The Impact of Panic on Society and Economy
The Great Panic of 2020 is already a defining chapter in our history. However, the repercussions have only just begun to unfold. It appears that the turmoil in the stock market, the resulting economic devastation, and the erosion of personal freedoms will linger well beyond when the threat of coronavirus subsides.
In terms of the stock market, the strategies that worked over the past 11 years are being turned upside down. The new dominant mantra has shifted from ‘buy the dip’ to ‘sell the rip,’ and there’s a good reason for this shift.
Historically, the U.S. stock market experienced a significant decline starting in the fall of 1929, coinciding with the onset of a decade-long Great Depression. Given the swift and brutal nature of the stock market’s decline over the past month and the likelihood of a protracted economic downturn, it is wise to examine this history more closely.
From September 3, 1929, to November 13, 1929, the Dow Jones Industrial Average (DJIA) plummeted by 48.9%. Remarkably, it then rebounded by 48.1% by April 17, 1930. This recovery, however, merely enticed the ‘buy the dip’ investors back into the market, just in time for another financial slaughter.
The bear market between 1929 and 1932, as described by Pater Tenebrarum, resembled a rubber ball bouncing down a staircase. Each bounce provided even the most astute investors with another chance to lose their capital. This cycle of repeated losses proved detrimental.
The bounce from November 13, 1929 to April 30, 1930 turned out to be what many now recognize as the ultimate sucker’s rally. Following this, the DJIA faced a staggering loss of 89.2% from its initial peak, taking with it the hopes and dreams of an entire generation.
Surely, such a catastrophic collapse could never repeat itself, right?
If it has happened before, it can certainly occur again. Thus, if a temporary bottom is found in the coming weeks, and the DJIA attempts to retrace back to its February 12 all-time closing high, consider this a gift—an opportunity to ‘sell the rip.’
The State of the Economy
The economy is being fundamentally battered by measures imposed to contain the coronavirus. This destruction will likely leave scars that could take years—or even decades—to heal. Mere injections of counterfeit currency cannot remedy this downturn. Yet, countless proposed solutions circulate, aiming to rescue us from our plight.
According to scientific assumptions, coronavirus spreads exponentially. The acclaimed method to contain it involves “flattening the curve” through social distancing. The entire world is urged to “hunker down”—either voluntarily or via government mandate.
Gyms, schools, bars, and restaurants are closing their doors. The city of San Francisco has mandated its residents to “shelter in place.” The iconic Maltese Falcon can only lament from the confines of an abandoned John’s Grill.
The former Mayor of San Francisco, now California Governor Gavin Newsom, has instructed all residents to remain at home until further notice. He stated, “We need to bend the curve in the state of California.”
While some may find merit in these suggestions, they pose a significant threat to the economy. Cash reserves are dwindling, credit markets are freezing, and people are losing their jobs. A full-scale mobilization, we are told, is necessary to combat the coronavirus.
For instance, Federal Reserve Chairman Jay Powell is activating all possible monetary tools—zero interest rate policies, quantitative easing, repo operations—to inject liquidity into the credit markets. However, that is just the beginning…
The Fed is now accepting stocks as collateral to provide liquidity. Additionally, they have established a Money Market Mutual Fund Liquidity Facility (MMLF), aimed solely at ensuring that short-term credit markets do not freeze up.
On the fiscal side, the Treasury is working with Congress to provide $1,000 checks—potentially two of them—to struggling Americans. While Mitt Romney supports this initiative, Chuck Schumer believes it falls short. Cory Booker is even advocating for $4,500 checks.
But why stop there? If a small amount of helicopter money is beneficial, why not send out $45,000 checks? After all, isn’t more always better?
Is Panic Worse than the Virus?
If only the world were as straightforward as Booker believes. Remember, when the U.S. Treasury borrows money created from nothing by the Fed to distribute checks, it engages in a practice of mass currency devaluation.
A check might arrive in your mailbox, but its actual value is a deception—a precursor to an impending disorder.
Nevertheless, amidst the impending doom, many suggest that mass currency devaluation and collective retreat are essential to win the battle against the coronavirus and salvage the economy. But is this truly the case?
To gain perspective, let us consider the thoughts penned by Charles MacKay in 1841 from his work, Extraordinary Popular Delusions and the Madness of Crowds…
“During seasons of great pestilence, men have often been swayed by the prophecies of deluded fanatics who claimed that the end of the world was approaching. Credulity is highest during times of turmoil. Prophecies of all kinds arise, whether for good or ill, and are easily accepted.”
“During the great plague that swept across Europe from 1345 to 1350, many believed that the end was near. False prophets could be found in major cities in Germany, France, and Italy, declaring that the Archangel’s trumpet would soon sound, heralding the Earth’s judgment.”
The ongoing coronavirus crisis has indeed attracted various soothsayers, much like bees to honey. The widespread hysteria surrounding the virus has led to public outbursts and exaggerated proclamations.
Bill Ackman famously stated, “hell is coming.”
Perhaps he is right. Or perhaps the current panic has been exaggerated. Is the panic truly worse than the virus? The answer remains uncertain.
What we do know, however, is that the spring equinox is upon us, marking the earliest onset of spring in 124 years. After the recent dreary weeks of winter, we welcome it.
Sincerely,
MN Gordon
for Economic Prism
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