“A sense of crisis is creeping into fixed-income markets at the start of the fourth quarter, coming off the back of a rocky September. The queue of soothsayers warning of impending doom is lengthening; growing concern about US domestic politics as well as the global economic backdrop risks sparking a full-blown market rout.
“Until the Federal Reserve finally calls time on its 18- month rate-hiking cycle, the bond-market beatings will continue. Something serious may break in the meantime as the sound of rivets popping around the world is getting louder. The 10-year US Treasury yield has risen almost 150 basis points since May, reaching 4.8%. The 30-year bond breached 5% on Wednesday, as did the 10-year Italian bond. Europe’s benchmark security, the 10-year German bund, surpassed 3%. It’s looking like a slow-motion train wreck, with worrying echoes of the October 1987 Wall Street crash.”
- Marcus Ashworth, ‘Bond Vigilantes Risk Breaking the Markets’, Bloomberg News, 4 October 2023.
—
Get your Free
financial review
—
If what you were ‘taught’ about the Great Depression is anything like our own schooltime experience, it will go something like this. There was a Great Crash in 1929, which ushered in hard times, notably in the US. Someone called Franklin Delano Roosevelt then rode in to the rescue, and set up a bewildering array of interventionist state agencies to right the economy. Erm.. that’s it.
If more than one of our school history lessons was devoted to the history of 1930s North America, we doubt it. So while we despair at the apparent lack of history teaching in our schools that can be the only thing accounting for why so many young Britons a) vote Labour and b) are happy to march under a flag with a hammer and sickle upon it, we should probably start polishing the windows of our own glass house before we elect to throw stones at those of others.
Can there be any historical episode more relevant to our current financial environment predicament than that of the Great Depression ? Which is why it was a revelation to us to discover that the wholly insubstantial school-age coverage that we received on the topic might well have been wrong in just about every fundamental aspect.
You can buy a Kindle copy of Murray Rothbard’s America’s Great Depression for about £2.10 on Amazon. We can go one better. Through the ever-excellent Mises website you can download a PDF copy for free. Reading this book changed our entire outlook on the topic of government intervention in markets and the economy. We suggest it will change yours too.
A preamble. The US financial commentator James Grant offers a dress rehearsal for the full-blown Depression experience in his recent book, The Forgotten Depression: 1921: the crash that cured itself. The clue is in the title. In 1921, the US economy experienced a post-war deflationary slump. Woodrow Wilson and Warren Harding immediately snapped into action and.. did precisely nothing. The economic storm quickly blew itself out.
In matters of the economy, while prevention may be better than cure, intervention most certainly is not. The post-1929 experience of the US shows this in spades. The one quote we remember from that long ago history lesson was from US Treasury Secretary Mellon. Faced with a slowing economy after the Crash, he urged the US administration, somewhat luridly, to
“Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate”
and so “purge the rottenness” from the system. Seen through the interventionist prism of our own times, he sounds like a James Bond villain. But the US government, of course, did no such thing. The then President Hoover gathered industrial leaders together and coerced them into maintaining wage rates. The New Deal itself arrived under Hoover, not Roosevelt. But FDR massively expanded the programme.
Whenever crisis comes, politicians feel obligated to do something, and just as importantly, to be seen to be doing something. The practical utility of action is squashed under the driving imperatives of the electoral cycle. As Rothbard puts it,
“Mr. Hoover met the challenge of the Great Depression by acting quickly and decisively, indeed almost continuously throughout his term of office, putting into effect “the greatest program of offence and defence” against depression ever attempted in America. Bravely he used every modern economic “tool,” every device of progressive and “enlightened” economics, every facet of government planning, to combat the depression. For the first time, laissez-faire was boldly thrown overboard and every governmental weapon thrown into the breach. America had awakened, and was now ready to use the State to the hilt, unhampered by the supposed shibboleths of laissez-faire. President Hoover was a bold and audacious leader in this awakening. By every “progressive” tenet of our day, he should have ended his term a conquering hero; instead he left America in utter and complete ruin – a ruin unprecedented in length and intensity.”
Perhaps what we were taught at school was wrong.
Rothbard identifies a number of ways in which government exacerbates rather than solves recessions. Among them:
- Preventing or delaying liquidation by the ongoing lending of money to insolvent businesses;
- Stimulating inflation, which blocks the necessary market clearing process of lower prices;
- Maintaining prices and wages above the levels they would naturally reach in a free market;
- Stimulating consumption and discouraging saving.
Perhaps the US’ Great Depression would have been over sooner if government had simply stepped out of the way ? Rothbard again:
“Economic theory demonstrates that only governmental inflation can generate a boom-and-bust cycle, and that the depression will be prolonged and aggravated by inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have shown.. how government intervention generated the unsound boom of the 1920s, and how Hoover’s new departure aggravated the Great Depression by massive measures of interference. The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of “enlightened” economists. And in any other depression, past or future, the story will be the same. [Emphasis ours.]”
