Stanford Progressive

Social Unrest and Money Printing: Is 2011 America’s New 1932?

By Lee Jackson, published November, 2011

The following is an excerpt from Issue XI of the free weekly financial newsletter The Opportune Time:

Quick Summary
✦  How the Present POLITICAL Picture Resembles That of the 1930s
✦  What Your MONEY SUPPLY Can Do for You

In the past, I often have drawn comparisons between 1932 and 2011, because in my opinion, the two years are eerily similar. Three years prior to both 1932 and 2011, the U.S. real estate market collapsed, the stock market crashed, and unemployment rose sharply. Despite unusually weak economic recoveries, people generally were optimistic that growth would accelerate following the 2008 and 1929 downturns. But in the latter halves of 1932 and 2011, concerns about the European banking system festered. In 1933, the European financial system collapsed, and the Great Depression ensued. Time will tell if a similar outcome will occur next year, and I presently am cautious.

The POLITICAL scene in the 1930s also was similar to that of today. Populist movements arose in response to weak economic conditions and in anticipation of elections in late 1932. For example, in January 1932, James Renshaw Cox, a pro-labor activist from Pennsylvania, led a march of 25,000 people through Washington, D.C., as shown below. At the time, the demonstration, dubbed Cox’s Army, was the largest ever in the U.S. capital. Following the march, Cox founded the Jobless Party, and ran for president in 1932. Despite his campaign’s lack of success, Cox‘s views did influence the political scene. In 1932, President Franklin Delano Roosevelt was elected to his first term, and he enacted the New Deal programs partly in response to pro-labor activism.

Although 2011 is not an election year, Occupy Wall Street (OWS) may be the beginning of what is to come in 2012. Given the scale of how large demonstrations grew in 1932, I expect social unrest to increase in the coming months. I would not be surprised to see populist movements, such as the Tea Party and OWS, gain ground and back a presidential candidate. I am interested to see whether the Tea Party or OWS gains more popularity. Given historical precedent and current public sentiment, I suspect OWS will have greater political influence. In particular, OWS is more fiscally liberal and more likely to support public work projects that appeal to unemployed demonstrators. When push comes to shove, I believe the American electorate is more likely than not to pressure the government to expand its role in the jobs market.

At the same time, I expect fiscal conservatives to criticize government initiatives and perhaps label them as socialist. Some of President Roosevelt’s New Deal programs later were ruled unconstitutional, and I suspect the current and next president(s) will face similar opposition. Such opposition likely will gain considerable traction, especially when economic problems begin to abate down the road. I expect public work projects to receive popular support in the near term, and to lose popularity  when economic growth rebounds in the long term.

Though in the past, I have focused on the similarities between the 1930s and today, in this report, I will discuss  one key difference. Unlike in the 1930s, the U.S. MONEY SUPPLY, or money stock, is expanding. Money, like every good, has supply and demand dynamics that determine its price. The ‘price’ of money is reflected by interest rates. In general, when the money supply expands, money becomes cheaper to borrow, and interest rates fall. The reverse is true too.

Central banks control the size of the money stock by creating and destroying currency and credit. Note that there are numerous ways to measure the money supply, but economists generally use M2. Put simply, the M2 money stock refers to the currency and loans outstanding in an economy. During the 1930s, the Federal Reserve (Fed), the U.S. central bank, tried unsuccessfully to expand the M2 money stock, as demonstrated by the upper chart featured below. Compare the 1930s to the lower chart featured below. The lower chart graphs the annualized growth rate of the M2 money stock every week over the past decade. The U.S. M2 money supply has not contracted for more than 500 consecutive weeks!

A key determinant of a currency’s value is its corresponding M2 money stock growth rate. Usually, the value of a currency falls when its respective money supply increases, and vice versa. I say “usually,” because a currency can lose value against one asset and simultaneously gain value against another. For example, since the start of 2008, the U.S. dollar (USD) has risen about 10% against the euro (EUR), but has fallen roughly 50% against gold. In other words, the EUR has fallen about 10% against the USD, and gold’s price in USD has roughly doubled.

There are many reasons why  the USD has performed better against the EUR than gold in the recent past, but I will focus on only one. In general, financial assets underperform real assets when currencies weaken. Financial assets are pieces of paper that people, often lawyers, declare have value. The USD, EUR, stocks, and bonds, all are contractual claims whose supplies can be expanded until they are essentially worthless. Governments can devalue their currencies, companies can dilute their stock, and borrowers can take out loans until their credit scores reach rock bottom. On the other hand, gold and other commodities are real assets, meaning they occur naturally or are built from natural resources. Gold, silver, copper, oil, soybeans, and houses, all are real assets and cannot be devalued. Because their supplies are limited, real assets tend to retain their value better than financial assets during periods of currency depreciation.

