Life, Luck and Debt from the Great Depression to the Subprime Crisis

You know, gloom and doom ain’t what it used to be. Often I think about the good old days – the 50s the 60s; they seemed like good old days to me. And part of the reason that they were such good old days is that, back then, we had a lot of trouble and people appreciated it.

Do you all remember the threat of nuclear war? Well I do. I remember as a child, they would have a school alarm and we would crawl under our desks. And I don’t know what that was supposed to achieve, but it was kind of fun. And I remember watching Nikita Khrushchev on television. When he stood in Moscow addressing Western ambassadors and said, “We will burry you,” and we thought he meant it. Why shouldn’t we? I mean those were times that were very different from today. We had real trouble. At least we thought we had real trouble.

Remember the Cuban missile crisis? It’s only now that we’re beginning to realize how real that threat was. I mean, those guys were on the edge of setting off a nuclear war. Che Guevara wanted a nuclear war. He wanted some terrifying event, some test of real war between capitalism and communism. Imagine if one of those guys had had a stomach ache that day, or an argument with his wife. It might have turned out very, very differently.

Back then, the apocalypse business was in a bull market…

But the trouble with this modern world is there’s not enough trouble in it. It’s really an amazing world where you don’t have to worry about money. There’s always some money. You don’t have to worry about jobs. We’ve had full employment for about as long as I can remember. Had a little slump in the 70s, but it wasn’t a big thing. This is so different from the lives of our parents. Many of you, some of our grandparents even, have lived through. My father lived in Denora Pennsylvania. These were poor Irish immigrants who came to America and then my father was born in 1921 and in 1923 his father dies. He’s an orphan at the age of two-years-old. And he describes his childhood in the early 20s. They’re picking up coal that had fallen out of coal trucks. They’re digging up potatoes that farmers had missed. This is a hard life. It’s nothing like the life that I have lead, and that most of us have lead. And then when he’s ten years old what happens? The Great Depression comes. One out of every four workers in America is out of a job. Ten thousand banks went bust.

My grandfather on my mother’s side had all of his money in a bank in Baltimore, Maryland. The bank went bust and he was broke. He had an office on the 10th floor of the Maryland National Bank Business. He said a lot of his friends committed suicide. They jumped off the building.

And my father had a knack for being in the wrong place at the wrong time. He lives through this period being an orphan, he goes through the Great Depression, then he enlists in the army in 1939. Boy was he lucky, he said. They assigned him the best duty in the whole US army, they sent him to Hawaii. And he was there, he was recovering from a hangover on December the 7th 1941 when these Japanese planes came over.

My father’s generation knew trouble. They appreciated trouble. What’d they do? They saved their money; they took care. They were careful; they had to be. Savings rate in the USA were always 10% to 12%, up until the 1990s. And these people also believed in owning their own houses. I remember my parents very vividly. You know? They had a mortgage, something like $5,000 dollars, and they were so happy when they paid it off. My father could lose his job if he wanted and he’d still have a place to live. It was a big deal to them.

Back through that whole period, the portion of the average home owned by the average family was something like 70%. Now its down to 52%. Now the average person barely owns half of his house. And people don’t care about it any more. It doesn’t mean anything to them. Owning a home and paying of a mortgage doesn’t have the same emotional content it once had. People don’t appreciate trouble any more. That’s my point.

The 1980s transformed the country. Because that was the decade in which the people who had grown up with The Depression and the War gave power to the next generation. The next generation – my generation – came and took over, and we had different ideas.

Then the Republican party transformed itself under Regan and the Neo Cons, they took up the idea that deficits don’t matter, that debt doesn’t matter. And all of a sudden, there was no longer a major political party in America opposed to spending too much money. That was a major, major change that people really, really, don’t understand.

There was no longer a voice of fiscal conservatism, not a significant voice. And after this point, America became the luckiest nation in the world. It had no major threat, and it had a money, pieces of paper, with no backing in gold, that it could hand out all over the world, and people would give it valuable goods and services. It was just an amazing, amazing thing.

But as I’ve written in The Markets and Money, there’s nothing like a long run of good luck to destroy a person. And America has had a long run. And when these veterans left, these WWII veterans, these Great Depression veterans, the whole country was transformed and taken over by people like me, with no real appreciation for trouble.

Now I saw firsthand our own industry transform. I’m talking about the financial newsletter industry. When I started in 1978, it was a very different industry dominated by a different class of people doing different things. These guys often came from a religious tradition. Many of them were hard religious conservatives, and these people had a vision, really a vision of apocalypse, of hell and damnation. They said look, “You’ve got to watch out.” Their headlines were always something like, “1929 All Over Again,” or “Here Comes the Great Depression.” And those things meant something to people, because people still had it in their minds, they had it in their instincts, and in their genes. They knew that they were trouble.

But now it’s entirely it’s entirely different; it’s a new world. The dominant emotion among investors is no longer that fear – the fear that we’ll have another depression, that we’ll have another crash. Those things don’t mean anything to people. They’ve seen a crash. We had a crash in ’87, nothing to worry about. No problem. Depression? Forget it, we had a recession in the year 2001. It was nothing, people kept on spending money.

People had no idea what a depression or recession really was. And now, I think I mentioned this yesterday, if you look at the magazine covers Fortune magazine, there’s a cover that says, “the greatest economic boom ever” that’s what we’re living through. The greatest-which is true-and all these headlines and the magazines: retire rich. The spirit, the zeitgeist of our age is completely, completely, transformed.

But, my point today, is that when you don’t really appreciate trouble, you go looking for it. You have to look for it. And sooner or later you find it. And what is the sub-prime adjustable rate mortgage? It is trouble. You’re just looking for trouble. You’re signing a contract that says, you’re payments are going to automatically be adjusted up to a higher rate than you can afford. I mean this is just pure trouble. And what is a hedge fund/ Where you pay “2 and 20.” It is just trouble. You’re just asking for it. And think about the enhanced leveraged credit hedge fund that went broke, that was one of those Bear Sterns funds. Imagine, imagine trying to sell that fund to people who lived through the 1930s. “Enhanced, leveraged, credit.” Good luck. The idea of it is just mind-boggling. Anyway, what about the 500 trillion dollar derivative market; I mean if you’re looking for trouble you’re going to find some there, sooner or later.

And the $8 billion dollar trade deficit. There’s plenty of trouble there waiting to happen. And I think I mentioned this yesterday, I was reading the paper, and they’re building condominiums in Florida in Miami. 20,000 new condominiums are being built in a place where they already have 23,000 on the market and the whole thing is just unbelievable. People do not think there’s going to be any real trouble. And more money is going into hedge funds than ever before, despite the fact that if anybody troubles to read the paper, you can see that the hedge funds have serious, serious, unknown problems.

My point is that if you don’t appreciate trouble, properly, you will go looking for it. And if you go looking for it, you will sooner or later find it.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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