What to Do When Markets Crash
If, as I suspect, we are close to a global economic crash, it makes sense to ensure one is prepared.
When I published my first website in 2003, I included an extensive section on what can be done to prepare for any eventuality. This post takes a slightly more holistic view of how to prosper in a contractionary economy. Rest assured that economic contractions have happened many times before. Millions before us have lived through periods of depression. Almost all managed to survive and some of them really prospered. It was those with the right mindset that did particularly well.
A Brief History of Western Depressions
1819: After three years of currency inflation caused by the federally chartered Second Bank of the United States, the economy fell apart.
1836-37: The slump occurred as the inflationary distortions of the central bank era were liquidated when President Andrew Jackson prevented the re-charter of the Second Bank, calling it a “money monster.” Elapsed time since previous Depression: 17 years.
1857: The economy retrenched after a decade of money and credit expansion on behalf of state governments that had forced their debt obligations onto the state banking systems. Elapsed time since previous Depression: 20 years.
1873: A post-Civil War downturn followed the excesses of the government’s rampant “greenback” inflation. Elapsed time since previous Depression: 16 years.
1893-95: The Panic and Depression hit the country after Congress force-fed the economy for years with depreciating silver and paper notes. Elapsed time since previous Depression: 20 years.
1921: A brief but sharp tumble took place after several years of credit and currency expansion to accommodate the spending for World War I. Elapsed time since previous Depression: 26 years.
1929-33: Known as The Great Depression, the stock market crash and banking collapse in the United States sparks a global downturn. Elapsed time since previous Depression: 34 years (ignoring 1921).
1953-54: A demand-driven recession due to poor government policies and high interest rates. Elapsed time since previous Depression: 20 years.
1982-83: Caused by tight monetary policy in the U.S. to control inflation and sharp correction to overproduction of the previous decade which had been masked by inflation. Elapsed time since previous Depression: 20 years.
2007: Elapsed time since previous Depression: 24 years.
Average elapsed time since previous Depression is 21.89 years.
Shortest elapsed time since previous Depression is 16 years.
Longest elapsed time since previous Depression is 34 years.
Also see Business Cycle Expansions and Contractions and List of Recessions.
The common thread woven through all of these earlier debacles was disastrous manipulation of the money supply by government. For various reasons, government policies were adopted which ballooned the quantity of money and credit in the economy. A boom resulted, followed later by a painful day of reckoning. None of these depressions, however, lasted more than four years and most of them were over in two. The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its monetary errors with a series of harmful interventions.
Lessons From History
History can teach us many lessons, so let’s go back to old Contractionary Economic rules, in other words, what to do when the economy contracts.
The Manchester School of Economics, had this as one of its central principles: Those who can lower their prices first, the most and hold them down the longest will get rich.
These businessmen also offered to pay in cash for everything, since liquidity is the largest concern in a contractionary environment. But in doing so, they demand a steep price discount from the seller, knowing as they do that everybody else is screaming for cash. He therefore buys at the best prices possible.
Now, having reduced the prices they paid, they are also able to lower their costs and then their selling prices. They can meet a market in which good volume sales require lower selling prices.
Any intelligent employee is in the same position using the Manchester rules. All that such an employee has to do is to offer to work for a lesser payment - to take a pay cut of perhaps 10-30 percent, and in turn get a two to three-year contract.
So the short lesson is:
Stand strong with cash, pay with cash, demand a low price or go elsewhere. Then cut your own prices. You will stay in business.
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