It has taken me nine years to work up the courage to write an article about the new great depression. I’m like everyone else. Talking about the next great depression scares me. But things have gotten bad enough (this article was posted in June 2012) that I believe these words must be put forward.
The first thing I want to do is to reassure you. There really is going to be a second great depression. Pretending otherwise makes things worse. I have a reputation for talking plainly about difficult financial subjects. I am going to do that here. But my aim is not to scare you into buying some doom-and-gloom book. So I am going to tell the full story, both the true bad story and the true good story. We are today headed into the next great depression. And then not too long afterwards we will be headed into the greatest times of economic growth we have ever seen.
Reality #1 About the New Great Depression: You Cannot Trust the Conventional Economics Experts to Tell You the Straight Story
You cannot trust anything the expert economists say. They are the ones who got us into this mess! If they knew what they were doing, we wouldn’t be headed into a second great depression. Please ignore anything that the conventional economic experts say.
Reality #2 About the New Great Depression: There is One Group of Economists Who Warned Us About the Economic Crisis Before It Hit
To make any sense of our economic crisis, we need to turn to a group of economists that do not make their living parroting the mainstream ideas. The leader of this group is Yale Economics Professor Robert Shiller, author of the book Irrational Exuberance. Here are some words from Shiller’s book, published in March 2000:
If over some interval in the first decade or so of the twenty-first century the U.S. stock market is going to follow an uneven course down, as well it might — back, let us say, to its levels in the mid-1990s or even lower — then individuals, foundations, college endowments, and other beneficiaries of the market are going to find themselves poorer, in the aggregate by trillions of dollars. The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.
So there were people who saw where we were headed back at a time when we could have done something to stop it from happening. Those are the people we should be listening to when trying to find a way out of this mess.
Reality #3 About the New Great Depression:: It is Very Easy to Understand Intellectually Why Our Economy Collapsed
Stock prices rose to insane levels in the late 1990s. At the top of the bubble, U.S. stocks were priced at three times fair value; they were priced at $12 trillion more than they were worth. Stock prices always return to fair value after 10 years or so; there is not one exception in the historical record. So anyone paying attention to stock prices knew in 2000 that over the next 10 years we would be seeing about $12 trillion in spending power disappear from the U.S. economy.
It is not hard to understand why we are all so afraid to spend money today. We had hoped by this time to be much farther along in our efforts to finance our retirements. We are trying to make up for lost time by cutting back on nonessentials and saving more than we ever have before. Our unwillingness to spend has caused tens of thousands of businesses to fail and millions of workers to be thrown out of work. But government stimulus programs and exhortations to spend do not change anything. We are scared about our financial futures. So we are not about to begin spending freely again.
The insane bull market of the late 1990s caused the economic crisis. We were borrowing the money to finance those inflated portfolio values from future investors. We are those future investors! Paying off a credit card debt is a lot less fun than running it up. We have behaved foolishly and caused ourselves great pain. There’s nothing complicated or hard to understand about it.
Reality #4 About the New Great Depression: It Is Very Hard to Accept Emotionally Why Our Economy Collapsed
The cause of the economic crisis is obvious: It is the heavy promotion of Buy-and-Hold/Get Rich Quick investing strategies that did it. The trouble is that this obvious explanation is very hard to accept emotionally. We all feel like fools. This is the fourth time in U.S. history that an out-of-control bull market caused an economic crisis (there has never since 1900 been an economic crisis that was not preceded by an out-of-control bull market). We like to think of ourselves as responsible people. We don’t want to admit that we did this to ourselves.
So we have become defensive about the dangers of Buy-and-Hold. We spend whatever mental energies we direct to consideration of the economic crisis to coming up with rationalizations for it. We blame the government. We blame the big, bad bankers. We blame anything but the marketing pitches that told us that there was no need for us to lower our stock allocations when stock prices reached insanely dangerous levels, that there was some sort of magic blue pixie dust that was going to cause it all to turn out different this time.
