Using Elliott Wave To Trade Forex Markets

Posted on July 9, 2016 by Anthony Jerdine

Using Elliott Wave To Trade Forex Markets
By Anthony Jerdine

In terms of the total value of all transactions, the forex market has become the largest market in the world. As the economies of countries across the globe become more and more intertwined, the relationship between the currencies of various countries grows in importance. It is this development that continues to drive interest in the forex markets. This article will examine a method to trade forex markets using the Elliott Wave Theory.

The Elliott Wave Theory
The Elliott Wave Theory is a method of analysis developed by Ralph Nelson Elliott (1871-1948) that is based on the theory that, in nature, many things happen in a five-wave pattern. As applied to the financial markets, the assumption is that a given market will advance in a pattern of five waves – three up waves, numbered 1, 3 and 5 – which are separated by two down waves, number 2 and number 4. The theory further holds that each five-wave up-move will be followed by a down-move also consisting of five waves – this time, three down waves, numbered 1, 3 and 5, separated by two up waves numbered two and four.

In addition, the theory holds that each of the countertrend waves – i.e., wave number 2 and number 4 – will unfold in an ABC pattern. In other words, during waves 2 and 4 of a five-wave uptrend, the security in question will retrace part of the wave 1 advance in a pattern consisting of two smaller down waves (labeled A and C) separated by one up wave (labeled B). Likewise, during waves 2 and 4 of a five-wave down-trend, the security in question will retrace part of the wave one decline in a pattern consisting of two smaller up-waves (labeled A and C) separated by one down-wave (labeled B).

In reality, things typically do not unfold in such a neat, clean, and easy to follow five-wave pattern. As a result, many individuals who espouse a belief in Elliott Wave analysis nevertheless end up interpreting the current wave count differently than other adherents. And in fact, it can be argued that the Elliott Wave is as much an art as it is a science, and that various interpretations are to be expected.

As such, one important thing to note is that this article is not so much about how to generate an Elliott Wave count – since so many individuals end up with different interpretations – but rather about how to trade forex markets using the Elliott Wave as the driving force. For the purposes of this article, I will use the Elliott Wave count as generated objectively by ProfitSource source software by Hubb. The software has an automated algorithm for generating and displaying the wave count.

It should be noted that the preferred count can change dramatically from one day to the next based on the built-in algorithm, and that another person or program may arrive at a different interpretation of the wave count and any given point in time. Still the benefit of using this method is that for better or worse, the count is calculated using an objective algorithm and is not open to subjective interpretation.

Laying Out the Steps of a Plan
Before embarking on any trading campaign it is essential to have a plan in place. So let’s set up a straightforward plan for using Elliott Wave as a basis for trading forex markets. Here are the steps that we will employ:

Step 1. Select a method for generating an Elliott Wave count.
This may be based on your own analysis, or via some charting or analysis software. As mentioned, we will use the wave count generated by ProfitSource software by HUBB.
Step 2. Wait for a wave 5 to begin.
In ProfitSource this occurs when a wave marked as “3” changes to a wave marked as “4” (this actually indicates the end of wave 4 and the start of wave 5). Waiting for this to occur can be the toughest part, for this step can require a great deal of patience. A given single forex market may experience the setup that we are looking for only a few times a year.
Step 3. Look for confirmation of the trend using another indicator or indicators.
Long Setup Confirmation: Once a wave 3 above the price bar changes to a wave 4 marked below the price bar we will then assess the following indicators to confirm that a long trade should be made:
90-day Commodity Channel Index (CCI) is positive (i.e., greater than zero)
The three-day relative strength index reverses to upside for one day.
These two confirming actions do not have to take place on the day that the wave number changes from 3 to 4. As long as the both occur at some point prior to the wave count being something other than 4, then a confirmation is considered to be in force and we will enter a long trade.

Short Setup Confirmation: Once a wave 3 below the price bar changes to a wave 4 marked above the price bar we will then assess the following indicators to confirm that a short trade should be made:

90-day CCI is negative (i.e., greater than zero)
The three-day RSI reverses to downside for one day
These two confirming actions do not have to take place on the day that the wave number changes from 3 to 4. As long as the both occur at some point prior to the wave count being something other than 4, then a confirmation is considered to be in force and we will enter a short trade.

