no great depression (yet)

The financial news is split these days. On the one hand there are the headlines and front page stories telling us how bad it is and how we need to do something. On the other hand, there are the editorials and reviews reassuring us that this is not the Great Depression revisited.

To give credit where credit is due, the optimists and reviewers have more data to support their cause. But just how good is that data? We are told that during the Great Depression, unemployment stood at 25% and thousands of banks failed. In the Spring of 1929, 300 banks failed. That was almost six months before the stock market crash. In 1930, a thousand banks closed. By 1932, the Dow had lost 90% from its peak in 1929. Surely we are nowhere near these numbers.

That was at a time with no unemployment compensation, no FDIC to ensure deposits, and no stiff drinks to soften the blows. Nobody would even acknowledge that there was a problem and according to the WSJ, Herbert Hoover insisted that the "fundamental business of the country.. is on a sound and prosperous basis." Where have I heard that recently?

Surely, we must have learned something from the Great Depression? And according to Richard Quest of CNN London, we did. We did and we can rest assured that we won't make the same mistakes again. "We'll just make different mistakes," he quipped last night when the Japanese market tanked.

Let me go on record now. Our problems are much worse than they seem. The housing crisis is in full swing. One in six Californians is "under water" with their mortgage. At the time when most of the option ARMs are still in their five year honeymoon phase, where you can pay as much as you please. Well before the real crash so to speak.

Every day the headlines correct earlier estimates, and label them "too rosy." Everyday new revelations are made and all are bad to very bad. Unemployment may only be at 7% but you have to go past 7 to get to 25. If we learned anything in recent weeks, it is how incredibly fast we can move from seemingly innocuous difficulties to outright collapses.

The constant flow of information we are exposed to is not helping either. It is undermining our confidence. Many are already suffering from information overload paralysis. A lack of confidence is the key enemy of the American economy. That economy rests on consumer spending. In other words, it is unsustainable. But I would much prefer if it wound down gently instead of failing catastrophically as now seems more likely.

If half the population can no longer afford to spend money, and the other half prefers not to because they don't feel confident, then we are on a very slippery slope indeed.

I've said it before, time to buy gold. Cash is just paper, and when confidence is lost paper has no residual value.