A Concise History of Financial Manias and How To Survive America's Coming 2008-2009 Depression by Andrew Molchan (This article first ran in the February 2008 issue of American Firearms Industry Magazine.)

(January 18th 2008) We are already into a recession. In Nov. 2006, I said in this column that the general economy would go into a recession in 2007, and it did. The recession started in November of 2007, and it's going to get worse before it gets better.

I hope you are reading all of my monthly columns because I'm one of the few writers in America telling the truth about America's survival. My columns are part of the antidote you must have to fight America's sea of popular and destructive delusions.

If you're a regular reader of AFI, you'll remember that over the last five years I've been saying, "Washington D.C. sincerely believes that all mistakes are cost free." As you can see, sometimes it takes years, but eventually mistakes are never cost free.

To give you the best advice, I went into my library and reviewed the last 400 years of the world's economic history. I found that during the last 400 years, all of the depressions in Europe and America have had seven things in common:

1. Some kind of excess credit was the root cause of every depression in the last four centuries. The key constant factor was EXCESS credit, credit that was out of control. Manias that cause people to borrow without any common sense.

2.The deflation of the excess credit is by definition a "slowdown." If it is the deflation of a major bubble of credit then it turns into a major slowdown, i.e. a depression.

3. Sometimes, the excess credit bubble formed and collapsed in a short time. However, sometimes the excess credit conditions built up for years before the eventual crash, like now when excess real estate credit has been building since the late 1990's.

4.The longer and bigger the build up of excess credit, the deeper, longer, and more painful is the following depression.

5.When excess credit builds for years, many clear-minded people could see the crash coming long in advance, like I saw it coming.

6. Every depression is fundamentally the same. However, the details of every situation were always different enough on the surface so the public could fool itself into sincerely believing that, "This time it's different."

7. Credit is credit. It makes no difference if it's borrowed money to buy tulips, credit for non existent gold mines, real estate, railroads, farm land or government debts, etc. Excess credit in whatever excess form it took was (is) the poison that eventually created depressions.

TREES CANNOT GROW TO HEAVEN

In late 2005, I was listening to a real estate seminar on TV. There were real estate managers from the biggest loan companies in America: Merrill Lynch, Citi Group, Bank of America,Wells Fargo, J.P. Morgan, etc.They all said the same thing. Home prices would go up from 8% to 12% FOREVER. I thought, "These assholes can't do fourth grade math. If you increase home values by twelve percent a year, in twentytwo years garages would be selling for a million dollars."

THE GOVERNMENT'S INEFFECTIVE "STIMULUS."

The government, both Democrats and Republicans, created the current credit bubble by looking the other way at massive fraud and greed within the real estate industry. Now the government wants to continue their mistakes by pouring gasoline onto the fire via a $150 billion dollar injection into the credit bubble.

Mass welfare is NOT a new idea. In the 1930's the government handed out lots of money but could NOT compensate for the deflation of the massive credit bubble of the late 1920's stock market.

In 2007, the government already had 27 million people (27,000,000) on food stamps.The above number is not a mistake, 27 million.The Continued from Page 8 government was already handing out billions of dollars.

In 1975, the government sent out $200 "stimulus" checks to everyone, and nothing happened.There was another slow down in 2001 and the government sent out $300 to $600 "stimulus" checks to tax payers, and once again nothing happened. During the last five years the big banks let millions of Americans used their home values as ATM machines, and homeowners borrowed $800 billion dollars.

Washington DC's $150 billion dollar "stimulus" is feel-good government smoke and mirrors. It's a cover to disguise the fact that it was Washington DC (both the Democrats and Republicans) that were the main engine of the credit bubble. Total US household debt as of right now, that includes mortgages, home equity and car loans, unpaid balances on credit cards that are being financed; that total is 14.9 trillion dollars (14,900,000,000). One hundred and fifty billion dollars in "stimulus" is approximately 1/100 of the current outstanding household debt. That's like Congress giving somebody who owes $100,000 a $950 check and saying, "Well, we solved your debt problems.Aren't we sweet people - be sure and reelect us come November 5th."

