Well, many of us ‘doomers’ have said this thing we’re going through has the potential to be a generational thing. After researching the crash of 1873 and the resulting depression lasting until 1896, I believe it’s time to call the ball. This is generational, and it’s going to last a long time. Without going into a large amount of detail, we’ll look at the why we are comparable to the crash of 1873.
This economic mess is created by a bubble, a debt bubble. Debt bubbles take a very long time to unwind. We’re talking about decades, not a few years or quarters. The euro is on the verge of collapse, the dollar is teetering as the reserve currency of the world. The drum beat grows to find a replacement, but none is available. The euro is failing due to the dysfunctional structure of it.
The reason the dollar works is due to the fact that the US has the full faith and credit of the United States Government behind it. ie…the power of taxation. The euro simply has a handshake and a smile backing it up. The euro stands a good chance of failing due to the immense debt load many of the member states carry. Sovereign debt bubbles take a long time to unwind because they are structural. It’s not about balancing the programs, it’s about cutting programs, affecting people. This creates a lot of discomfort for politicians and people. The tough decisions are simply not made as they should be. So, in order to straighten out a debt bubble, you have (as you know) to be patient and unwind all the programs. For the US, as reserve currency we don’t have to deal with the problems, we can print. Everyone else isn’t that lucky. The structural nature of this debt bubble means that whatever happens we are in for a very long haul. I don’t expect to see this resolved for the next 20-30 years if things hang on for that long.
The crash of 1873 started in Europe and spread rapidly throughout the region. This resulted in contagion to the United States. If you’re interested, there’s a lot of reliable information on wikipedia on the crash. The parallels are eerie and disturbing as the premise behind then and now are very close. It’s incorrect to compare today to the 30′s. The foundations of the market and economic disruptions are different.
An emotional touch point for me will be when the announcement comes down that a member nation of the European Monetary Union leaves the EMU. I believe that could potentially trigger a long bank holiday due to all the financial contracts, bonds, and trades needing to be re numerated. This re balancing, which is required due to a currency re-emerging into the market and the euro GDP being weakened, should result in a bank holiday. A potential bank holiday that would stop all atm and credit transactions as well. Should this bank holiday last more than a few days we could see some supply chain disruptions due to JIT inventory management at the large retailers. Why? Easy, everything revolves around that word…..debt.
For a member nation to leave the EMU without dealing with it’s structural debt issues would lead to a very interesting market situation. One we’ve never been in before and more closely resembles 1873 rather than 1929.
- WIKIPEDIA: Panic of 1873
- Bank Holiday: the temporary closing of a bank in the event that its obligations exceed its resources.