Speaker 1: One of the people I’ve been listening to recently is Jim Rickards. Jim is a very smart author on finance and precious metals, and he’s been paying close attention to what’s been going on lately with regards to the lockdown’s the mass printing of money, the depressed economy and a range of other things. Essentially, he thinks there’s a new Great Depression on the horizon and we need to be prepared. Here’s a taste of what he’s been saying.
Speaker 2: What a depression means, depressed growth. You can have growth and depression. It’s just the growth is below potential. So if your potential is three to three and a half percent and your actual growth is one and three quarters percent, that gap between, say, three and a half, I want to close that gap is depressed growth. Now, if your debt is going up five, six, seven, eight percent a year, which it is, and if your growth is one and a half, two percent a year, which it is, which will be in my forecast, then your debt to GDP ratio and your debts going up faster than your income, you’re going broke. It’s as simple as that. So we’re looking at intergenerational changes. And again, it all comes out of the current pandemic. But the pandemic, the social unrest and the depression that all converged in 2020, this is we’re not going to be able to some 30 weeks or 30 months. It’s going to take 30 years to get out.
Speaker 1: So Jim Rickards thinks we are in a similar situation to that of what happened way back in 1929. Obviously, I’m sure none of my viewers were alive back then. Who knows, maybe one or two were. But the 1920s was the period called the roaring 20s. Back then, the economy was on fire. Banks were giving out loans to everyone in the stock market was at all time highs. That was until the end of the 1920s where a big shift occurred. The economy started slowing down. People started buying less items like the new vacuum cleaners and the new electric washing machines. What then subsequently occurred was a huge market crash. The Dow Jones went from 5700 points to 520 points. As Rickards alluded to. It only recovered 30 years later. And we may be in a similar time today, at least according to Jim. This is what he said. This is both a supply shock and a demand shock. It’s extreme. I think people looking at the 2008 financial crisis, even 1998 with Russia, 1994 with Mexico, none of these crises are good baselines. If you want to understand what’s going on now, you need to go back to 1929. You have to go back to the Great Depression. And what he’s talking about with the supply and demand shock.
Let me explain. So back in the 1970s, there was that big market crash lasting 23 months. You had the dramatic rise in oil prices. You had the miners strike. The Haith government fell. But this was predominantly a supply shock. Why? Because OPEC cut off oil exports to the United States and supply was very low. This was the main thing that caused the crash 2008. It was the opposite. We had a demand shock. People lost their jobs, people had their homes foreclosed on, and there was no way that they were going to be spending money. That’s a demand shock. Even though the supply was there, there was no demand for any goods. However, currently we have both a supply and demand shock supply, as in U.S. companies not being able to operate the way they normally would. They can’t get the same amount of exports as normal due to the pandemic or imports. A lot of them have been in lockdown and this has slowed production. So that supply. But also it doesn’t take a genius to know that we’ve got a demand shock as well. People have lost their jobs. People aren’t as confident about the economy anymore, and they’re not spending money. So demand is not there. It’s the double whammy. And this is what makes the current economic conditions worse than normal. As Jim Rickards said, this is the first economic shock that most economists can think of. That was both a supply shock and a demand shock. The happy talk from Wall Street and the White House is an illusion. The worst is yet to come. So we can safely say that Rickards is not the biggest fan of the U.S. economy and its potential future outlook. I do want to show you a bit more of what he’s saying and then I’ll try see how well I can explain it.
Speaker 3: So by every measure, this is unlike anything we’ve ever seen in the United States, you know, outside of, you know, maybe the beginning of World War two. But the wars are different. None of the existing models are really adequate for understanding of what people say. Oh, I have a 20 year time series or a ten year time series or I have correlation models. Regression models and so forth, I say throw them all out the window because none of them capture what’s going on right now, you have you’d have to be ninety five years old or older to have a living memory of the Great Depression.