So it is our contention that our governments and central banks could not have done a worse job of handling monetary and economic affairs ever since the 2008 Lehman Brothers shock. Rather than allow a free market to work its magic, they have followed Rothbard’s interventionist playbook to the letter.
There is a terrible hubris at the heart of mankind. Like every other living thing on the planet we are products of nature, but we consider ourselves to be well above it. We are beset by regular reminders of our vulnerability, but quickly dismiss them off-handedly to a spiritual plane, calling them “acts of God” as if to show that we could never have prevented them. In a significant essay for ‘Foreign Affairs’, The Black Swan of Cairo, Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous.
“Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large- scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”
There is an analogy from the natural world. In the 1960s and 1970s, mid-western American states fell victim to scores of wildfires. Constant interventions by the US Forest Service appeared to have little positive impact – if anything, the problems seemed to worsen. Over time, foresters came to appreciate that fires were a normal and healthy element of the forest ecosystem. By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future. Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable fire to come has a far greater store of latent fuel at its disposal.
Not interfering with the market’s adjustment process is simply allowing Schumpeterian “creative destruction” to operate, and cleanse the forest. But that process is anathema to well-compensated entrenched interests that suckle from the teat of the State. Banks, for example. So while “laissez faire” would accelerate any banking crisis and shorten the resultant economic contraction, it would reveal the identity of too many naked swimmers when the tide retreats. Instead, courtesy of highly paid lobbyists, we get a long drawn out depression. The example of Japan’s zombie banks from the 1990s is still fresh, but ignored in the west.
To reiterate, Rothbard identified the numerous ways in which government can hobble the adjustment process:
- Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further..
- Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments which, in their turn, will have to be liquidated in some later depression. A government’s “easy money” policy prevents the market’s return to the necessary high interest rates.
- Keep wage rates up..
- Keep prices up..
- Stimulate consumption and discourage saving.. more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved capital even further.
- Subsidize unemployment. Any subsidization of unemployment (via unemployment
“insurance”, relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.
An iatrogenic illness is one caused by the doctor himself. The economies of the West now face policy measures of the sort highlighted by Rothbard that are stated to be in our interests, but which have already shown themselves more likely to do harm to the patient and prolong the recession.
The tragedy of our times is not that the history doesn’t exist. Rather, the history is out there – but we all have to experience it for ourselves. Marcus Ashworth suggests that the pain will subside once the Fed finally stops its rate hikes and punishment beatings. Our concern is in a sense subtler – that the Fed has singularly done so much damage and lost control of the bond market so completely and comprehensively that even lower rates can no longer save us from what’s to come. To coin a Twitter / X hashtag, #GotGold ?
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Get your Free
financial review
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
“A sense of crisis is creeping into fixed-income markets at the start of the fourth quarter, coming off the back of a rocky September. The queue of soothsayers warning of impending doom is lengthening; growing concern about US domestic politics as well as the global economic backdrop risks sparking a full-blown market rout.
“Until the Federal Reserve finally calls time on its 18- month rate-hiking cycle, the bond-market beatings will continue. Something serious may break in the meantime as the sound of rivets popping around the world is getting louder. The 10-year US Treasury yield has risen almost 150 basis points since May, reaching 4.8%. The 30-year bond breached 5% on Wednesday, as did the 10-year Italian bond. Europe’s benchmark security, the 10-year German bund, surpassed 3%. It’s looking like a slow-motion train wreck, with worrying echoes of the October 1987 Wall Street crash.”
—
Get your Free
financial review
—
If what you were ‘taught’ about the Great Depression is anything like our own schooltime experience, it will go something like this. There was a Great Crash in 1929, which ushered in hard times, notably in the US. Someone called Franklin Delano Roosevelt then rode in to the rescue, and set up a bewildering array of interventionist state agencies to right the economy. Erm.. that’s it.
If more than one of our school history lessons was devoted to the history of 1930s North America, we doubt it. So while we despair at the apparent lack of history teaching in our schools that can be the only thing accounting for why so many young Britons a) vote Labour and b) are happy to march under a flag with a hammer and sickle upon it, we should probably start polishing the windows of our own glass house before we elect to throw stones at those of others.
Can there be any historical episode more relevant to our current financial environment predicament than that of the Great Depression ? Which is why it was a revelation to us to discover that the wholly insubstantial school-age coverage that we received on the topic might well have been wrong in just about every fundamental aspect.
You can buy a Kindle copy of Murray Rothbard’s America’s Great Depression for about £2.10 on Amazon. We can go one better. Through the ever-excellent Mises website you can download a PDF copy for free. Reading this book changed our entire outlook on the topic of government intervention in markets and the economy. We suggest it will change yours too.
