Current market, the Great Depression and recommended readings

Hi everyone,

I'm new to investing and all the podcasts and websites I follow are calling for a market crash that would rival the Great Depression. Therefore I have been trying to understand the conditions that led to the 1929 crash and today's environment.

From what I can understand, the Great Depression was a deflation in the US and other developed markets from a supply and demand imbalance. The prices of commodities began to fall due to oversupply and decreasing demand. I think this was caused do to rapid expansion of credit and malinvestment. The fall in commodities is the same as what we've seen in the last 5 years however the CPI has continued to show inflation. So we have been going through a deflationary environment in commodities but the US government managed to stop the deflation in the economy through quantitative easing. QE wasn't necessary back in 1930 because the US was a creditor nation so the rise in long term interest rates (due to contraction of credit) had little effect on the ability of the US treasury to pay their debts. However in today's environment the US, along with every other country, has been increasing their debt and engineering economic growth through consumption rather than investment which is unsustainable. They stopped QE back in 2011 hence why commodities have declined in price since then. So now we're in a deflationary environment and the US can't allow this to continue because deflation hampers the governments ability to make interest payments on their existing debt coupled with current deficits and un-funded liabilities of Medicare, social security and Obamacare. This is why the Fed insists upon a 2% inflation target.

Now we have president-elect Trump coming into office in about a month who has said he plans on implementing a massive infrastructure project to create jobs (to the tune of 1 Trillion). This will have to be funded again with more debt, especially if he plans on making the tax cuts he has promised. Therefore we have to assume the only way to accomplish this is to issue more debt through government bonds which means more money printing by the FED. This seems like a dangerous loop of fighting deflation through money creation which can't end well. I hope I'm understanding this all correctly.

So now I'm trying to understand a little better where we might be heading. I know overnight rates are set by the FED and longer term rates by the market, but I would like to better understand why the FED raises and lowers short term rates and what effect they think this will have as well as the markets reactions to US policy and how the rise and fall of long term rates is determined. I think the recent spike in long term rates is due to inflation expectations; but deflation has the same effect of rising long term rates? Also, I would like to learn more about the credit cycle and effects on the economy.

Everyone is talking about a massive bond bubble at the moment and the end of the bond bull market. People are starving for yield and pushing up valuations on bonds. Why will the bond market reverse? Is it because of the possibility of defaults by government? In 1929, people went into cash and bonds to protect their wealth. With low and possibly negative rates on holding cash and a collapse of the bond market today, where would the money flow? The bond market is much bigger than the stock market, and even though the stock market is at historically high valuations, I think this would be the only place for this money to flow. At least your holding a company with tangible assets and not an IOU.

Lastly, in 1929 silver declined with other commodities, but there was still faith in the currency because it was backed by gold. With floating currency and the devaluation of these currencies worldwide, will people look to any store of tangible wealth like gold and silver? Will they be more affected than any other commodity?

Sorry, I know that was a mouthful. Any recommended readings to better understand where we are today and where we have been?



  • Take introduction and intermediate macroeconomic so you can understand the basic theories behind fiat currency. Any textbook will work. You will probably need a professor to ask questions because it is a lot to take in on your own.
  • Search Wikipedia for Keynesian economics. All modern monetary systems were based off Keynes work yet most people have little more than a passing knowledge of his ideas.
  • I just started Rothbard's "America's Great Depression" at the moment and so far it looks pretty good, it was pretty cheap so I'd recommend it. Milton Friedman's explanation of it in supposed to be *the* explanation from what I've heard so that might be worth checking out
  • Read Jesse Livermore's "Reminiscences of A Stock Operator." Then Amity Shlays "Forgotten Man" will explain the particulars. I might sum it up simply as a death spiral of credit and spending contraction exacerbated by lousy Hoover & Roosevelt policy. If you can answer what caused the the great Finanial Calamity then you can figure out what happened back then by reading those two books. Do not consult any liberals, elitists, professors, modernist ministers or members of the establishment in this quest. Remember you're looking for the disease not the symptoms, son.
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