1929 Recapitulated?

Back in 2003 I wrote an article about the coming Great Depression. Well, the current "sub-prime" banking crisis certainly fits the pattern of a financial bubble finally bursting.

Basically, a wunch of bankers have been lending money to people such as myself who can't afford it, and now they're all surprised as it blows up in their faces. The boss of the Northern Rock bank, Britain's recent casualty, bleated before a parliamentary committee that "nobody could have foreseen this", as if people such as myself haven't been forecasting this outcome for, literally, decades.

I see that UBS in Switzerland has written down billions of dollars against bad debts. How can one choose a bank these days? Well, there can be no guarantees really, but probably it is necessary to do a load of homework first. For example, UBS's share price has fallen 83% over the last year in the lead-up to their crisis. Bear Stearns' share price had been sliding for some time before that crisis broke. It seems somebody had a clue. Probably, if you have any funds that you can't afford to lose, they should be spread between a number of UNRELATED institutions, and a number of currencies. In the UK, guarantees only cover up to around £30,000 on deposits (and the deposits must be in unrelated banks for them all to be protected). Check this article at http://www.moneysavingexpert.co.uk for advice.

Is the dollar a safe currency any more? Nobody knows. US interest rates are down, making it unattractive and raising inflation in countries whose currencies are pegged to the dollar. If too much money leaves the US to find better rates elsewhere, the US will find itself with the unenviable choice between a collapsing currency raising the prices of imports to unaffordable levels, or raising interest rates and crushing the economy that way instead. That is, slump1 or slump2.

Bankers around the world are afraid of inflation - and certainly, hyperinflation such as in Zimbabwe at the moment or Germany between the wars is worth avoiding at all costs - but generally, a great depression is much worse than normal inflation levels. Inflation, after all, allows people to pay off their debts with cheap money: the debt remains much the same but your wages tend to go up each year. Depression makes debts progressively harder and harder to pay off as money becomes more and more expensive (falling prices means your cash is more valuable (e.g., your wages may fall), which means it is harder to pay things off). The golden rule: cash is king. Hold on to it!