So what we know about it is maybe we learn from our parents or grandparents or study that there are a lot of resources. I’m not saying you can’t understand it. I’m just saying that no one alive has lived through it or very few. And as a result, I think that people don’t really understand it. There’s a lot of talk in the U.S. right now about what they call pent up demand. And the idea is that, you know, have a V shaped recovery. So the economy will fall very steeply, very quickly, but it will bounce back, you know, equally steeply on the upside and very quickly. And that’s not true. It is going down quickly. That part’s true. But when it hits bottom, then we haven’t hit bottom yet. When it does, it’s much more likely to come back very, very slowly. Not at all fast. Not at all strong for a lot of reasons. Some of these effects will linger and buyers might get under control, but it’ll still be around. But more importantly, behavior changes that can change for a generation or longer. I grew up in the 1950s. I did not lived through the Great Depression, but my parents did and my grandparents did. And I you know, as a young child, you learn from your parents behaviors. And we I mean, we saved rubber bands. We we collected the Boy Scouts. We go out and collect tin cans and newspapers. And we weren’t doing it for, you know, environmental reasons. We were doing it in order not to waste resources. And people didn’t spend much. They didn’t spend extravagantly. They didn’t overborrow, they didn’t overpay. All that came later. That was much more characteristic of, say, the 1970s, 1980s and forward, but not in the 50s and 60s. So my point being, the impact of the Great Depression on behavior lasted for 30 or 40 years, you know, through the 1970s. My view is, is something very similar is happening right now. The impact of this on everybody, people losing their jobs, hours being cut back, people being ill, people dying, that this will last for a generation will affect people alive today for the rest of their lives. And so, therefore, I don’t expect a quick rebound in the economy. I expect very slow, drawn out and weak rebounds.
Speaker 1: You say one of the things that I think we failed to do in this modern era is look back through history and learn from it. What was that like way back in the late 1920s, 1930s when the Depression hits? How does it go from being able to buy most things that you wanted to, not wanting to spend a penny at all? First, let’s look at what unemployment was like back then. OK, 1929, unemployment was ridiculously low at three point two percent. That was until the market and the economy crashed the next year. Unemployment eight point seven percent, then fifteen point nine percent. Then in 1933, ahead at its all time high of twenty four point nine percent, a.k.a., a quarter of Americans had no job, no form of income to supplement their family’s needs. You can imagine what their behavior was like back then. They went from buying the Ford Model T’s, the newly invented vacuum cleaner and dishwasher, to not thinking of spending anything at all, a transition from prosperous to very poor. And Rickard’s thinks we are in a similar period today. Looking at unemployment today, it’s not the greatest picture.
It went from being three point five percent at the start of the year to six point nine percent nearing the end of the year. And this is one thing that Rickards thinks is contributing to the change in behavior, the change of mentality that people are starting to have. They realize, hang on, I may have a job today, but one day in the future I may not be so lucky. Let me save every dollar I earn in case that happens. Instead of going out on cruises or traveling or buying the latest iPhone. No, let’s put that money into my savings accounts. And what does this do? It doesn’t only affect them. The fact that they’re not spending. No, it affects all of the businesses in the country because of the people and the country are not spending money, then the businesses are not selling much. And what do you think happens to the economy while the factories slow down, the sales decrease and GDP stops growing? And this is one of the things that Rickards is talking about when he says that he thinks it’s going to be a slow recovery when it comes to the economy, not a V shaped like everyone is thinking. It’s because of the behavioral change that people are having. Unlike the big boom we had in the 2010 decade, it appears that consumer mindset is changing and people are less. Willing to spend this results and slowing economic growth, as Rick had said, you can have growth in a depression. It’s just the growth is below potential. So if your potential is three, three and a half percent and your actual growth is one and three quarters percent, that gap is depressed growth. Now, if your debt is going up by five, six, seven, eight percent a year, which it is, and if your growth is one and a half, two percent a year, which it is, which it will be, and my forecast, when your debts are going up faster than your income, you’re going broke. It’s as simple as that. OK, let’s look at what USA GDP growth was before the pandemic hits. So before this, that was hovering around that two, three percent mark. Jim, forecasts of the future, however many years, it’s going to be around one and a half, two percent a year. And obviously the reasons for this, we’ve just explained consumer velocity, willingness to spend so our income as a country is slowing down. No one can deny this. But what’s the other end of that equation? It’s a debt, of course. What are our expenses looking like? And debt is rising by a lot more than that two percent mark. Even before the pandemic hit, it was a lot higher than that. And in the future, Jim is predicting growth of five, six, seven, eight percent, which I think is more than a fair estimate.
So you have your income, GDP slowing down, growing by, let’s say, around two percent in the future. But then you have debt which is growing by a whole lot more than that. And that’s the big problem that the USA is facing today. How do we deal with this equation which we are on the wrong side of?