Saturday, December 20, 2008

How to respond to people who like to make parallels to the Great Depression

One of my professors told me that if you want to look smarter than the next guy (which is all this business is about by the way) that it helps to know obscure history and/ or obscure international events.

Everyone can quote what the hype is now, just read the headlines. But if you want to look smarter than the next guy, wait for him to open his big dumb mouth spouting off that:

"These are the worst economic conditions since the Great Depression and that valuable lessons are to be learned if only one knew the parallels that existed" (that tired and played out cliche you will soon poke holes in).

You can look puzzled for a second (as you are fake pondering your reply) and gesture with your hands implying that you are super-deep in though. Take a big breath and say:

"I am not quite following you. I thought the Great Depression was a consequence of over-large factory inventories, a stock-market crash and Germany's inability to repay back its war debts with gold, causing a strain on bank lending in Britain which then caused massive bank closings here in the United States.

It seems to me that none of these factors are an issue now.
We are no longer on a gold standard and we have the FDIC to insure that bank runs are a non-starter.

Plus, over-large factory inventories, which would lead to deflation as suppliers try to adjust their inventory, are not really a problem anymore thanks to advances in the supply chain. We do not have factories churning out tons of product and laying off a bunch of workers, although the recent moves by GM and Ford are a farce of the bygone Depression on which you speak, but it seems like the federal government is taking care of that problem this time around. (Tear it down and now build it back up before he knows what the f*&k just happened).

No, despite all the mainstream talk these days being offered by every T.V. economic pundit, I see more of a parallel between current economic conditions and the Panic of 1873. (inferring that your adversary gets his info from the sell-outs, the herd-followers, the "experts" telling you the obvious)

Unlike the "Great Depression" (Make sure you do the air quotes aggressively in his face) the Panic of 1873 was caused by a building boom in the Austro-Hungarian Empire which was formed in 1867. The emperor supported new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral.

But the economic fundamentals were shaky and as continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates.

This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default.

The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke ( the Philadelphia banker who invented the bond drive to finance the Civil War, the most famous and well respected banker of the time) proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The only people who made money at this time were self-financed capitalists like Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller who had the capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices thus starting what would later be deemed "The Gilded Age". (Aggressive air quotes needed again as you continue to pummel the schleps ego).

That is how you look smarter than the next guy, destroy the guy's notion that he knew what was going on in the first place and then bring up something he probably knows nothing about. History and international events are the clear choices.

Usually though, my mind works faster than my mouth and I screw the whole processes up or it takes 10 minutes longer to get my point across and the guy has to leave just as I was about to unload on him, or the guy asks me a tangential question and I get off subject.

But if this conversation were to take place in a a movie, and I was some economic know everything bad-ass, this was how it would go down.

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