The Depression: Past And Future

America’s recovery has run out of steam. Job growth is nonexistent. Stock indexes cling to highs set earlier this year. Barack Obama’s moneyfest has failed to right America’s listing ship. Yet no one from the Potomac to Wall Street has noticed the obvious — that the U.S. is facing a deflationary collapse worse than anything that has happened in 80 years.
I remember the Crash of 1987, Black Monday, Oct. 19. The only thing I had going for my family was that I held enough gold to somewhat offset the huge losses in my portfolio.
But I was lucky. The ensuing recovery meant that I never understood the hardship my parents and grandparents endured during the Great Depression. I worry that may change.

Bedtime Stories That Give Me Nightmares

Upon learning of the great stock market crash that swept away fortunes, my grandfather said to my dad, “Good riddance.”
The family homestead on Alberta’s prairies seemed a world away from the vexations on Wall Street in the autumn of 1929. My grandfather could not anticipate that the sweeping loss of wealth and confidence would impact his life.
When the stock market crashed, the price of wheat gyrated and began a long decline from $2.50 a bushel to a low of 25 cents a bushel in 1934.
But it wasn’t just the collapse in grain prices that almost bankrupted my family; it was the disappearance of confidence that cut a wide swath over all businesses.
My dad told the story of my grandmother. She had bought about 5,000 bushels of wheat. When the margin ran out, the brokerage firm Tull and Arden Ltd. of Calgary, Alberta, called and wanted more cash. These margin calls happened more than once. My grandparents decided to put up enough cash to hold them over. They sent Tull and Arden $5,000 above the margin.
Many brokerage firms were going out of business. My grandparents asked around and were assured that Tull and Arden would not fail.
My dad told me of the morning his mother came out of their farmhouse to say that the radio had just reported that Tull and Arden was bankrupt. The $5,000 in additional margin money evaporated; my grandparents’ lifetime of savings.
There was talk that Tull and Arden would make good on their clients’ losses. That did not happen. My grandparents never saw a nickel out of the $5,000 they had sent to support their contracts. It was gone along with the original $3,000 they had invested. That equals $100,000 in today’s money. (You can run the numbers yourself here.)
Because the family homestead wasn’t mortgaged, my grandparents were able to hang on — but just barely. Many of their neighbors were not so lucky. As confidence dwindled, so did credit. The economies of the world corkscrewed downward, and my family faced hard times over the next decade.

The Dollar’s Quarter Century Of Decline

We are staring into the face of an economic depression. Bankers are again nervous that other banks might turn off the tap. And the banking crisis of 2008 still plagues the global economy.
Already, banks have once again begun hoarding capital. And the modern economy cannot function when credit is not available. Since most companies and households don’t take out big new loans every day, it takes time for this truth to be realized. But when this happens, panic will ensue.
Washington and the Federal Reserve are doing their utmost to turn back the deflationary tide. The Fed has already injected more than $1 trillion into the economy in a desperate attempt to resuscitate the business cycle. I believe if the President had his way, he would pump trillions of dollars more into American banks, automakers and any and all corporations that might help him get re-elected. What Obama and the Federal Reserve are unable or unwilling to understand is that all this money is killing the one great thing America still had going for it: the U.S. dollar. The greenback that was once revered around the world is now an asset that depreciates almost daily.
The endgame of this accidental or purposeful mismanagement of the American economy could be a 1929-style crash of dollar instruments and devastating deflation.
Obama Will Kill The Dollar, Too
I anticipate that the greenback will lose another 30 percent of its worth against major currencies in the next two years.
As my former publisher at Agora, Bill Bonner, wrote earlier this month:

Every empire ends up broke… and defeated. And the fate of every country that has tried to run a pure paper money system… with currency not backed by gold… has been a disaster. It didn’t matter what anyone thought or did. Once you head down that road, it seems that you have to go all the way. There are a lot of byways and side-roads you can take. But you always seem to end up in the same place.

The correction in bullion prices earlier this year has run its course. Political posturing by the President and Congress and their failure to deal with the fundamental economic and debt problems facing the nation are leading us toward bankruptcy. I believe this ongoing crisis will push gold to $2,000 per ounce by Christmas.
Some have accused me of being a gold bug. Not true. I am a survivor bug. I will take no joy in seeing gold at $2,000 per ounce or even $3,000 per ounce. Such prices will mean hardship for the people I love and for the country I love, the United States of America.
Yours in good times and bad,