Lessons from the Book 📖 New Great Depression

Overview

The New Great Depression (2021) by James Rickards is an eye-opening look at the devastating economic effects of the Covid-19 global pandemic.

Coronavirus has completely changed the world. With businesses and schools still shut down all across the globe, the social and economic landscape has been uprooted. In particular, the effects of lockdowns and quarantines in the United States will be felt for generations to come. Not only will there be mental health issues to deal with, but also a crippled economy that is struggling with unemployment, debt, and deflation.

However, encouraging inflation by reinvesting into gold is one method that seems to provide hope for America digging itself out of the hole that the coronavirus has created.

Insights from Chapter 1

#1

SARS-CoV-2 is a deadly virus more commonly known as coronavirus. The resulting disease from the virus is called Covid-19. Some infections produce no symptoms at all, while others cause lung inflammation, which leads to difficulty breathing and a myriad of other potential symptoms and complications.

#2

The pandemic began in Wuhan, China. Like all pandemics, the number of infections began slowly but grew exponentially. By May 2020, the American Enterprise Institute estimated the number of Covid-19 cases in China was 2.9 million. The official figures reported by China are drastically lower, but almost certainly undercounted.

#3

The virus was spread to Italy by Chinese citizens arriving in Milan for Fashion Week. Italy’s older population and strained medical facilities exacerbated the spread of Covid-19, but unlike China, numbers were recorded accurately, serving as a demonstration of the effects of the virus for the entire world.

#4

Compared to other deadly viruses throughout history, such as the Spanish flu and swine flu, Sars-CoV-2 spreads more rapidly and remains in populations longer. Waves of increasing infections can be decreased by common sense practices such as social distancing, mask wearing, self-quarantining when necessary, and sanitizing constantly.

#5

While certain countries and US states have shown resilience and effective responses to initial waves of the virus, those same places experienced spikes of infection more recently. The best-case scenario with such spikes is that they decrease in severity with each progressing one.

#6

As China was slow to go public with the virus, and initially deliberate in silencing news of how severe it was, the World Health Organization (WHO) did nothing but help China with its coverup. The WHO lied publicly about the virus, refusing to call it a pandemic.

#7

The true origins of Sars-CoV-2 have been under debate, with two prominent theories. The first is that the virus was transmitted to humans from an infected animal at a wet market in Wuhan. A wet market is an open-air market that holds, slaughters, and sells wildlife to customers.

#8

The second is that the virus originated in a laboratory where Wuhan scientists were experimenting with it. While both theories have come under scrutiny for lack of evidence, there is an overall consensus that the virus was transferred from animals to humans at some point.

#9

Regardless of where the virus originated, China must take responsibility for the lives lost and financial ruin due to the resulting global pandemic. If the truth ever does come out and it is revealed that the virus came from a lab, it would constitute a crime against humanity.

Insights from Chapter 2

#1

The US economic lockdown in response to the virus in March 2020 will go down as one of the greatest blunders in American history. As there were gross inconsistencies with how and when individual states closed non-essential businesses, lockdowns were largely ineffective at stopping the spread.

#2

While there were many alternatives to lockdown, such as voluntary social distancing, handwashing, and proper masks, the real reason for the lockdown was to “flatten the curve,” as famously explained by Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Disease.

#3

Flattening the curve means slowing the spread of the virus over time to avoid overcrowding hospitals.

#4

The problem with simply flattening the curve is that it prolongs the duration of the spread of the virus, instead of simply having a large spike of cases at a single time. In fact, flattening the curve may actually cause more cases due to a delay in herd immunity.

#5

The genuine concern with having a large spike of cases at one time is that hospitals would become overrun. But there are solutions to this problem that didn’t involve ruining the economy, such as erecting temporary hospital structures and sending doctors from low-risk areas to high-risk ones.

#6

However, this rationale for the lockdown was not clearly explained to the general public. While people thought that flattening the curve would reduce the number of cases, it was used to simply buy time for a miracle vaccine that didn’t seem likely, or even possible.

#7

The greatest mistake in pushing for more time with lockdowns was the failure to consider the economic consequences. The lockdowns ended up costing the country around $4 trillion in asset value and $2 trillion in output value.

#8

Other costs of the lockdown include loss of immunity to common bacteria and viruses that we used to encounter out in the world every day. After being forced into our homes, our bodies may not be accustomed to those same bacteria and viruses when we return to the public.

#9

Most of the deaths caused by the virus would have occurred with or without the lockdown. In fact, the infected fatality rate of .65 is only marginally higher than for the seasonal flu, and definitely lower than previous pandemics, none of which resulted in a lockdown.

#10

Forcing people to stay at home has led to numerous deaths outside of the virus as well. With jobless rates soaring, the connections between unemployment and suicide, and unemployment and alcohol and drug related deaths, cannot be ignored.

#11

Many esteemed and qualified scholars and authors have begun speaking out against the lockdown. They say history has shown that government-mandated quarantines are not effective in times of health crises, and that individual choice, when given all relevant information, can and will lead to the best outcomes.

