Been There Done That

In under a decade, U.S. real estate more than tripled, national debt rose by two and a half times, personal and business debt exploded, new banks expanded exponentially, we imported with wanton abandon and people were living high on the hog. And then the bottom fell out of the markets. Loan defaults soared to clearly intolerable limits literally causing 40% of the banks to fail, unemployment rocketed, 150 New York businesses collapsed in a matter of days… real estate values fell through the floor. The Great Depression? The financial meltdown of 2008-2009? Could be, but what I am describing was the Panic of 1837 (May 10^th to be exact; Martin Van Buren had just succeeded Andrew Jackson as President). A five year depression followed, and the economy did not fully recover until the Civil War/Reconstruction era decades later.

The fact is that we’ve been here before, and the “reset” button has been pushed hard in 1837, 1929 and 2008. Since we’re still in the last financial crisis, it’s anybody’s guess as to where we go from here, but one shimmering set of facts stands out uniting these three monumental collapses in the American economy. Each of these crises was caused by wild and economically unjustified speculation and profoundly stupid economic policies.

In the 1830s, everybody was buying and bidding up the value of land, and banks were issuing “paper” money of questionable value. The opening of vast new tracts of federal lands to buyers had fueled real estate speculation. The federal government, using revenues from a huge new tariff, was flush by 1835 – Andrew Jackson actually paid off the national debt – but states hoarded gold and silver, and the use “paper” money from various sources (like banks) became the common practice. It got so bad that Jackson began requiring payments for federal land to be backed with gold or silver. The financial markets were unprepared for that requirement, so people were waiting for the next President, Van Buren, to fix the mess.

Wikkipedia: “Jacksonian Democrats blamed the bank irresponsibility, both in funding rampant speculation and by introducing paper money inflation. This was caused by banks issuing excessive paper money (unbacked by bullion reserves), leading to inflation.” Van Buren took office in January of 1837. In just a few months, with no real governmental solution in sight, the panic started over absurdly rising land values and questionable paper money; Jackson was given the initial blame, soon to be passed on the Van Buren. Sound familiar? People rushed to banks to withdraw deposits, but there was no FDIC to protect them when the money was gone. Values, banks and businesses just collapsed.

1929 was triggered by absurdly rising stock prices; everybody was buying and bidding up the price of stock. Banks failed one after the other. 2008 was launched by wildly trading in overleveraged financial instruments which were use to buy everything from stocks to homes – prices were soaring along with the debt load. You know the drill here.

What is startling about the first two catastrophes is that they each took decades to recover. We don’t know about the third, but the prognosis isn’t particularly good. In the past, stuff fell in value fast, a few “bear market rallies” played in the intervening years, but for the most part, after the fall hit bottom (which was never instantaneous), most of the American economy went “sideways” for years. 1837 and 1929 crashes were only stopped by the demands on materiel created by the wars and rebuilding that followed. What is the driver that will begin to move the current American economy back to a happier and healthier place? In the current era, with the proliferation of nuclear weapons, war can be terminal. So to pick up a chant and misapply it to this scenario, “war is not the answer.”

If history is any lesson, we can expect more than one bear market rally – we are living in exceptionally volatile times – but there is absolutely nothing “obvious” in our future that suggests that we should be optimistic any time soon. If history repeats itself, markets will fall again, to what level is anyone’s guess. Have they already hit their bottom? Maybe, but it seems unlikely that the markets can sustain the current rally, and as our borrowings rise, any rise in hard commodities like oil and gold will reflect a loss in confidence in the long term value of the dollar. This inflationary reality seems all but certain.

If there is a lesson in all this, perhaps it is that governments can only fix so much. They can only slow the progress and perhaps, we hope with optimism, bring us to bottom faster so that the seeds for recovery can at least be planted, even as it may takes years to effect. We need to rebuild values ourselves.

The reality is that every working American is now faced with this challenge, in a clearly competitive global marketplace (which can no longer be walled off): what fundamental value do I bring to the earth and how is that value measured? The future will be unforgiving in that evaluation. Burning the midnight oil education and nose to the grindstone work metaphors are clearly called for. We cannot presume that we have lifestyle and healthcare entitlements; we must earn them… all over again. Past excellence is a wonderful memory, but future accomplishments require new vectors and ground-up rebuilding. As I lecture to young college students, I know they can do it. As I meet stubborn people in my workforce environment who feel that “this too shall pass soon,” I wonder if they can.

I’m Peter Dekom, and I approve this message.