My good friend's take on the stock market

A very good friend who was in the investment business years ago and who is a serious student of economics has long felt that the US economy and the world's as a consequence, is headed for a meltdown. In his mind it all has to do with too much credit which at some point weighs down the economy to the point it becomes non functioning until the excess debt is rationalized away to a more reasonable level. Here is as letter he recently wrote to some public figure outlining his concerns. While he has been on this horse for many years, there's nothing that says he might be right at some point in time. I believe he sees the meltdown in the sub-prime mortgage market as the leading edge of the general collapse. Hope he's wrong. His letter follows below and a mini-rebutal from WSJ Online is here

Dear Ms. Sonders,

With all due respect, the problem investors face is................ excessive debt and credit!

Irving Fisher discovered, after intensive but belated study, that the cause of the crash and deflationary depression of the 30's resulted from excessive debt and credit, then primarily in the banking system, today in both the banking system and throughout all sectors of the economy, this time dozens if not hundreds of times the magnitudes of the late 20's, early 30's.

Dr. Fisher's classic book 100% Money which incorporates his testimony before Congressional banking committees in '33-'35, explains his discovery that excessive credit caused the surprise crash and surprise depression of '29 onward.

Congress dismissed Fisher's 100% money as did Harvard oriented Keynesian New York bankers, not to mention most economists at that time, Ludvig von Mises having lost out to Keynes on the subject of economic leadership in America.

Fisher's remedies being dismissed from the Banking Act of 1935 doomed us to repeat history, though by magnitudes far greater than those 77 years ago.

While I have admittedly focused on the master economist Fisher and the issue of the threat of excessive credit, it has been next to impossible to quantify its magnitudes enabling another crash and depression.

I worked with Alan Greenspan in the 1960's when I was director of research of an intstitutional research and brokerage firm on Wall Street and he was our economic consultant. I interpreted his wrk to reflect a belief that someday we might have another crash and depression, that Fisher might prove prescient.

Unfortunately, Greenspan could not quantify the metric of excessive debt and credit that might cause another crash and deflation.

No drunken driver breathalizer test equivalent existed or exists for excessive debt and credit causing deflation.

I was lucky to be the number one mutual fund manager in Lipper rankings in 73-74 and my persuasion then was that we were being subjected to the consequences of excessive debt and credit creation. I was wrong, so very wrong.

Lo and behold, it has taken another 33-34 years for the surprise start of a stock market crash and depression as the result of excessive credit creation.

I admit to having been convinced since '73 of an upcoming surprise crash and depression not seen by any of the authorities, not the Fed, not Greenspan, and now not Bernanke.

Once again, with even greater conviction, I believe that excessive dollar credit in America and around the world, is causing an early phase of what will be an extended crash and an even more extended depression.

Only time will tell if this is the surprise similar to that of '29 or if the authorities can cause another burst of credit creation and induce participants to use the credit to extend the stock market and economy. I think they cannot.

Credit will overwhelm them, and the economy and financial markets, like drunken sailors, will pass out for an appropriate sleep off and hangover. The Global Economy will show its real colors in a global collapse of dollar and local credits and stock markets as well.

All due to no metric to measure the impact of excessive debt and credit on markets and the eoncomy.

Ironically, as the magnitude of dollar debt and credit deflates, the dollar will rise is value, the supply of dollar credit being much diminished and borrowers no longer eager or willing to borrow.

Interest rates will rise sharply as a liquidity squeeze world wide squeezes and squeezes more.

Thereafter,, rates will collpase and no one willl wish to borrow. The analogy of debt and credit to alcohol will cause the equivalent of alcoholics anonymous for debt and credit.

Gold will crash as the credit liquidation persists, primarily as holders of this superior inflation
hedge, leveraged world wide, finds itself lifeless in a deflation.

Real estate values will decline in value and, at the same time, become a source for more and more taxation by bankrupt governments.

Another way I arrived at some kernels of truth regarding the depressing impact of excessive debt and credit was threefold, one, reading all Barrons issues from 1927 to 1937, two, the same for all First National City Bank's (now Citi) monthly economic newsetters for the same period (until Walter Wriston's regime removed them from the library),and three, reading many ecoomics books and articles claiming no deflationary depressions to be possible ever again.

The clincher was,reading Irving Fisher's 100% Money.

Bernanke is supposed to be a student of the Great Crash and Depression, claiming as his solution were it to occur, dropping billions in cash from helicopters to induce inflationary spending to offset the deflation..

This pebble in the ocean of debt cannot stop the liquidation of devastating amounts of debt and credit, the house of cards base upon which the American and now the Global Economy rests,

Comments in the media are finally so similiar to those from Wall Street in 1929-30 that we are in all probability now witnessing an unanticipated surprise,

Fisher's discovery, after the fact (he was widely quoted in 1929 as saying "America is on a permanent plateau of prosperity") has not onlly been undiscovered today by most economists but also its importance is thus being totally missed as it was over seventy years ago.

So the workings of history repeat! Surprise!
Surprise!