A glance at American history shows that most economic recessions are preceded by a period of hardship (such as a war) and reckless investing, or “irrational exuberance.” Recessions are a natural part of any country’s business cycle, but the United States has failed to recover from the 2008-2009 Recession, the worst it has seen since the Great Depression was ignited by the Stock Market Crash of 1929. Aside from lagging economic growth and rampant unemployment, similarities can be drawn between them.
The Great Depression and the Great Recession were both caused in part by bursting housing bubbles, credit abuse, bad bank practices, and buying stock on margin. During the Roaring 20s Americans lived well beyond their means as they did even more so in the early 2000s. Back then and before the housing bubble burst in 2009, people bought houses they could not afford. After the recession of 1920, banks took on the double-duty of standard banking (savings, checking, and loans) and selling securities. This practice fueled economic growth and pushed the stock market into bubble territory. Banks played a role in manipulating the stock market by selling shady stocks to unsuspecting customers. When over 9,000 banks failed in the 1930s, those with their life savings stored in them lost every penny.
A law passed in 1930 to prevent these practices by separating commercial and investment banking. In 1999, the Glass-Steagall law was repealed letting the banks run loose once more. Margin debt is a risky investment process that is partially to blame for the Crash of ’29. Today, it is once again out of control. A study done by Deutsche Bank titled “Red Flag! The Curious Case of NYSE Margin Debt” includes a historical comparison of margin-debt warnings that have recently occurred just prior to major stock bubble crashes (such as the periods of 1999-2000 and 2007-2008).
The commentary issued from 1999 and 2007 is eerily similar to what is being said today. Common phrases include “A rising stock market encouraged more investors to go into debt to buy stocks, sending margin debt levels past their all-time high”; “High margin debts show the effect of over-leveraging and mispricing of risk”; and “Either the market rises dramatically to make those loans good or in any down move there is tremendous selling pressure.” Ignoring these warnings is what has placed so many economic downturns into the history books.
It seems like America can’t learn from its mistakes; mistakes that have occurred numerous times since the Great Depression. Since then, there have been eleven recessions, starting with the relatively short Recession of 1945. When America can’t learn, gold brokers brace themselves for an influx of investors looking to precious metals. Wise politicians like Ron Paul understand that the economy may never recover to previous highs, and are bullish on precious metals. Ron Paul’s precious metals broker is in the right market.