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Lessons from the Great Depression

In facing the present crisis, an investor would do well to invest wisely and spend prudently — lessons that can be gleaned from studying the American-European Great Depression.

Published: 19-12-2012 00:00

Lessons from the Great Depression

The Great Depression is the most cited economic crisis in history. Its parallels to the present crisis are definite, specifically, its financial origins and the negative effects on employment and productivity. Even then, the problems going on in the West had their profound effect in other parts of the globe.

The difference this time around, is that economies are even more interdependent, what with globalization really taking hold.

During crises, money tends to move away from problem areas, to developing nations, such as other parts of Southeast Asia, as well as more developed countries like Singapore and Hong Kong. Investors today, whatever their location may be, can better use globalization to their advantage in choosing locations where to invest, or to store their safe-haven assets such as gold.

Is gold confiscation a possibility?

In 1934, Americans were made to hand over their gold assets, under pain of a $10,000 fine and/or up to 10 years of imprisonment for failing to do so. It is no wonder that there are concerns among investors today of, say, the US government confiscating bullion once more, and Americans seek storage of their gold in Singapore and other neutral political jurisdictions. Not to say that confiscation is an impending possibility, but measures leaning towards safety and privacy could only help.

In general, investors prefer less paperwork, for the sake of convenience, and this also lessens the likelihood of having one’s gold expropriated. Again, Singapore is an attractive location in this regard. When buying gold in Singapore, the only paperwork done is in the issuance of receipts by a precious metals dealer. The Singaporean government itself does not require anything, and does not track those who make purchases.

Before buying gold and silver, particularly when doing so online, make sure you know the location of your dealer, so that you’ll know how much information about yourself you will have to disclose. And even when storing your gold in a safe jurisdiction like Singapore, it helps to know in which country the storage company is registered.

Another important thing: Buy physical gold, and not just certificates of ownership, which often are not backed by actual gold. The difference is astronomical. If or when exchange-traded funds and futures funds start collapsing for failure to honor redemptions in gold, certificates will be rendered worthless. Gold itself will remain as appealing as ever, if not more so.

Spending your way to prosperity

A lesson that today’s leaders could learn is that you could not spend your way to prosperity. The Great Depression lasted for nearly two decades, and the length of the crisis had much to do with spending levels that were simply beyond American revenue. Unfortunately, politicians may push bad policies to their bitter end, in the hopes of staving off the crisis that will come nevertheless.

Source: maxgladwell.com Chart source: maxgladwell.com

Contrary to common belief, it was not World War II spending, on firepower and destruction, that ended the Depression. Rather, it was an increase in savings, and a return to stable consumption, that did the trick. Those of us with a parent or grandparent who lived through the Depression, or World War II for that matter, know how frugality can become ingrained as a means of dealing with scarcity of resources.

Measure wealth according to purchasing power, not nominal gains

American and European policies today are intent on propping up stock markets, even with the corresponding effect of higher prices. Not to mention, the stock markets themselves may eventually plummet, as happened in the October 1929 crash that heralded the Great Depression.

When counting your eggs as an investor, you have to consider how your assets grow not just in nominal terms, but in terms of purchasing power. As can be seen in the website pricedingold.com, gold has maintained its value over time, amid all its ups and downs.

Conclusion

In as much as the world has changed, and the Great Depression is different from today’s, there are still things we can learn from the former so as to get by with as little damage as possible. Gold purchases play a big role in this regard.