Why, Historically, a Large Collapse is Likely

Very few people who are alive today were around in 1929, so, understandably, the very concept of such a debacle seems like the work of overly-active and overly-pessimistic minds. For that reason, a further examination is needed as to what has led up to this occurrence.

The mania up until 2008 was the biggest since the 1720-1784 mania. It should therefore result in a deeper decline than in 1929-1933.

Declines following manias always carry below the starting point of the mania. The crashes following the Tulip Mania of the 1630s, the South Sea Bubble of the early 1700s and the Roaring Twenties bull market, all brought prices to below the level of the bull markets’ starting points. In this case, the mania-style bull market started in 1974.

Thanks to the great rise in positive social mood during our present mania, the stock market remains historically overvalued in terms of dividends and earnings. (When people without jobs are provided with loans to buy multiple houses, with no money down, it becomes reasonable to believe that pigs have wings.)

The greatest extreme in positive social mood in centuries has led to the greatest expansion of credit in history. This level of outstanding debt is unsustainable and will be unserviceable and unpayable. The trend toward negative social mood that has begun, and which is about to accelerate, will continue to curtail lending, leading to a tidal wave of defaults and a major deflation in equities.

The trend toward negative social mood, concurrent with a collapse of the market, will lead to an economic contraction. Small bear markets lead to recessions; big bear markets lead to depressions. The recent mania was the biggest in nearly 300 years, so the depression will be correspondingly deep.

As a by-product, this trend of major negative social mood will bring a frightening degree of social unrest. Under such conditions, people who, for years, had seen only increases in entitlements and suddenly find those entitlements disappearing, will not accept diminished entitlements quietly. If they do not receive what they had been promised, many will choose to take what they want from whomever they can. An inkling into this trend can presently be viewed by us from afar by examining a similar, more minor situation playing out in the streets of Europe.

People will desire what they consider to be money, not stocks. A concurrent gold mania will occur. Gold, silver and other traditional, dependable commodities will become the basis of wealth, and fiat currency will decline in value dramatically.

This outlook is extreme and is difficult even to imagine. As mentioned previously, no one alive has ever seen anything like it, and it is understandable for us to say to ourselves, “It can’t possibly be that bad. At worst, we might have a double-dip recession, but we’ll get past it.”

However, all the above is based upon historical occurrences and consistent patterns.

It will be a ragged decline. The banking system will not deteriorate all at once; the crisis will occur piecemeal, with some events more devastating than others. Some communities will be harder hit than others. Those who are more independent of commerce (ranchers, small farmers) will not be as affected, as long as they can continue to produce. Those in or near large inner cities will feel the effects most greatly, particularly food shortages and crime.

As extreme as this prediction is, if it is correct, it may well begin within a year. If it does, it will be wise to be prepared to act as soon as possible for self-preservation.

There will be three factors that will be key to self-protection in such conditions:

Become as liquid as possible.

Keep your money in a form that will not inflate, such as precious metals, and in a location in which it will not be taken away by collapsing governments.

Prepare a geographical location to escape to that is as unlikely to be affected as possible.