#12

When former President Donald Trump and his wife, Melania, both contracted the virus, it served as a dramatic piece of evidence that shows how the virus will continue to spread with or without a lockdown.

Insights from Chapter 3

#1

The New Great Depression started on February 24, 2020, when Italy said its caseloads had tripled, declaring to the world that the pandemic was real. The New Great Depression can be delineated in terms of the crash, the people, and the prognosis of the economy going forward.

#2

While the 3.6 percent fall in the stock market on February 24 was far from catastrophic, there was a clear shift in psychology. Market participants had initially thought the virus was simply a Chinese problem, but on that day stocks were repriced to reflect a global pandemic.

#3

By March 23, the market had taken a 37 percent decline. While there was impressive growth in late March, the truth is that the stock market no longer accurately reflects the state of the American economy, or people - the skyrocketing unemployment rate does.

#4

While the numbers are staggering when looking at the loss during this depression, the other myriad side effects include loss of pride, dignity, happiness, and hope for the future. However, one number stands out in gauging the situation: the 60 million who lost their jobs between March and October.

#5

It’s often assumed that as life returns to normal, so will the jobs. In the New Great Depression, as with every depression, normal is gone. As we lose our small businesses, people ignore that they account for half of the total jobs in America.

#6

In the larger picture, American businesses are not the only ones affected. World trade as a whole is collapsing, as measured by great decreases in global exports. Economies around the world are faltering. Losses of the European Union are comparable to what they were following World War II.

#7

Americans weren’t prepared for the first run of layoffs from March to June 2020. This affected already struggling businesses, with layoffs focused on lower-paid workers mostly in the service sector. The next round of layoffs will be in 2021 and should target higher-paid professionals, like bankers and lawyers.

#8

Just as there will be a second wave of layoffs, there will be a second wave of Covid-19 cases. If we are to learn from history, the second wave of the Spanish flu in 1918 was far deadlier than its first.

#9

The economic impacts of the second wave will be devastating for American society. As more people spend less, which began even before the pandemic, the job market’s nosedive will not likely cause that to change. In particular, recent graduates will have an even more difficult time securing jobs.

#10

Projections for the US economy do not foresee an immediate rebound. Output levels of 2019 may not be regained until 2023. Even when those output levels are reached, the after-effects of the pandemic are expected to be felt for the next thirty to forty years.

#11

Because unemployment is high and US citizens are shifting towards saving their money versus spending it, the recovery of the American economy is expected to be a slow process.

Insights from Chapter 4

#1

There have been several public-policy responses to depressions in the past, such as infrastructure spending during the Great Depression. The response for the Covid-19 pandemic appears to be Modern Monetary Theory (MMT), a fringe economic policy theory centered on government spending.

#2

MMT is based on the idea that the value of money is dictated by the government because citizens are forced to pay their taxes with the government’s money. As long as the only option to pay those taxes is the government’s money, the government can control currency value.

#3

MMT uses that idea to push for unlimited government spending, specifically on public welfare programs such as Medicare, free tuition, and guaranteed basic income for all. The hope is that a crumbling infrastructure can be saved by spending money on it, but this relies on the government enforcing tax laws.

#4

Since 2007, the Federal Reserve has dealt with crises by extremely easing or tightening the US money supply, which means aggressively printing more money or severely limiting its production. These tactics work up to a certain point, but do little to create real economic growth.

#5

Congress has authorized more government spending in 2020 than in the past eight years combined, and will add more to the national debt than all presidents from George Washington up to Bill Clinton collectively. Congress has fully committed to increasing government spending in order to increase consumer spending.

#6

While there are no signs of a US default (an absolute failure to repay a debt) in the future, America’s growing debt is adding more obstacles to its economic situation and recovery. A stagnant economy, an increasing wealth gap, and withering American consumer confidence are expected to continue.

#7

The MMT policy fails because it overlooks velocity, the behavioral component of the turnover of money, which is consumer confidence. If consumers aren’t confident about their prospects, regardless of how much free money they receive, they will save it as opposed to spending it.

#8

The New Great Depression will lead to deflation, which decreases the price of goods and services. While this initially sounds like a good thing, the Federal Reserve is fearful of deflation for the way it impacts the government’s debt, debt-to-GDP ratio, and the health of the banking system.

#9

Regardless of inflation or deflation, the government’s debt will need to be paid in full. Whereas inflation creates money and allows the government to pay off its debt with less-valuable currency, deflation does the opposite and makes the debt situation even more difficult.

#10

The debt-to-GDP ratio is the amount of debt divided by the gross domestic product (GDP). If debt continues to rise (which it is), and the country’s production slows (which it is), the debt-to-GDP ratio will rise astronomically, leading to higher interest rates and loss of consumer confidence.

#11

Finally, deflation negatively affects the banking system as it increases money’s real value. While this increases the value of banks’ lending claims, it also means that debts are more difficult to pay off. As debtors eventually default, the banks lose even more money.

Insights from Chapter 5

#1

There is relatively little writing that came out of the Spanish flu, as if citizens of that time actively tried to forget it ever happened. This silence has left one facet of the flu completely overlooked, which is how the flu affects the brain and central nervous system.