Step 4. Identify a reasonable stop-loss point.
For a long setup we will subtract three times the three-day average true range from the low established leading up to the trade as our initial stop-loss point. For a short setup we will add three times the three-day average true range to the high established leading up to the trade, and use this as our initial stop-loss point (See example to follow).
Step 5. Enter trade and stop-loss order.
We will assume that a trade is entered at the next day’s open price. The stop-loss order will also be placed. This order is a trailing stop and we be updated each day that the trade is open.
Step 6. Consider taking some profits on first good move and trail a stop for the rest of the position.
Trade Exit Plan
1. If stop-loss order is hit then the entire trade is exited.

2. If the three-day RSI reaches 85 or higher for a long trade, or 15 or lower for a short trade, or if the wave count changes from 4 to 5, we will sell half and adjust our trailing stop as follows:

For a long trade we will use a trailing stop that subtracts one times the three-day average true range from the previous day’s low.
For a short trade we will use a trailing stop that adds one times the three-day average true range to the previous day’s high.
3. If the wave count changes to something other than a wave 5, we will simply exit the trade on the next day.

Example Setup and Trade
In Figure 1 we see the setup for a short trade. On the most recent trading day, the blue number 4 first appeared above the price bar. Prior to the day, a blue number 3 had appeared below each price bar for the past several days. This suggests that a wave 5 decline may be setting up.

Below the bar chart you can see that the three-day RSI ticked lower on the day and that the 90-day CCI is in negative territory. This confirms the setup and constitutes a sell short signal, so we also calculate our stop-loss price by adding three times the average true range over the last three days to the current day’s high price. On the next day the euro/yen cross was sold short at 112.63 and a trailing stop was entered at 117.74.
Figure 1 – A sell short setup for the euro/yen cross is completed.
In Figure 2 you can see that roughly a month later the three-day RSI registered a reading below 15. As a result, on the next day we would have bought back half of our position at 109.50 and also adjusted our trailing stop to only one times (rather than three times) the average true range over the past three days added to the current day’s high, thus generating a much tighter trailing stop (this tighter stop does not appear until Figure 3).
Figure 2 – Three-day RSI signal profit-taking opportunity; half of short position is covered and trailing stop is tightened.
Finally, in Figure 3 you can see that the euro/yen cross worked slightly lower over the next several weeks, but ultimately our trailing stop was hit and the remaining portion of our original short position was closed out at 109.44.
Figure 3 – Trailing top is hit; trade is exited.

Conclusion
There are many ways to interpret an Elliott Wave count. There are also many methods for entering and exiting trades once a signal is deemed to have occurred. This article serves as an example of just one way to go about performing these tasks. Whatever method one ultimately chooses the keys to successful implementation are to:

Develop some objective way to interpret the current Elliott Wave count. Consider employing some sort of filter or filters to ensure a valid trading signal.
Always have a stop-loss point.
Consider taking profits on the first good move in the expected direction and then letting the rest ride with a trailing stop.

Why ETFs Are Popular with Wealthy Investors

Posted on March 22, 2016 by Anthony Jerdine

Why ETFs Are Popular with Wealthy Investors
By Anthony Jerdine | March 22, 2016

The higher their net worth, the more likely wealthy investors are to invest in exchange-traded funds (ETFs), according to research by Spectrem Group. This is particularly the case with younger investors, the study, Asset Allocation, Portfolios and Primary Providers, found.

The study breaks down just how much ETFs account for in the portfolios of affluent, millionaire and ultra-high net worth investors. Spectrem’s research also reveals which demographic is most likely to give their financial advisor the responsibility of managing their ETF investments.

inRead invented by Teads
Here are the salient points from the study that can help advisors zero in on how better to serve these demographics. (For related reading, see: Finding and Retaining High Net Worth Clients.)

Allocation Among Investors
Domestic ETFs make up 14%—with an average value of $26,000—of the portfolios of mass affluent investors. This is up slightly from 2014 when ETFs with an average value of $25,000 made up 13% of their portfolios. These investors are defined as those with a net worth between $100,000 and $1 million (not including primary residence).

One-fourth of millionaires with a net worth up to $5 million invest in domestic ETFs. The mean value of these investments is $88,000. This is down from last year when 28% invested in domestic ETFs, which had an average value of $92,000.

Ultra-high net worth investors, or those with a net worth between $5 million and $25 million, are the most likely to be invested in domestic ETFs, Spectrem’s study found. Forty-three percent, up from 40% in 2014, are invested in ETFs. ETFs in their portfolios have an average value of $438,000. This is down from $469,000 in 2014.