Universal point #7, "Credit is credit." Where's the $150 billion coming from? Is Congress going to go out and cut grass and wash cars to earn it? No way, we should live to see the day. Congress is going to BORROW the money, i.e. more CREDIT for the credit bubble. Congress's "solution" is to create more excess credit by borrowing another $150 billion. Here's what's going to happen in the real world. A family will get their "stimulus" check and say, "This is great! Now we can afford that big flat screen TV we've been wanting." So they'll go to the store, buy a TV that's made in China (a great "stimulus" for the Chinese factory workers).Then, they'll put the TV purchase on their credit card because they put everything on their credit card.

The following is a concise history of financial depressions over the last 400 years. After reading this summary, even though it's short, you'll know 100% more about the history of financial depressions than President Bush, 98% more than Congress, and 96% more than America's best known TV reporters.

HOLLAND 1630

The first great speculative mania in modern times started in 1630 and came to an end 1637. It was the "Tulipomania," centered mainly in Holland.Tulips, some 160 species of them, started arriving into Antwerp from Constantinople. By 1634 rare bulbs were being sold for the price equal of two horses, their harness plus a carriage. Many tulip traders suddenly became rich. Everyone thought the passion for tulips would last forever. People mortgaged their homes, pledged crops and property and took out credit in the total belief that tulip prices only go up. Characteristic of all manias, suddenly prices fell over a cliff. Thousands of people were wiped out and the resulting impoverishment had a chilling effect on Dutch economic life for twenty years.

FRANCE 1716

A Scotsman, John Law, wanted for murder in England, arrived in Paris a year after Louis XIV had died. The Sun King's persistent wars and extravagance had brought France to the edge of bankruptcy. Mr. Law started the Mississippi Company (Compagnie d'Occident), and claimed to have the gold mining rights to most of both North and South America. He convinced Philippe II, Duc d'Orleans, the Regent to young Louis XV, that he, John Law, could pay off France's debts with the gold of the Americas. In manias, people only see what they want to see and nobody in France gave much thought to the fact that Spain claimed most of the Americas.

The French crown gave Mr. Law a charter to open the Banque Royal, and Mr. Law started selling shares of stock in the Mississippi Company. The price of the shares went wild. Most of the enormous profits were not used to search for gold in Mississippi, but to pay off the debts of the French crown. The euphoria of almost instant wealth reached a point where some women were giving sexual favors for the chance to buy shares. A grateful king made John Law Comptroller General of France and Duc d'Arkanas.

In 1720 the bottom fell out and there was a run on Banque Royal. The crush in front of the bank was so horrible 15 people were trampled to death. Thousands of people were financially destroyed and never recovered. One of the reasons why Paris today is mainly a city of apartments is because for decades after the crash most people in Paris could not afford to build individual homes. John Law escaped to Venice where he died years later. For over a hundred years afterwards people in France were very suspicious of banks.

AMERICAN 1690

Sir William Phips led an expedition of mercenary soldiers from Massachusetts to Quebec. Plunder from the capture of Quebec was to be used to pay the Army. The fortress of Quebec did not fall, and the unpaid troops returned to Boston.The government solved that problem by printing paper notes that promised to eventually pay in gold. The paper money became popular and the "wonder of paper money" spread to other colonies. There never was any gold to back the paper and it became worthless. (Take note, President Nixon totally disconnected the US dollar for gold in 1971).

ENGLAND 1720

The English government, after the War of the Spanish Succession, found itself with large debts. Robert Harley, the Earl of Oxford, promised to pay part of the debt if the government gave him a charter to start a company, the South Seas Company, that would look for gold in the new world.The IPO opened at £128 in January 1720, went to £330 in March, £550 in May, and in June over £1000. (This was when an average worker in England was making £6 a month.) Thousands of people became rich.As in France, much of the money went to the government and there never was any search for gold in the South Seas.The bottom fell out in late summer.The English government in 1720, like the American government today in 2008, came up with some "emergency financial rescue plans." However, once a significant crash starts its impossible to stop. The "stimulus" package in 1720 was too small in relation to the credit collapse, and the same is true today in 2008. The English Parliament then became all self-righteous and blamed everyone else. Conveniantly forgetting that it was Parlament that had created the South Seas Company.