During periods, like today, when money supplies in many parts of the world are increasing, most currencies lose value against real assets. At present, I feel people should track both their real and their nominal investment returns. For instance, since reaching its decade low in March 2009, the S&P 500, the most commonly used benchmark for U.S. stock market performance, has risen more than 62% in terms of the USD, a financial asset. But over the same period, gold, a real asset, has rallied more than 70% against the USD. Dividing 1.62 by 1.70 demonstrates that despite its 62% nominal increase, the S&P 500 has fallen almost 5% in real terms. In short, much of the gains in the S&P 500 have been due to USD weakness, a result of the ballooning M2 money stock.

On the other hand, from 1929 until 1933, the U.S. M2 money stock shrank dramatically, and the USD strengthened against both stocks and precious metals. U.S. stocks fell steadily, as illustrated in the chart above, and did not return to their 1929 highs until decades later. Please note that the S&P 500 had not been created during the 1930s, and the Dow Jones (DJIA) was the main U.S. stock market benchmark. In addition, the U.S. economy was on a gold standard, meaning the price of gold in USD was fixed by the American government. But, by analyzing the historical silver prices in the following table, we can glean what happens to commodity prices when the M2 money supply contracts.

I only have access to average annual silver prices for the first half of the twentieth century, but you will notice the USD strengthened considerably against silver from 1928 to 1932. Note I cropped some data out of the chart to save space, but the full table is available online. Interestingly, during most of the five years that silver’s average annual price fell, the DJIA steadily declined. Then, on April 5, 1933, President Roosevelt signed Executive Order 6102, which adjusted the gold standard from $20.67* to $35 per ounce. The value of gold increased by more than 70% against the USD, or the USD was devalued by more than 40% against gold. The U.S. government effectively increased the money supply by more than 70% with one stroke of a pen! The devaluation of the USD caused the average annual price of silver to more than double from 1932 to 1934. According to data from Yahoo! Finance, the average annual level of the DJIA increased by slightly more than 52% from 1932 to 1934. In summary, from 1932 to 1934, the average annual price of gold rose more than 70%, that of silver rose more than 100%, while that of the DJIA rose just over 52%.

The price action across markets during the late 1920s and early 1930s demonstrates how rapid changes in money supply positively correlate with stock, commodity, and currency performance. When M2 contracted sharply from 1929 to 1932, the USD strengthened and risk asset prices fell. When the USD was devalued in 1933, risk asset prices rebounded strongly. Moreover, precious metals outperformed stocks during the late 1920s and early 1930s, as bleak economic conditions led to negative real returns for stocks, even when they rebounded nominally in 1933.

In my mind, the M2 money supply lessons of the 1930s are relevant to today. As I mentioned earlier, the S&P 500 reached a multi-year low of 666.79 points in March 2009. Since then, M2 has expanded rapidly, and the S&P 500 has risen more than 62%, gold more than 79%, and silver more than 142%. U.S. stocks have performed well in nominal but not real terms.

Based on my observations from today, I feel many market participants are looking for a bullish run toward 1,400, or a bearish retest of the March 2009 low. I used to be a member of the March 2009 low retest camp, but after studying how money supply growth can affect asset prices, I believe U.S. stocks are unlikely to revisit their decade lows. For instance, the S&P 500 may fall to 900, then remain range-bound between 900 and 1,400 for several years, as rapid M2 growth ‘backstops’ U.S. stocks.

But again, rapid M2 money supply growth can provide a nominal ‘backstop’ to U.S. stocks, but not a real one. Though U.S. stocks may not retest their March 2009 nominal lows, I expect them to continue to decline in real terms, as weak economic fundamentals sap global growth. In my view, global economic fundamentals present more real than nominal downside risk.

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© Copyright 2011 by The Opportune Time, LLC.  All Rights Reserved.
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Author Name and Electronic Mail Address:   Lee Jackson |

1 Comment »

  1.  Max, December 2, 2011 @ 11:16 pm

    Yes Lee, the similarities between 1932 and 2011 are very strong.
    The two prevailing factors to make sense at this sort of historical replication cycle and what are the psychological and economic. That of 1929 was an epochal crisis of excessive euphoria that was replicated in 2000 and today we can confirm that the output from this type of crisis, the stock market seems to happen with the terms and psychological reactions unchanged over time. First, the big drop (which lasted 3 years in both cases) then shooting (game respectively in 1932 and 2002) and finally a sudden slip again (then happened in 1937 and in recent years has materialized between 2007 and 2008) . The fourth step is next to a new recovery, while the fifth (the current one that began last spring) opens the door to the next and last correction before a stable and lasting recovery. These cyclical stock market have obviously also an economic explanation: the exit from the crisis so deep is exposed to the risk of relapse, even abrupt. This is what happened in the United States in 1937 by the specter of “double dip” and this is what happened with the crisis of 2008-2009. The current situation very much resembles that of the Nasdaq Dow Jones in 1940 and if history would repeat itself until 2013 to say that the stock market, including high and low, gray clouds may persist. Only since 2013, the recovery would be more structural and permanent.

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