Investing in a Depression

Income loss is the one fixture of every depression in recorded history, and so too will the 2007 Depression severely lower income. Whether through inflation or deflation, it is bound to occur. Income from investments is just as threatened by the 2007 Depression as income from employment. One only needs to look at: the drop in corporate earnings; the falling stock market; the minuscule yield on bonds, including government bonds; the increasing possibility of default of bonds, including government bonds; meaninglessly low interest rates on bank deposits.

In deflationary depressions, like the 1929 Depression, cash is king because its purchasing power increases. This can happen through several ways: its market value increases (as in a hard money system); the velocity of money drops (i.e. the speed at which people spend money for stuff); supply physically decreases (as theoretically possible in a paper money system, maybe); some combination of all the above.

Although it is possible that in the 2007 Depression "cash is king," we are of the opinion that cash will be trash in the very near future. Because the Federal Reserve is putting its considerable might into preventing deflation at all costs, we feel that inflation is the name of the game. This will happen through several ways: physical supply of money will expand at an accelerated rate; the velocity of money increases; or a combination of the two.

As all but one historical paper money experiments have ended with a hyperinflationary depression, investing will take on a new face. It will not necessarily be to increase wealth; rather, it will be to lose as little as possible, or hopefully preserve it. Gone are the days of making investments which will increase steadily in value. As one individual of our acquaintance put it, when the water goes out before a tsunami hits, don't go onto the sea bottom and fight over the fish. Head for higher ground instead.

We feel very strongly that the tsunami will come in after the synthetic CDOs we wrote about in yesterday's post start unwinding. Between then and now, however, 'higher ground' may be a difficult thing to find. Investment markets of all varieties are in disarray, and supposed safe havens (bonds, precious metals, and select foreign currencies) don't look so good. One could take cynical risks, and throw one's lot in with one of the biggest swindlers in human history: JP Morgan. When their synthetic CDOs start paying out, they might be the biggest winner... or they might not be. Time will tell.