AMERICA 1776

 When the American Revolution started, the new government had no gold. Washington's soldiers were paid with "Continental" dollars.The government printed more and more Continentals until shoes in Virginia eventually went up to $5,000 a pair, and a full suit of cloths was $1,000,000. Shortly after, the value of the Continental dollar collapsed and they became worthless.

THE FIRST FEDERAL RESERVE BANK

After the collapse of the Continental dollar, the American government opened the First Bank of the United States to regulate state banks and the currency.

However, local banks liked printing their own currency.That gave them almost unlimited freedom to create credit. They did NOT want any interference in their credit bubbles. In 1810, the local banks bribed Congress to close the first Federal Reserve.

AMERICA 1819

After the successful War of 1812, land and property values started to climb upwards. All the local banks, no longer having to worry about a Federal Reserve, started created a mountain of credit by issuing loans and printing their own paper money. A real estate credit bubble grew and expanded. In 1816, the now worried Congress created the Second Bank of the United States, (i.e. the second Federal Reserve). The Fed tried to impose some order, but all that did was burst the bubble. In 1819 the real estate market turned into what we have today in 2008. Real estate values imploded and thousand of land speculators were financially wiped out.

AMERICA 1837

After the real estate crash of 1819, several powerful people blamed the Fed for not creating easy moneyand fast credit for everyone, (This is what Congress is saying again in 2008). Several state governments used the Fed as the scapegoat. Mississippi, Louisiana, Maryland, Pennsylvania, Indiana and Michigan said it was the Feb's fault and used that as an excuse to not pay any of their debts. Congress once again closed the central bank. It would be nearly a century before the third Federal Reserve, the Central Bank of the United States (the current Fed), was opened in 1913.

AMERICA 1857 Without a national Federal Reserve Bank, regulation of the banks was in the hands of each state.Another credit bubble started to re-inflate. Banks once again started printing money with gold supposedly as the back up to the paper money. In some states, groups of banks got together, and as the state bank examiner went to examine a particular bank, all the banks in that area would secretly ship their gold to the bank being examined so the gold would equal the amount of paper money issued by that bank. In New England, it also became poplar to fill the bottom of the gold boxes in the vault with nails, and only cover the top with gold coins. One New England bank was caught, and was found to have over $500,000 in outstanding paper notes, and gold reserves of only $86.48.That caused the credit bubble to collapse into the "Panic of 57."

AMERICA 1873

After the Civil War a speculative boom developed around railroads, canals and the new "turnpikes." The British were making tons of money from rapping China. (See my article in the November issue of AFI, "Why America Must get the British out:" The article is also on AFI's website www.amfire.com) British money helped to hyperinflate the bubble. People at the time were saying things like, "How can you go wrong with a railroad?" Like in 2006 when tens of thousand of people where saying, "How can you go wrong with real estate?" In 1873, as now in 2008, many of the biggest banks were eyeball deep into highly risky speculation. In 1872, any railroad going from anywhere to anywhere was suddenly golden. Just like in 2004-2006, when every rat infested slum house in every rotten slum city was suddenly golden. In 1872, prices once again became completely detached from real values, and once again everything collapsed. Banks in New York refused to pay in gold, and would only pay with paper money. The New York Stock Exchange closed for 10 days, and tens of thousands of once rich people were financially devistated.

AMERICA 1907

There was a credit bubble and Wall Street panic in 1907.This one is historically unique because J.P. Morgan called on America's clergymen to preach sermons of confidence and encouragement,AND IT WORKED.Thus proving that stock prices are to a great extent psychological. Or, as Hollywood would say, "Perception is everything." What Mr. Morgan did in 1907 is the reason why people like Fed Chairman Bernanke today will look directly into the TV cameras and say, "There is no recession."

