The conditions have now aligned for a repeat of the major stock market crashes that have occurred since the founding of the US Federal Reserve Bank (Fed) in 1913. Considering their vast experience and resources, the Fed has to know that their plan to control inflation by raising interest rates rapidly and significantly since 2022, and also tightening credit this year, will likely result in another major crash. Although the Fed has issued vague warnings about the impending pain on the stock market and economy, they have not explained how and why they will again wipe out trillions of dollars of wealth of unsuspecting investors.
As Marty Zweig, a successful Wall Street investment adviser known for data studies, warned, “Don’t fight the Fed,” because the central bank largely controls the direction of the stock markets. Generally, the major stock market booms start with the Fed stimulating slow economic growth by lowering interest rates, often while the government increases deficit spending. As Austrian business cycle theory predicts, this results in asset price inflation (e.g., stocks, houses, etc.), and sometimes also consumer price inflation. The major busts result when the Fed seeks to control the inflation by raising interest rates significantly, while the government reduces deficit spending.
The following graphs demonstrate the strong inverse relationship between the Dow stock market index and interest rates largely set by the Fed (i.e., stocks values inflate when interest rates are lower and deflate when higher). The top graph from Macrotrends shows the Dow Jones stock market index on a logarithmic scale and adjusted for today’s dollars over time. The bottom graph from the Fed shows interest rates over the same time. These graphs can be used to locate the major stock market cycles and analyze the effects of interest rates along with deficit spending in causing booms and busts.
Figure 1: S&P 500 versus federal funds rate
The Dow Jones stock market can be considered to be in its sixth major boom and bust cycle. The first cycle had a 1913–15 boom and 1915–20 bust. The second cycle had a 1920–29 boom and 1929–32 bust. Then, there was a 1932–50 period that was effectively absent of major booms that could go bust. The third cycle had a 1950–65 boom and 1965–82 bust. The fourth cycle had a 1982–2000 boom and 2000–2002 bust. The fifth cycle had a 2002–7 boom and 2007–9 bust. The sixth cycle had a 2009–22 boom and a bust starting in 2022. The five major stock market crashes can be considered to have started in 1915, 1929, 1965, 2000, and 2007, with another likely in 2022.
1915—As the Fed started cutting interest rates in 1913, the Dow stock market climbed and peaked in 1915. That year, the Fed started raising rates and the stock market dropped in 1916. During 1917 and 1918, deficit spending for World War I, while interest rates were flat, caused rampant inflation and a spike in stock prices. After the war, the Fed rapidly raised interest rates in 1920 to cause a stock market crash and the depression of 1920–21.
1929—After the Fed cut interest rates from 1921 to 1925, the so-called roaring ’20s brought a booming Dow stock market from 1921 to 1929. After the Fed started raising interest rates in 1927, the stock market crashed in 1929 and the economy tanked. During the 1930s, the Fed cut interest rates, but President Franklin D. Roosevelt resisted deficit spending after 1932. The Fed even raised, before lowering, interest rates in 1935 to cause stock market losses and the recession of 1937–38. These policies prolonged the Great Depression until World War II, if not longer.
1965—Deficit spending during World War II, along with low interest rates during and after the war, helped bring a postwar boom with economic recovery, consumer price inflation, and stock market gains. During the late 1960s and 1970s, the government accommodated inflation by raising interest rates slowly over a relatively long time period. This caused a long, flat stock market with sharply declining real values (due to inflation) from 1965 to 1982. Finally, the Fed raised interest rates rapidly and high around 1978 to cause a severe recession in the early 1980s.
2000—After 1981, the Fed started cutting interest rates and the government increased deficit spending, especially on defense. The stock market boomed. The Fed raised interest rates starting in 1993 and even higher in 1999 to stop what was claimed to be the “irrational exuberance” of the booming stock market, while the US government ran budget surpluses from 1997 to 2001. The stock market, especially tech, crashed in 2000, and the economy receded during the recession of 2001.
