In a series of emails with Vince Farrell, CIO of Soleill Securities we were discussing his comments on CNBC about the contrast between 1929 and now. His point was that the policy decisions being made now are the correct ones and that there are a number of protections in place, as a result of the depression, that will prevent this recession from becoming a depression.
Briefly here are Vince’s points that are both necessary steps to preventing depression and signs of hope for the future:
On World Trade-
Then: Smoot Hawley Tariffs enacted, result, world trade falls by two-thirds (66%!)
Now: During the last G7 meeting, members agree to “do no harm” in terms of protectionism.
Money Supply-
Then: Money was kept tight and the supply of money contracted by 33%.
Now: The Fed balance sheet has been doubled and they are flooding the market with liquidity.
Taxes-
Then: Taxes were raised to confiscatory levels, >60% on income as an example.
Now: Taxes are much lower except on corporations and need to be kept there.
Unemployment-
Then: There was no unemployment insurance and unemployment reached 25%
Now: There is insurance and the unemployment rate may reach 9%, or only roughly a third of depression levels.
Deposit Insurance-
Then: There was no insurance for the depositors, so that when banks failed (2,500 in 1933 alone) their money was just gone.
Now: Deposit Insurance levels have been raised to $250,000 on accounts including money market funds and most non-interest bearing business accounts have unlimited coverage.”
If we as a nation, and our policy makers in particular can continue to remember the lessons from the past Depression 2.0 will turn out to be just hype and babble from the talking heads. It will be a tough recession and there are many serious structural changes needed but having been through a few recessions before I can report that each one looks like the end of the world when they appear; Now is a good time to tape Kipling’s quote about keeping your head while others are loosing theirs to your bathroom mirror.
Giovanni Isaksen
Ashworth Partners Ltd.