AMERICA 1925

There was a rip-roaring land boom in Florida from 1923 to 1925. Real estate values would double in a month. People could buy land with only 10% down and it was the usual credit bubble in the usual way.Trees cannot grow to heaven and in 1926 the inevitable collapse arrived. In 1925 the banks in Miami cleared over a trillion dollars, $1,066,528,000.This was when a new Ford cost $410. However, the next year, 1928, the bank clearings in Miami had gone down to $143,364.000. In 1926 the collapse of real estate in Florida was a bad omen for the New York Stock Exchange. In 2007, real estate in Florida once again collapsed - that once again was a bad omen for the stock market.

AMERICA 1929 Individuals could buy stocks with only 10% down. The other 90% was credit. After 1924, the credit bubble started feeding on itself.As the stock market went up more and more people borrowed money on 10% margin to buy more stocks. Brokerage houses pushed loans, and then even more people were drawn into the get-rich-quick stock market mania. In early 1929 wives were asking their husbands, "Why aren't you making money in the stock market like everyone else?" When the credit bubble was inflating, Congress as usual encouraged the speculation because it increased tax revenue.

As always, credit trees cannot grow to heaven and the credit bubble collapsed in the usual manner. Tens of thousand of once rich people were wiped out for life. The stock market collapse spread to the banks, and hundreds of them closed their doors. There was a long term "chilling effect" on the total American economy. Real estates prices in 1929 dollars did not get back to 1929 levels until 1953.

Dan Bechtel, my old and dear friend who created B-Square. His father made a million dollars in the Florida land mania of 1926, but sold out before the crash. A million dollars in 1930 is like 45 million dollars today. In 1930 you could buy a five-bedroom house in an upscale neighborhood for $5000. Dan's father had moved to Texas, and in 1930, was worried about his bank. He was out of town, and phoned his wife and told her to go to the bank, and withdraw all of their money. She wanted to do some shopping that morning, and arrived at the bank at 1:00 PM. The bank had closed its doors at 12:00 noon, and it never reopened. Dan's family lost the million dollars.

AMERICA 2008

Looking at all the financial collapses for 1630 to 2008, they all have some things in common. Every big financial collapse in the last 400 years was set off by a by a deflation of excess credit. What the credit was based on was always a little different: tulips, South Sea gold, farmland, paper money, railroads, 10% stock margins, dot.com companies, sub prime slum homes, etc. However, the credit inflation took on a life of its own and became totally detached from whatever real value the underlying object was supposed to have. Every significant credit bubble, and eventual deflation, was extremely destructive to overall business for several years after the collapse. The current 2008 real estate and consumer credit bubble is enormous, and its deflation will take several years to un-wind.

Sub prime mortgages are in the news, but America is one giant credit bubble from top to bottom. There are many areas of enormous credit overhange that are not even being talked about. For example, the "equity" of corporations listed on the NASDAQ.We hear about price/earning's ratios, and next quarter's projected profits, and so forth.What we never hear is that 82% of the companies listed on the NASDAQ have long-term debt equal to 86% of their stock market capitalization. So what are the buyers of that stock really buying? Answer, a lot of debt.

IS THE STOCK MARKET "OVERSOLD"?

I keep hearing people on the TV talk shows saying, "The market is oversold, you should buy now." Two years ago, I was having some drinks with an old friend Jon, who's a writer and big game hunter. We were at a private hunting lodge, owned by a French billionaire, up in the Smoky Mountains. It was a very nice place. Jon was the rifle editor for American Firearms Industry Magazine back in 1973. During the course of the evening we got around to talking about stocks. He said he lost a ton of money during the dot.com collapse. He said that when the dot.com companies went down 60% to 70% from their highs, he thought that they were, "Over sold." He started buying, and as we all now know, most of the dot.coms went down to nothing and were de-listed from the stock exchange.

Only God knows the future for sure, but in the last six months when people have asked my advice about stocks, I told them that I'd sold my "long stocks." I did buy a significant amount of a short fund. Rydex Inverse OTC 2X, symbol RYVNX on the Amex. It's a 200% geared fund that goes up by 200% inverse of the Nasdaq 100 Index. In November 2007 it was 11, and it's now over 15. A 45% increase in ten weeks is a little better than most stock funds did during the same time period. I put a "sell stop order" in at 14, and if it continues to run upwards as I suspect, I'll just move the "stop sell" order on up.

