(Note: The following article was written in May of 2011, but publication was delayed until now, as the situation had not yet progressed to the point that readers might have considered the pattern of events described below as even being within the realm of possibility. As the situation discussed in this article is now getting closer, the projections below may seem less fanciful.)
In high school history class, the Great Depression was explained. We were taught, essentially, that in 1929 there was a stock market crash, and after that, lots of people were desperately poor. Whilst this is true, the explanation is overly simplified to the point that there is no practical lesson we can learn from it.
Here’s what actually happened: In the autumn of 1929, the first in a series of waves occurred in the stock market — a downward wave. It was followed by a rally (upward wave), then a much deeper and longer downward wave. This third wave, in turn, was followed by a series of smaller upward and downward waves until the market hit bottom in 1932-33.
In studying these waves (Elliot Wave Theory), it becomes apparent that the same waves occur in any major market fluctuation, and the degree of downside is always relative to the degree of upside. The third wave is always the most extreme.
I anticipate that the third wave in the present series is imminent. It will be deeper and longer than the downward wave of 2008. The others will be smaller, but ultimately, together they will be more severe than the series of fluctuations from 1929-1932.
On the surface, it seems unlikely that financial downturns would behave predictably, but Elliott Wave Theory is based upon human nature. In any era, the reactions to events will be similar, as human nature remains the same, regardless of the era we live in. The present unraveling of the American Empire is remarkably similar to that of the Roman Empire and other empires in the interim.
A Little History
In 1933, the Glass-Steagall Act was passed in Congress. Its purpose was to create banking reforms to control speculation by banks, a root cause of the Great Depression. Ever since that time, economists and Congressmen alike have said, “Depressions are no longer a concern. There can be no more depressions.” They stuck to that position, while forgetting that the control of possible depressions was directly linked to the continued existence of Glass-Steagall.
Beginning in the 1980s, the major banks began work to eliminate the Glass-Steagall Act in order to recreate the opportunity for enormous profit, similar to what occurred in the late 1920s. Although their efforts met with resistance, then Chairman of the Federal Reserve Alan Greenspan helped to convince the government of the day to vote in favour of the repeal. The premise was that America was positioned to create a housing boom of historic proportions, making possible home ownership for millions of people who previously would not have qualified for a loan. It was further suggested that banks could not fulfill this opportunity without the repeal of Glass-Steagall.
Conservative Congressmen saw the benefits to both commerce and the banking industry in this concept. Liberal Congressmen saw the hope for millions of average people to have homes. Glass-Steagall was repealed with everyone’s blessing.
Unfortunately, few, if any, of those Congressmen who voted for this repeal bothered to learn why Glass-Steagall had been drafted in the first place, and the stage was now set for the Greater Depression.
A small minority of prognosticators have been harping on the prediction of a “Greater Depression” since the late 1990s. We anticipated that a housing bubble would develop, followed by a massive crash, and that the stock market would then also begin its crash. I believed that the warning sign that this was on the verge of occurring would be that “Teflon Alan” would resign as Chairman of the Fed at least one year prior to the disaster, as he would want to distance himself from it. This he did in 2006, leaving Ben Bernanke to hold the bag.
We also predicted that the crash would not come all at once; that, as always in history, it would be a series of waves. However, the majority of people would follow what they had been told by their high school history books. As soon as there was a rally of significant proportions (second wave), they would believe that recovery had arrived. They would believe this in spite of the fact that the massive debt still existed and, like a cancer, still required elimination before real prosperity could follow.
If we are correct, and the Greater Depression is in its first stages, the worst (by far) is yet to come.