A preamble. The US financial commentator James Grant offers a dress rehearsal for the full-blown Depression experience in his recent book, The Forgotten Depression: 1921: the crash that cured itself. The clue is in the title. In 1921, the US economy experienced a post-war deflationary slump. Woodrow Wilson and Warren Harding immediately snapped into action and.. did precisely nothing. The economic storm quickly blew itself out.
In matters of the economy, while prevention may be better than cure, intervention most certainly is not. The post-1929 experience of the US shows this in spades. The one quote we remember from that long ago history lesson was from US Treasury Secretary Mellon. Faced with a slowing economy after the Crash, he urged the US administration, somewhat luridly, to
“Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate”
and so “purge the rottenness” from the system. Seen through the interventionist prism of our own times, he sounds like a James Bond villain. But the US government, of course, did no such thing. The then President Hoover gathered industrial leaders together and coerced them into maintaining wage rates. The New Deal itself arrived under Hoover, not Roosevelt. But FDR massively expanded the programme.
Whenever crisis comes, politicians feel obligated to do something, and just as importantly, to be seen to be doing something. The practical utility of action is squashed under the driving imperatives of the electoral cycle. As Rothbard puts it,
“Mr. Hoover met the challenge of the Great Depression by acting quickly and decisively, indeed almost continuously throughout his term of office, putting into effect “the greatest program of offence and defence” against depression ever attempted in America. Bravely he used every modern economic “tool,” every device of progressive and “enlightened” economics, every facet of government planning, to combat the depression. For the first time, laissez-faire was boldly thrown overboard and every governmental weapon thrown into the breach. America had awakened, and was now ready to use the State to the hilt, unhampered by the supposed shibboleths of laissez-faire. President Hoover was a bold and audacious leader in this awakening. By every “progressive” tenet of our day, he should have ended his term a conquering hero; instead he left America in utter and complete ruin – a ruin unprecedented in length and intensity.”
Perhaps what we were taught at school was wrong.
Rothbard identifies a number of ways in which government exacerbates rather than solves recessions. Among them:
Perhaps the US’ Great Depression would have been over sooner if government had simply stepped out of the way ? Rothbard again:
“Economic theory demonstrates that only governmental inflation can generate a boom-and-bust cycle, and that the depression will be prolonged and aggravated by inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have shown.. how government intervention generated the unsound boom of the 1920s, and how Hoover’s new departure aggravated the Great Depression by massive measures of interference. The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of “enlightened” economists. And in any other depression, past or future, the story will be the same. [Emphasis ours.]”
So it is our contention that our governments and central banks could not have done a worse job of handling monetary and economic affairs ever since the 2008 Lehman Brothers shock. Rather than allow a free market to work its magic, they have followed Rothbard’s interventionist playbook to the letter.
There is a terrible hubris at the heart of mankind. Like every other living thing on the planet we are products of nature, but we consider ourselves to be well above it. We are beset by regular reminders of our vulnerability, but quickly dismiss them off-handedly to a spiritual plane, calling them “acts of God” as if to show that we could never have prevented them. In a significant essay for ‘Foreign Affairs’, The Black Swan of Cairo, Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous.
“Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large- scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”
There is an analogy from the natural world. In the 1960s and 1970s, mid-western American states fell victim to scores of wildfires. Constant interventions by the US Forest Service appeared to have little positive impact – if anything, the problems seemed to worsen. Over time, foresters came to appreciate that fires were a normal and healthy element of the forest ecosystem. By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future. Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable fire to come has a far greater store of latent fuel at its disposal.
Not interfering with the market’s adjustment process is simply allowing Schumpeterian “creative destruction” to operate, and cleanse the forest. But that process is anathema to well-compensated entrenched interests that suckle from the teat of the State. Banks, for example. So while “laissez faire” would accelerate any banking crisis and shorten the resultant economic contraction, it would reveal the identity of too many naked swimmers when the tide retreats. Instead, courtesy of highly paid lobbyists, we get a long drawn out depression. The example of Japan’s zombie banks from the 1990s is still fresh, but ignored in the west.
To reiterate, Rothbard identified the numerous ways in which government can hobble the adjustment process:
“insurance”, relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.
An iatrogenic illness is one caused by the doctor himself. The economies of the West now face policy measures of the sort highlighted by Rothbard that are stated to be in our interests, but which have already shown themselves more likely to do harm to the patient and prolong the recession.
The tragedy of our times is not that the history doesn’t exist. Rather, the history is out there – but we all have to experience it for ourselves. Marcus Ashworth suggests that the pain will subside once the Fed finally stops its rate hikes and punishment beatings. Our concern is in a sense subtler – that the Fed has singularly done so much damage and lost control of the bond market so completely and comprehensively that even lower rates can no longer save us from what’s to come. To coin a Twitter / X hashtag, #GotGold ?
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Get your Free
financial review
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
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