The likelihood of the mass affluent, millionaires and the ultra high net worth investing in ETFs in the next 12 months also increases with their net worth. Thirteen percent of mass affluent investors indicated that they would invest in ETFs over the course of the next year. This compares with 21% of millionaires and 31% of ultra high net worth investors. Each percentage is basically unchanged from 2014, Spectrem points out.

Significance of Age
When it comes to ETF ownership, age is only a significant factor among millionaire and ultra high net worth investors. Of the 25% who are invested in ETFs, 63% are Millennials. Only 37% are Gen Xers and 23% are Baby Boomers. Among the 43% of ultra high net worth investors who invest in domestic ETFs, almost half are 47 years old and under or 48-54.

Young millionaire and ultra high net worth investors are much more likely than their older counterparts to give their financial advisor the primary responsibility of managing these investments. Almost seven out of 10 millionaire Millennials and 44% of ultra high net worth investors ages 47 years old and under indicated that their financial advisor is primarily responsible for managing their ETFs.

Diversification and Other Drivers
Diversification is one of the primary factors affluent investors consider when selecting an investment. ETFs are finding increasing favor with wealthy investors for their diversification benefits, the research found. They are lower cost and there is a wide variety of ETFs to choose from. These funds can also be traded at any time of the trading day—like stocks—and not just at market close, like mutual funds.

Spectrem points out that young investors who tend to be more tech-savvy and environmentally conscious than older generations may find ETFs increasingly attractive. That’s likely because there’s a large pool of specific ETFs that track markets appealing to investors interested in niche markets, such as technology and socially-conscious companies.
ETFs are very popular with high net worth investors. Young millionaire and ultra-high net worth investors are also much more likely than their elders to give their financial advisor the responsibility of managing their ETF investments. Having a good background in ETFs and being prepared to offer a wide selection of them can only help advisors looking to broaden their cadre of wealthy investors.

Posted on March 18, 2016 by Anthony Jerdine

Sony Acquires Major Music Catalog for $750 Million
By Anthony Jerdine| March 18, 2016

Sony (NYSE: SNE) has purchased the remaining half of a music catalog owned by the estate of Michael Jackson.

The deal to buy the 50% of Sony/ATV Music Publishing that Sony did not already own will give the company full rights to classic songs by The Beatles, Bob Dylan, The Rolling Stones, Marvin Gaye, and many other artists. However, it will not include rights to Jackson’s own work, which his estate will retain.

Sony will pay the Jackson estate $750 million for its stake in the catalog under the terms of a process that began in September 2015, when Sony exercised a right that has existed since the joint venture was formed by Michael Jackson and Sony in 1995, the company explained in a press release. That previous agreement allowed for one partner to purchase the other partner’s interest pursuant to a procedure outlined in the Sony/ATV operating agreement.

“The entertainment businesses have long been a core part of Sony and are a key driver of our future growth,” said Kazuo Hirai, president and CEO of Sony Corporation. “This agreement further demonstrates Sony’s commitment to the entertainment businesses and our firm belief that these businesses will continue to contribute to our success for years to come.”

What does this mean?
While Hirai’s statement makes the deal sound like a typical business transaction, it’s actually the culmination of a piece of Jackson’s legacy that rivals his music career. The singer purchased what would become Sony/ATV in what is now considered one of the best business deals in entertainment history.

“This transaction further allows us to continue our efforts of maximizing the value of Michael’s Estate for the benefit of his children,” said John Branca and John McClain, Co-Executors of the Estate.

It also further validates Michael’s foresight and genius in investing in music publishing. His ATV catalogue, purchased in 1985 for a net acquisition cost of $41.5 million, was the cornerstone of the joint venture and, as evidenced by the value of this transaction, is considered one of the smartest investments in music history.

The deal makes Sony undisputedly the largest music publisher in the world. In addition to the many classic artists’ copyrights the company either controls or administers, it also manages work from current stars, including Alicia Keys, Lady Gaga, Pink, Shakira, Ed Sheeran, Sam Smith, Taylor Swift, and Kanye West, among many others.

Publishing matters more than ever
With the transition to digital downloads and subscription services like Pandora and Spotify, publishing rights remain an important element in how songwriters get paid. As the publishing company, Sony either outright owns or administers songs on behalf of the songwriter.

