Federal Reserve

Are We on the Cusp of Another Roaring Twenties?

With stock markets continuing to push toward new record highs, there has been much talk about the US entering another “Roaring Twenties.” The 1920s have become almost legendary in popular culture, inspiring any number of movies, TV shows, and musicals. Will the 2020s go down in history the same way?

The 1920s were certainly a time of great economic growth in the United States. But they weren’t perfect, and the results of faulty policies during that time led directly to the Great Depression. In that sense, the Roaring Twenties aren’t something we want to emulate in every respect. But we might not have a choice. So how close are we really to emulating the 1920s, and what lessons can we learn from the mistakes that were made then?

The Depression That Wasn’t

The 1920s in the US began with a depression, the depression of 1920-21. There have been several books written about it in recent years, and it’s often referred to as the forgotten depression. It was a short, sharp depression that was overcome quickly, and forgotten as economic growth took off.

The depression of 1920-21 was the result of the inflationary monetary policy that was undertaken to fund the war effort in World War I. With the end of the war and a return to a normal economy, all that extra money led to a rise in prices and, as one would expect from monetary manipulation, a boom and bust.

Unlike every other crisis in the 20th century, the US government did nothing to counter it. In fact, President Harding cut the federal budget significantly and didn’t call on the Federal Reserve to engage in countercyclical monetary policy. The result of the depression and the lack of government intervention was a quick recovery, so that by the end of 1921 and into 1922 the economy was back on the upswing.

We’re in a slightly different situation today, in which we’ve seen a self-inflicted recession, one brought about by state lockdowns. Both the Federal Reserve and Congress have engaged in trillions of dollars worth of stimulus in an attempt to counteract the effects of the lockdowns. And now we don’t know which way the economy will turn.

The economy was already showing signs of weakness before COVID, and hasn’t strengthened at all since then. GDP is still down, unemployment is up, and the federal government seems intent on passing trillions of dollars more stimulus. The government is doing everything just the opposite of what it did 100 years ago. And the results may end up being the opposite too. Rather than staving off a worse depression, the Fed may end up causing one.

Monetary Mismanagement

Perhaps the highlight of the Roaring Twenties was the monetary mismanagement on the part of the Federal Reserve later in the decade. Economic production boomed throughout the decade, but price levels hardly budged. Normally one would expect prices to fall with increased production, based on the laws of supply and demand. But the Fed was attempting to keep price levels steady, and in order to counteract the increased production that naturally would have resulted in prices falling, the Fed pumped more money into the economy to boost the money supply and keep price levels steady.

The result of the massive increase in the money supply over the latter half of the 1920s was economic misallocation and malinvestment of resources. The massive bubble blown by such monetary mismanagement collapsed in spectacular fashion in 1929, and stock markets didn’t recover for another 25 years.

The Great Depression: The Result of the Roaring Twenties

While we now know the root cause of that bubble and its collapse, policymakers haven’t taken those lessons to heart. They focus on some of the Fed’s later actions, namely its attempts to shrink the money supply after the depression had already begun, rather than on the Fed’s actions that caused the bubble in the first place.

That in turn has resulted in a series of economic crises that have been “solved” by ever more money creation. We’ve seen this repetitive cycle occur time after time. The Fed creates money out of thin air and pushes it into the financial system. Whether it occurs as money supply targeting, inflation targeting, interest rate targeting, or asset purchases (quantitative easing), what’s being done is nothing more than increasing the money supply time after time.

Each successive solution results in an increased money supply and further malinvested resources, sowing the seeds for the next crisis. Eventually this will end in a major bust that could take down the entire monetary and financial system. But in the meantime, rather than learning the lesson from the 1920s and holding off on monetary intervention, the Fed continues to accelerate its easy monetary policy, and the effects in the future could be severe.

Weimar Hyperinflation

The 1920s weren’t the best decade for some countries, most notably Germany. Still reeling from the aftermath of World War I, the German government was saddled with reparations payments to the Entente powers. The size of the reparations was not just punitive, it was unmanageable for a country whose industry hadn’t recovered from the war.

That led to a decision on the part of German central bankers to attempt to inflate their way out of their financial difficulty. We all know what happened afterward, with the Reichsmark becoming so inflated that it took a cartload of paper money to buy a single loaf of bread.

Germany’s experience with hyperinflation continues to influence the decisions of German policymakers today, but US policymakers didn’t learn from it. They still think that hyperinflation can’t happen here, that inflation is something endemic to the economy rather than the result of central bank action, and that fears of hyperinflation are overblown. But with $3 trillion added to the Fed’s balance sheet in a matter of weeks in 2020, the risk of hyperinflation in the US is rising exponentially.

Those who survived Weimar Germany’s hyperinflation in the best condition were those who owned tangible goods, held gold and silver, or who held currencies that could be exchanged for gold and silver. That’s a lesson that investors in the US should take to heart.

How Will You Prepare for the Twenties?

Whether the 2020s become as roaring as the 1920s in the US, or as miserable as the 1920s in Germany, remains to be seen. But what’s nearly certain is that at some point during this decade we could see a major stock market crash and financial crisis, possibly even one that rivals the Great Depression in its severity. Investors who haven’t prepared themselves for that possibility stand a chance of suffering vast losses.

If you haven’t protected your assets already with an investment in gold, what are you waiting for? Thousands of investors have already taken advantage of the ability to roll over or transfer assets from existing retirement accounts into a gold IRA to make an investment in physical gold coins and bars. They’re not only protecting themselves against a market crash, they’re also benefiting from the tremendous rise in the gold price this year.

Don’t let yourself get caught short in the event of a market downturn. Contact Goldco today to find out how gold can protect your investment portfolio and retirement savings.

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