WHEN TO BUY STOCKS AGAIN?

You can think about buying "long" after we have a few weeks of over 1000 new daily lows on the NYSE. After a dozen bigger banks in America have to merge to keep from going bankrupt. After Time Magazine has a picture of a dead dragon on its front cover with the headline, "Have Asian Stock Markets Died?" That will be the time to start nibbling away at the very best Asian and Middle Eastern Muslim stocks.

I'm sorry to say that I cannot recommend America stocks. We are going into a deflation stage that could last for some time, perhaps years, but after deflation America will suffer a serious decline in the value of the US dollar. Serious US dollar declines could be three to ten years away, but it's coming. Companies that do NOT operate with US dollars as their main currency will have a currency advantage. I do NOT like American companies with big overseas operations like the currently "defensive stocks" of companies like McDonalds, Coca Cola, and so forth because unless America's corporation tax rate goes from its current world uncompetitive 35%, down to 20%, most "overseas earnings" will never come back to the USA.

American needs to change it's laws to what the British corporations like Reed have, i.e. any money earned overseas (like at the SHOT Show), and brought back into England is taxed at only 10%.

Both the Muslim Middle East and Southeast Asia countries will, (are) building a common market with their version of a Euro like common currency. After the Asian markets crash, they will be the places in invest. Their economies will grow, and their new common currencies will go up significantly against the US dollar.

SURVIVING DEPRESSIONS

The key is to be ahead of the game. Every a-hole politician in Washington is saying, "We have a problem with housing." Gee, like nobody knew that! Politicians only describe the problems that everyone already knows. Five years ago I started to advise everyone: 1, pay off your mortgage, 2, get out of debt, 3, if you cannot write a check for your car you can't afford it, 4, don't use your credit cards, 5, save some money, and 6, "credit scores" are NOT wealth.

When you get old, you don't need a high credit score, you need money. I took my own advice. I have zero long-term debts. Everything I owe is 70 days or less. On average, I use one of my credit cards maybe once a week. Do I live well? Yes I do, and I don't have to worry about owing money to anyone. My advice has been, "You can't avoid growing old, but it's within your power to avoid losing your home in your old age."

WHAT TO DO RIGHT NOW?

 Modernize YOUR business. Manufacturers and importers, get as close as you can to your dealers. Dealers, get as close as you can to your customers.

YOUR BEST INVESTMENT IS YOUR OWN BUSINESS

For manufacturers and importers the two most important things are the retailer, and the customer in the retailer's store. This is the only area/people/place that manufacturers and importers can significantly influence. The key words are "control," and "you in control." Let's check out of hotel delusion and check into hotel reality. In this downturn distributors are going to be "cutting costs." That means REDUCING THEIR SALES EFFORTS. So if you're not communicating to your dealers, you're going to be dead in the water without a paddle. What recessions do is sweep away the dry rot, and the dry rot in our industry is too many levels between the manufacturer and retailer. My feeling is that the old system is NOT going to survive this downturn. Be the first to change, not the last.

You or I have ZERO control over the general economy.We have near zero control over the idiots in Washington. However, YOU have enormous control over your business. It's time to be creative. For example, manufacturers can have dealers that either buy "sample" guns outright, or rents them for $1 a month.The customer can look, feel, test-shoot a specific model gun.There are variations for stocks, finish, and so forth.The customer orders his "customized" gun and it comes directly from the manufacturer or importer to the retailer. The customer has a wide choice of guns, and can "customize."

Even in the 1930's there were companies that made profits and expanded their business. I'm NOT predicting the 1930's, my point is don't wait for the tide to come in because sometimes it's YEARS before the general economic tide returns. Dealers, us your computer, Internet, firearms transfer services, everything you can and get closer to your customers.

Manufacturer/importers, do everything you can to build a direct personal relationship with your dealers. Ask your retailers to help you towards getting closer to your customers. Even though the general economy will slow, firearms sales will be one of the better fields for those companie that modernize their retailer-customer system.

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