When Pandora streams music, the publishing company collects a mechanical royalty (money owed for a song being reproduced either physically or digitally) and a performance royalty (money owed when a particular song is streamed, played on the radio, or performed in public). In some cases, Sony/ATV owns a song outright (and pockets whatever Pandora, Spotify, or any other company pays), but in most cases, it shares the revenue with the songwriter.

Given that physical music now only sells a fraction of what it once did, owning publishing rights is the key to making money in this industry. Locking up this catalog for $750 million may prove to be a bargain in the long-term given the number of timeless songs — everything from New York, New York to All You Need Is Love — that Sony now fully owns.

Sony Acquires Major Music Catalog for $750 Million

Manage Vacation Rentals from Remote Location

Posted on March 15, 2016 by Anthony Jerdine

How to Manage Your Vacation Rental Property From a Remote Location
BY Anthony Jerdine ON MARCH 15, 2016 LANDLORDING AND RENTAL PROPERTIES
Your vacation property can do more for you than just provide you with a home away from home; it can also provide you with extra income.

This is achieved by turning it into a rental property. When you aren’t using it, other people can be, and you can derive an income from that.

There are several “online vacation rental marketplaces” — websites where people can list what they offer in a searchable database. What they offer can consist of anything from a spare couch to a private room to an entire home or condo.

Your vacation home property — and for the purpose of this article we’re going to assume it’s an actual home and not a spare bed! — may be just a couple hours away, or it may be all the way across country.

If it is more than halfway across country, or if it isn’t convenient for you to get to it every other week or so, then you have two options.

You can hire a property management company to take care of all of the details of the property for you.
You can handle all the issues regarding the property yourself, as a “remote” manager.
Each option has its own pros and cons.

We hope you never have to evict a tenant, but know it’s always wise to prepare for the worst. Navigating the legal and financial considerations of an eviction can be tricky, even for the most experienced landlords.

Every major city across the country will have at least a handful of property management companies. You simply need to contact a few of them in your area and compare the services they provide and the amount they charge for those services. There are a variety of property management companies. Some will deal only with large apartment complexes, but others will deal with small commissions, such as a single vacation home.

It is important that you research each company thoroughly. You will be entrusting your property and potential income to them, so you need to be sure they can do the job you hire them to do!

A property management company will do everything for your home that you would do if you lived in the same city as your vacation home — they will not only ensure that all appliances and utilities in the home work properly, but arrange for any emergency repairs that might be needed.

They will hire a lawn service for you and someone to clear snow from the property in winter. Because you’ll be dealing with people who book your property through an online vacation rental marketplace, the property management company will not have to investigate any of your potential renters.

A property management company will charge you for all the services they provide, and so those are the pros and cons of using such a service. They will take all the hassle away from renting your property to vacationers. They may also be able to save you money on repairs since they probably have repair people on staff if they manage several properties. But since you will have to pay them a fee to manage your property, this will impact your bottom line to some extent.

7 Questions You MUST Answer Before Investing in a Vacation Rental

Manage Your Property Remotely

Any property can be managed remotely in an efficient manner if you make thorough preparations to be able to do so.

1. Ensure that you can rent out your property.

Whether you are going to have your property managed by a company or are going to do it yourself, the first thing you need to do is make sure that your local governments (city, state, and homeowners, if any) will actually allow you to do so.

Although private people renting out vacation properties is growing in popularity, some communities are moving to prevent this practice because they feel it brings too much traffic to local neighborhoods. You will need to stay abreast of such local developments.

2. Prepare your property to be rented.

At this point, you need to ensure that your vacation property offers a safe and pleasant atmosphere for potential vacationers. All appliances should work properly, the HVAC system should work properly, and so on. Any blemishes to inside or outside walls should be repaired, there should be no cracks in sidewalks, and so on.

If you need to make any repairs at this point, keep a list of all the people and/or companies that you use to make repairs. You’ll want to use these same people (assuming they do good work) should any emergencies come up while guests are staying in your home.

3. Compile list of all repair people.

It’s better to know who to contact for any emergency before such an emergency occurs!

Make a list of all the potential repairs and services you might need, from lawn mowing and snow removal to plumbing, Roto-Rooting, and roof repair. You can investigate these businesses via the internet to see how long they’ve been in business and to see any reviews of their work.

Make sure you put this list in a prominent position in your vacation home — for example, affixed by a magnet to the refrigerator door — and that your potential renters know that they can call any of these people at any time if there is an emergency.

4. Provide your renters with your contact details.

While your potential renters will be able to contact you via the “online vacation rental marketplace” site, once they are actually in your home they will need to be able to contact you directly if there are any emergencies, so you’ll need to leave a phone number and email.