Reality #5 About the New Great Depression: We Are Slowly But Surely Coming to Terms With these Realities
I’ve been writing on the internet about the dangers of Buy-and-Hold Investing since May 2002. I’have seen it all. I’ve had old friends of mine threaten to kill my wife and children. I’ve seen web sites set up for the sole purpose of ridiculing me and intimidating me. I’ve been banned from discussion boards and blogs where I had been a widely praised and widely loved community members for years before I started posting about the dangers of Get Rich Quick investing strategies. I’ve had my means of making a living taken away from me because I dared to accurately report the numbers that people use to plan their retirements. I’ve had big-name experts in the field tell me that they love my work but then add that they don’t want to be associated with me in any way because they have seen the intensity of the hate directed at those who speak honestly about the realities of stock investing. I think it would be fair to say that I am the world’s leading expert on the emotional pain felt by Buy-and-Hold investors in the process of coming to terms with the long-term consequences of their many acts of financial self-destruction.
As the world’s leading authority on this sad matter, I have some good news to impart: It’s getting better!
I haven’t been banned at a new board or blog for six months now. That’s never happened before! I have recently been invited by several bloggers to write Guest Blog Entries for them. That’s never happened before! I occasionally today see reasonably long comment threads appear at the three weekly columns I write on the dangers of Buy-and-Hold. That’s never happened before!
Things are changing.
Why? Because that’s the way it goes with the humans. We have a hard time letting in painful information. But eventually we get around to it. This is the fourth economic crisis that was caused by the widespread promotion of Get Rich Quick strategies. We didn’t come to terms with our mistakes quickly on the first, second or third times either. But we did eventually. We will come to terms this time too. It’s always darkest before the dawn. That’s because it is the darkness that scares us into doing what we need to do to bring on the light.
Reality #6 About the New Great Depression: Things Cannot Change Until They Get a Lot Worse
Buy-and-Hold is not just an investing strategy. It is an industry.
There are rich and powerful people who who have written books promoting Buy-and-Hold. They very, very, very much do not want to get about the business of correcting those books.
There are rich and powerful people who have developed calculators rooted in Buy-and-Hold. They very, very, very much do not want to get about the business of correcting those calculators.
There are rich and powerful people who have built web sites that promote Buy-and-Hold. They very, very, very much do not want to get about the business of acknowledging the financial distress they have caused their readers.
We need to change. We need to begin telling people the realities of stock investing as revealed to us by the academic research produced after Buy-and-Hold was developed. But it’s going to be hard to pull that off.
The consequences of not doing what we need to do must become very dire before we will be willing to take on this hard task. The economic destruction we face today is not nearly bad enough to spur us on.
But it’s getting there. And there are signs that the next great depression is no longer all that far off in the future. If stocks perform in the future anything at all as they have always performed in the past, we will be seeing the second great depression begin sometime within the next two or three years.
Reality #7 About the New Great Depression: We Know How to End the Next Great Depression Once It Comes
The first great depression was caused by insane stock valuations too. But we didn’t know that at the time. So it took some time to bring that one to an end. There is no reason to believe that the second great depression will last even nearly as long.
It’s not possible today to inform middle-class people about the dangers of Buy-and-Hold. Honest posting on these matters is banned at all the major sites. Shiller’s book was a widely praised bestseller. But even Shiller has acknowledged that he has never gone public with all he knows about how stock investing works because he would be viewed as “unprofessional” if he did so.
All that will change with the coming of the next great depression. Once the second great depression is not something we are speculating about but something we are struggling to overcome, the Ban on Honest Posting will be lifted throughout the internet and we will be able to use this wonderful new internet technology to fill people in on what they need to know to invest effectively and thereby to bring the new great depression to an end
Reality #8 About the New Great Depression: We Will All Live Richer Lives on the Other Side of the Second Great Depression
Investing was not a subject of sustained academic study until the 1960s. And the first model that was developed was the now discredited Buy-and-Hold Model. So there has never been a time when middle-class investors have been able to tap into the benefits of stock investing in an effective way.
All that is about to change with the start of next great depression. We know more about how stock investing works today than any group of people has ever known before. We are blessed. We just need to work up the courage to take on the powerful people who do not want others to learn about the mistakes they have made. We’re almost there.
It’s a strange paradox. But the new great depression might end up bringing on the greatest period of economic growth in our nation’s history. I’m scared. I am sure that you are too. But I want you to know that this is not a scary time that we will be going through for no good purpose. Sometimes we need to go through scary times to achieve great jumps forwards. The experiences that I have seen doing the work I have been doing in this field for the past nine years tells me that this is one of those times.
The new great depression is coming soon.
That’s not necessarily such a bad thing.