The last depres­sion the U.S. went through was in 1930’s, and it was part of huge global downturn.

From a Mar­ket update newslet­ter from Sprott Asset Management, Eric Sprott & David Frankin write: “We are Now in the Early Stages of a Depres­sion.” Anything with this type of lead is a must read:

We are now in the early stages of a depres­sion. The eco­nomic indi­ca­tors we fol­low to track real eco­nomic activ­ity are all sig­nal­ing a slow­down of mas­sive pro­por­tions. You wouldn’t know it read­ing the main­stream papers of course – they all focus on the rel­a­tive decline in the slowdown’s inten­sity. (Sprott Asset Management, It’s the real economy, stupid)

Sprott & Frankin looked at some finan­cial and eco­nomic trends that devel­oped the late 1920’s and early 1930’s and have found sim­i­lar trends today. The first trou­bling trend they see is the nose­dive in world indus­trial output:

The sec­ond trend is the nose­dive of the DJIA:

How bad things will get get is anyone’s guess.

On the investor front, Sprott & Frankin think cur­rent mar­ket val­u­a­tions are only being held up at present lev­els by investor sen­ti­ment — earn­ings have not improved and the real econ­omy is still strug­gling, and the mar­ket hasn’t yet priced this in, yet:

We find the sim­i­lar­ity between the 2008 eco­nomic col­lapse and the 1929 eco­nomic col­lapse dis­turb­ing. Don’t get sucked in… the real econ­omy is still strug­gling and the mar­ket has yet to reflect this. In 1932, the Dow Jones Indus­trial Aver­age bot­tomed 90% below the Sep­tem­ber 1929 peak. The S&P 500 Index peaked in Octo­ber 2007 at 1,576, and from our brief analy­sis above we can eas­ily cal­cu­late a drop in the S&P 500 of as much as 88% from that peak using our ‘dou­ble trou­ble’ sce­nario. At the very least, under all of our sce­nar­ios it appears that the S&P 500 Index will test the March 2009 low of 666. Judg­ing by the con­tin­ued declines we are see­ing in the real econ­omy, we expect that test to hap­pen sooner rather than later.

On the “hope and change” front, Sprott & Frankin sum­ma­rize two sta­tis­tics that do not bode well for increas­ing taxes or deficit spend­ing, the two main engines of team Obama’s and the Democ­rats’ “hope and change” agenda.

Gov­ern­ment Tax Rev­enue Declining | The End of Hope and Change?

· 32 of the 46 states whose fis­cal year ended mid­night July 1, 2009, did not have bud­gets signed by their Gov­er­nors. States are grap­pling with deficits total­ing a col­lec­tive $121 billion…

· Per­sonal income tax, which accounts for more than a third of state rev­enues, dropped by 26% in the first four months of 2009…

· The US gov­ern­ment has spent $2.67 tril­lion thus far in fis­cal 2009, but has only col­lected $1.59 tril­lion…

· The US gov­ern­ment col­lected $685.5 bil­lion in indi­vid­ual income taxes so far this year, a 22% drop from the $877.8 bil­lion the gov­ern­ment took in dur­ing the first nine months of 2008…

· US cor­po­rate income taxes plunged 57% to $101.9 bil­lion in 2009, down from $236.5 bil­lion in the first nine months of fis­cal year 2008…

Unem­ploy­ment Catastrophe | The End of Hope and Change?

· The June 2009 job­less rate reached 9.5%, the high­est since 1983.

· 4 mil­lion Amer­i­cans have been look­ing for work for more than 26 weeks, rep­re­sent­ing 29% of the unem­ployed – the most since records began in 1948.

· Dur­ing the last 30 years, Amer­i­cans who lost their jobs took an aver­age 15.8 weeks to find new posi­tions. In June 2009, the aver­age dura­tion of unem­ploy­ment was 24.5 weeks, the longest since records began in 1948.

· The num­ber of peo­ple col­lect­ing unem­ploy­ment ben­e­fits reached a record 6.88 mil­lion in the week ended June 27, 2009.

· Approx­i­mately six peo­ple are seek­ing work for every job open­ing, the most since the gov­ern­ment began keep­ing such records…

Fis­cal ruin of the West­ern World Beckons | The End of Hope and Change?

Yves Smith of The Naked Cap­i­tal­ism Blog com­ments on Ambrose Evans-Pritchard’s arti­cle in the Tele­graph, Fis­cal ruin of the West­ern world beckons:

For a glimpse of what awaits Britain, Europe, and Amer­ica as bud­get deficits spi­ral to war-time lev­els, look at what is hap­pen­ing to the Irish wel­fare state.

I am not exactly keen Ambrose Evan-Pritchard’s pre­scrip­tion, which is greater mon­e­tary eas­ing with more fis­cal restraint. I put bank­ing indus­try reform (of the root and branch sort) very high on the list, but the sort needed will never hap­pen in the absence of another break­down. So we patch the sys­tem with duct tape and see how long it holds together. Fail­ing that, I have doubts of the effi­cacy of mon­e­tary measures.

But that aside, I do agree with his more gen­eral points, that the cur­rent pol­icy mix is not a good one, and that too many peo­ple are mak­ing the dan­ger­ous and often self serv­ing assump­tion that we are out of the woods.

The finan­cial sys­tem it is still vul­ner­a­ble to shocks. We have maybe a 20% odds of a dis­or­derly fall in the dol­lar. I was at a McK­in­sey pre­sen­ta­tion ear­lier this week. McK­in­sey advised the Trea­sury on the stress tests and is now advis­ing the Fed. Given those roles, the firm is going to play risks down. But even they peg the odds of the dol­lar hit­ting an air pocket and caus­ing seri­ous col­lat­eral dam­age at 10–20%., pretty cer­tain to be a sys­temic event,. There are also seri­ous prob­lems with the Euro banks . I don’t have a good enough sense to put odds on it, but I would haz­ard at least 10% odds of a sys­temic event ema­nat­ing from some nasty blowups.

Nearly 30% prob­a­bil­ity of seri­ous bad stuff hap­pen­ing is NOT in any main­stream sce­nar­ios. Yes, odds favor us mud­dling through with very weak growth, but the down­side is con­sid­er­able, and is being ignored because tak­ing the right mea­sures will be bad for “confidence”

Ambrose Evans-Pritchard has some indi­rect advice to give those not trou­bled by the Health Care Reform Price Tag:

The Fed’s doc­trine – New Key­ne­sian Syn­the­sis – has let it down time and again in this long saga, and there is scant evi­dence that Fed offi­cials recog­nise the fact. As for the Euro­pean Cen­tral Bank, it has let pri­vate loan growth con­tract this summer.

The imper­a­tive for the debt-bloated West is to cut spend­ing sys­tem­at­i­cally for year after year, off-setting the defla­tion­ary effect with mon­e­tary stim­u­lus. This is the only mix that can save us. (Telegraph.co.uk, Fiscal ruin of the Western world beckons).