Can the Government Stop Another Great Depression?

The following article is excerpted from a recent issue Elliott Wave International’s Financial Forecast.

Elliott Wave International (EWI) is offering the full 10-page issue, entitled “The Most Important Investment Report You’ll Read in 2009,” free for a limited time. In addition to the following market commentary, it includes independent forecasts of stocks, bonds, metals, the U.S. dollar and economic trends.

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By Steve Hochberg and Pete Kendall
Editors of The Elliott Wave Financial Forecast

As Conquer the Crash so boldly counseled, prosperity entails managing one’s finances and livelihood so as to be in tune with a 1930s’ style deflationary depression. But conventional wisdom disagrees. “There’s no comparison” to the Great Depression, says the world’s leading financial authority, U.S. Federal Reserve Chairman Ben Bernanke: “I’ve written books about the Depression. We didn’t have the social safety net that we have today. So let’s put that out of our minds.” He cites as evidence a 25% unemployment rate, a one-third decline in U.S. GDP and a 90% decline in stock prices, all of which occurred during the 1930s’ depression.

Unfortunately, what Bernanke’s managed to do is put one important word out of his mind—yet. Like the rest of the “this is no depression” camp, he fails to note that his cited figures are the extreme readings of that era. Bernanke also ignores the critical fact that today’s bear market is actually ahead of where the stock market was at the same point during the 1929-1932 decline and that the economy is lurching lower in a manner suggesting strongly that it will have little trouble keeping pace with the economic contraction of the 1930s (see Economy & Deflation section below).

Another common refrain is that, in contrast to the early 1930s, there are now competent financial authorities doing everything in their power to unlock the credit markets and reignite the bull market in equities. It’s certainly true that the Fed is doing everything in its power, and even some things that aren’t, to reel in the crisis. The U.S. Treasury is doing likewise. By Bianco Research’s tally, the potential total of U.S. bailouts is closing in on $9 trillion. But these efforts are every bit as impotent as Conquer the Crash and the September issue of The Elliott Wave Financial Forecast suggested that they would be. Here’s the key quote from the September EWFF: “The bailouts keep coming at lower lows, signaling further declines ahead.” Incredibly to most people, since this quote appeared the Dow has declined by another 30% and various government financial wizards have put forward even bolder yet more haphazard “rescue” initiatives.

The ballooning bailout makes us more convinced than ever that it will fail. The whole “Keystone Cops” approach to “the rescue” strengthens our conviction. One day the bailout is aimed at jacking up asset prices; the next it is buying mortgages; the next it is rescuing the consumer; and the next it’s all-hands-on-deck to prop up whoever it is that happens to be failing on that day. The alphabet soup of rescue programs now includes ABCPMMMFLF (no, we didn’t make this up), which is supposed to “shore up” the $1 trillion asset-backed commercial paper markets. And still, credit spreads shoot higher.

Another program, the “systematically significant failing institutions program” (SSFIP), was established in November to deliver a $40 billion “equity injection” into AIG. The problem, which will probably become the focus of intense Congressional scrutiny at some later point, is that the injection was made in October, before the program even existed. The Wall Street Journal puts it this way: “Practically every day the government launches a massively expensive new initiative to solve the problems that the last day’s initiative did not.” At the latest economic summit in mid-November, the U.S. and other nations were reputedly “close to a deal to create a new ‘early warning system’ to detect weaknesses in the global financial system before they reach epic proportions.” Among the stated objectives: greater transparency. Of course, “sources spoke on the condition of anonymity because plans are still being worked out.” The real reason that these people want to remain anonymous is that like everyone else, they recognize the proportions of the unfolding epic and thus the futility of the bailout effort.

For more information on navigating the current market turmoil, including forecasts of stocks, bonds, metals, the U.S. dollar and economic trends, download Elliott Wave International’s free 10-page report, The Most Important Investment Report You’ll Read in 2009.