#2

There have been a handful of studies that looked into the mental effects of the Spanish flu, many of which involve dysfunction and violence through murder, suicide, and abuse. It also manifested itself silently through depression, personality changes, and confusion. Unfortunately, Covid-19 also causes mental health damage.

#3

Covid-19 causes two forms of mental health damage: cognitive impairment as a result of the virus penetrating the central nervous system, and behavioral dysfunction as a result of the isolation caused by quarantining and commercial lockdowns.

#4

A report by the Recovery Village, an addiction treatment and rehabilitation network, showed a 55 percent increase in consumption of alcohol and 36 percent increase in illegal drug use as of May 2020 in response to the pandemic, and the stress of isolation, unemployment, and simple boredom.

#5

A growing body of research has additionally shown the negative social effects of the pandemic. The mental health of the nation has been strained by the lack of human connection and community due to lockdowns and quarantines. The overwhelming feeling is that of anxiety, which occasionally leads to violence.

#6

On May 25, 2020, George Floyd, an African American man, was arrested and killed by a white police officer over allegedly passing counterfeit money. The officer was watched by three other officers as he pressed his knee on Floyd’s neck for nine minutes. The country was enraged.

#7

After weeks of peaceful demonstrations, violent protests, and criminal looting, it cannot be said whether or not Covid-19 played a part in the unrest following another incident highlighting the US battle with systemic racism. But if Floyd’s death was a match, lockdown boredom, and fatigue served as kindling.

#8

Social disorder along with economic decay is not restricted to the United States. It is a global problem. But as the two continue to work in tandem, the connection between them becomes more obvious. If the country, and world, are to return to normalcy, the economy must be corrected first.

Insights from Chapter 6

#1

The perception gap between individual beliefs and reality is the best way to describe market behavior today. While the reality is that we are in a global pandemic, the stock markets have rebounded from their initial crashes and have given some market participants false hope.

#2

There are two scenarios for the market going forward. The first is that the market is in fact ready to rebound, providing a great chance to buy stocks at record lows. The second is that there will be slow growth and constant unemployment. Both of these scenarios cannot be right.

#3

Market predictions are rarely right, because they never foresee a market crash. They did not see the crash in 2008, nor did they see this latest one in 2020. While every market situation provides opportunities to make money, it is up to you to make the right decisions.

#4

There are three steps to beating the market: getting the forecast right, getting the policy reaction right, and trading ahead of both. The market forecast is a projection of future market numbers and characteristics, and the policy reaction is how banks will respond to certain economic conditions.

#5

The majority of trading happens today by robots. The good thing about robots is that they assume the future will resemble the past. Of course, that is not always the case, so it is easy to get ahead of robot trading algorithms most of the time.

#6

Diversify your assets to avoid any major collapse affecting all of your stocks. Having a varied portfolio spreads out your potential risk instead of potentially relying on similar stocks.

#7

Diversification does not mean just buying different stocks, especially if they are all the same asset class. An asset class is made up of investments that share similar characteristics and abide by the same laws, as they are often connected with one another. Buy across asset classes.

#8

Be nimble and prepared to change your trading strategies. Ideas that were perfect six months ago may change rapidly. The most important thing is to remain informed, and constantly evaluate and upgrade your trades. That doesn’t mean day trade, but simply execute forward-looking trades (around six months forward).

#9

In the post pandemic world of 2021-2022, there will be deflation, stocks and interest rates may fall even more, gold will continue surging, the Covid-19 recovery will be slow and arduous, unemployment will stay around 10 percent, and the US dollar will be weakened.

#10

With the loss of confidence in the US dollar, gold has the opportunity to soar, especially because panic buying of precious metals is a common response to global disasters or uncertainty. There is no telling how high gold’s value will rise in the coming years.

#11

Real estate also is affected by the pandemic. Due to the complicated environment of the restaurant business, commercial real estate has fallen dramatically. At the same time, the widespread success of working from home is reducing demand for corporate office space.

#12

While commercial real estate will be hurt, residential real estate looks promising due to the migration to suburban areas and away from urban ones caused by the pandemic. This migration is also caused by the perceived increase of violence in major cities via protests and riots.

#13

The recovery from Covid-19 will be extremely slow, and life will never be the same. The path for the economy lies in inflation. If the government purchases gold, the dollar will devalue and cause inflation.

#14

We must avoid deflation for the US in order to begin paying off its debts.

Author’s Style

James Rickards uses advanced language when discussing the economy in The New Great Depression . While there are explanations for some higher level concepts and ideas, readers would benefit greatly if they had prior knowledge of basic economic theories.

Rickards also does not use charts or diagrams to assist with his main points. Instead, he relies on quoting other sources and using historical information to help establish his arguments.

Author’s Perspective

James Rickards is an American lawyer, investment banker, economist, and bestselling author on matters of finance. He has testified before the US House Science Committee on Oversight about the risks of financial modeling and the 2008 U.S. financial collapse. He worked on Wall Street for 35 years.

Rickards has authored seven books, most notably Currency Wars: The Making of the Next Global Crisis (2011), The Death of Money (2014), The New Case for Gold (2016), and Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos (2019).