” initiatives.
The ballooning bailout makes us more
convinced than ever that it will fail. The whole “Keystone Cops” approach to
“the rescue” strengthens our conviction. One day the bailout is aimed at jacking
up asset prices; the next it is buying mortgages; the next it is rescuing the
consumer; and the next it’s all-hands-on-deck to prop up whoever it is that
happens to be failing on that day. The alphabet soup of rescue programs now
includes ABCPMMMFLF (no, we didn’t make this up), which is supposed to “shore
up” the $1 trillion asset-backed commercial paper markets. And still, credit
spreads shoot higher.
Another program, the “systematically
significant failing institutions program” (SSFIP), was established in November
to deliver a $40 billion “equity injection” into AIG. The problem, which will
probably become the focus of intense Congressional scrutiny at some later point,
is that the injection was made in October, before the program even existed. The
Wall Street Journal puts it this way: “Practically every day the government
launches a massively expensive new initiative to solve the problems that the
last day’s initiative did not.” At the latest economic summit in mid-November,
the U.S. and other nations were reputedly “close to a deal to create a new
‘early warning system’ to detect weaknesses in the global financial system
before they reach epic proportions.” Among the stated objectives: greater
transparency. Of course, “sources spoke on the condition of anonymity because
plans are still being worked out.” The real reason that these people want to
remain anonymous is that like everyone else, they recognize the proportions of
the unfolding epic and thus the futility of the bailout effort.
For more information on navigating the
current market turmoil, including forecasts of stocks, bonds, metals, the U.S.
dollar and economic trends, download Elliott Wave International’s free 10-page
The Most Important Investment Report You’ll Read in 2009.
Steve Hochberg began his professional
career with Merrill Lynch & Co. and joined Elliott Wave International in 1994.
He became co-editor of The Elliott Wave Financial Forecast for its inaugural
issue in July 1999. Pete Kendall joined Elliott Wave International as a
researcher in 1992. He has been co-editor of The Elliott Wave Financial Forecast
since its inception in July 1999. He is also the director of Elliott Wave
International’s Center for Cultural Studies.