2007—In 2001, the Fed started cutting interest rates and loosening credit on home loans while the government increased deficit spending. The stock market boomed back to its prior peak (in 2000) and home prices inflated. From 2005 to 2008, the Fed raised interest rates and the government decreased deficit spending. In 2007, the stock market and home prices crashed. The economy suffered through the Great Recession until 2009.
2022—Since the start of the Great Recession in 2007 and until 2022, the Fed has lowered interest rates to near zero while the government increased deficit spending. This has accommodated asset and consumer price inflation. Since March of 2022, the Fed has quickly raised interest rates by about five percentage points.
Today, the Fed is clearly still concerned about the inflation. However, higher interest rates have already led to a financial crisis among the banks. Experiences with past markets indicate that, if the Fed continues to fight inflation, the stock markets will likely crash, like they did twice in both the early 1900s and early 2000s. If the Fed gives up their inflation fight, the stock market will likely gradually fall in value over many years if not decades, like they did after 1965.
There have been some other large, but less significant, stock market declines. The crashes in 1917, 1941, and 2020 were caused by fears of wars and a pandemic but were soon reversed by lower interest rates and massive deficit spending used to meet the aggression. The crashes of 1937 and 1946 and subsequent recessions were preceded by rising interest rates and limited deficit spending, but 1937 was part of the recovery from the Great Depression while 1946 was soon reversed by the exceptional postwar boom. The crashes in 1968 and 1972 were preceded by rising interest rates and limited deficit spending but occurred within a major crash. The crash of 1987 was preceded by rising interest rates and reduced deficit spending but was a brief and steep up-and-down blip within a major boom.
The graphs indicate the major stock market crashes have always resulted when, and only when, the Fed has responded to inflation by raising interest rates by three percentage points or more, while the government reduces, or at least doesn’t significantly increase, deficit spending. There has never been a so-called soft landing, and the graphs indicate a so-called Fed pivot, which has usually arrived after the crash. The graphs also indicate the 1915, 1929, 1965, 2000, and 2007 crashes caused Dow stock market index losses of 59, 85, 71, 35, and 49 percent. The losses were not recovered until eleven, thirty, twenty-nine, eight, and six years after the start of the crashes, respectively.
The government has responded to the major stock market crashes, with the exception of 1929, by lowering interest rates and increasing deficit spending to gradually pump stock prices back up and eventually even higher than before. There is no guarantee that this will happen again, especially with the political far right threatening to repeat the policies that prolonged the Great Depression by restricting deficit spending.
Stock markets are unfair to uninformed and amateur investors since they are rigged by the Fed and government without transparency. Informed stock traders and insiders can earn far greater returns by selling stocks high before the stock market crashes. They can also profit by buying low later if they are assured that the government will bail out the market with low interest rates and deficit spending. Moreover, the stock markets will be unsustainable as soon as most investors realize that they are rigged.
Monetary and fiscal manipulations, currently needed to stimulate stock markets and pull economies out of recessions, should be replaced by something else, like effective deregulation of free markets.
About the Author
Mike Holly received Master degrees in Business Administration and Chemical Engineering from the University of Minnesota in 1980 and 1983, respectively. His health care article published on Mises Wire is an updated and condensed version of his MBA thesis. He did his internship at the Minnesota Department of Health where he invented an ambulance allocation model. After receiving his chemical engineering degree, he worked as an Alternative Energy Engineer and Business Analyst with the Minnesota Department of Energy and Economic Development from 1984-5. In 1985, he co-founded Sorgo Fuels and Chemicals, Inc. to develop technology for the production of various products from an agricultural crop, but was blocked by preferential government policies favoring monopolies and also production from other resources. In 2016, he founded Americans Against Monopolies to catalog the preferential government policies favoring monopolies in virtually every major U.S. market.
- Preserve your retirement with physical precious metals. Receive your free gold guide from Genesis Precious Metals to learn how.
Article cross-posted from Mises.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