5. Employ a handy-person.

A handyman or woman is not the same as a property management company. This would just be someone you trust who would be available to meet your guests and hand over the keys to the home and take them back at the end of their stay.

If this handy-person or caretaker is able to do minor repairs, so much the better.

This person can also go into the home after your renters have left to ensure that there is no damage, which in turn will enable you to return a damage/cleaning deposit to your renters if all is well.

You will have to pay this individual a stipend, but it would typically be much less than if you were to hire a property management company.

Vacation homeowners

#anthonyjerdine

Daylight Savings Time

Posted on March 12, 2016 by Anthony Jerdine

Spring is just around the corner but first we have to adjust our clocks for daylight savings time. Be sure to turn your clocks ahead one hour as daylight savings time begins at 2:00 am on Sunday, March 13, 2016

Learn about daylight savings time (http://en.wikipedia.org/wiki/Daylight_saving_time)
As a reminder, be sure to replace the batteries in your smoke alarm and if you have a digital thermostat with replaceable batteries, be sure and check or replace those batteries as well.

Learn about thermostats (http://en.wikipedia.org/wiki/Programmable_thermostat)

Leadership

Posted on March 11, 2016 by Anthony Jerdine

By Anthony Jerdine| March 10, 2016

Leadership is something that everyone should work on become better at. Everyone in your life is looking for a leader and looking to be led.

Many people, though, don’t realize they they themselves can be that leader! Leadership is a concept that I’ve been working on my whole life and have learned quite a bit about.

Here are 5 ways to tell if you are a leader and how you can work on becoming a better one:

1: Leaders take ownership of their lives. They know they have the choice to be anyone or do anything they’d like, and they own it! They do not blame other people or situations, because they know that they themselves have the power to change their lives at any moment.

2. Leaders take action. They aren’t afraid to take action and know that this is the best way to gain experience and wisdom. Also, when you take action you set an example for every else, this automatically makes you a leader.

3. They are good communicators. Leaders are great communicators. You will not get too far if you cannot communicate effectively. To develop your communication skills, I recommend the book “How to Win Friends and Influence People” by Dale Carnegie.

Courage

Posted on March 9, 2016 by Anthony Jerdine

Greetings

by Anthony Jerdine

Courage has been on my mind- if we look at the textbook definition it is the quality of mind or spirit
that enables a person to face difficulty,
danger, pain, etc., without fear. (dictionary.com)

Now this may seem we are heading off to battle, or facing a lion in the jungle- but in actuality most humans are faced with their own suffering mind, negative thoughts and lack of action.

Fear permeates their subconscious and soul fields.

Simply put, most humans are not living 100% in their Full Potential.

How does this change?

Or the question I should ask is, are you wanting to live from your Full Potential 100% of the time?

I know I do.

Here are a few teachings to guide you to stay in your highest, most positive and best Self.

1) Create dynamic action in your body. The body needs to act ceaselessly- action builds up energy and strength. Inaction will allow weakness to take over and ultimately destroy the body. MOVE.

2) Surrender your mind- not to just anything- but to a higher ideal. Rest your thoughts on something greater than yourself- something noble, purposeful and beyond any selfish interests. This will allow you to gain mental stamina in the world- to rise above. The higher the ideal- the greater your stamina, objectivity and interestingly enough, your success.

3) Develop your Intellect. This is not about acquiring more information- this is building the muscle within you that makes decisions according to Divine Right Timing and Divine Right Order. Your intellect maintains a strong sense of Self, your individuation from the Ultimate Energy and directs all your actions towards that above chosen ideal.

Does this sound like a lot?

It’s not, honestly. It takes a rhythm, a discipline.

It takes COURAGE- to go above and beyond what most humans will ever commit to.

You got this..

And I’m right with you. 

Courage defined

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TIPS

Posted on March 7, 2016 by Anthony Jerdine

TIPS are Hot: Is Inflation Back?
By Anthony Jerdine | Updated March 07, 2016

For the duration of the recovery, inflation has been sluggish, lagging the Federal Reserve’s target of 2%, even as improvements in the labor market would seem to indicate that the economy was healthy. As of Friday, however, there are indications that inflation is at last picking up. Treasury inflation-protected securities (TIPS) are attracting more attention from investors, indicating that the market expects inflation to pick up in the near future.

The 10-year breakeven inflation rate, which measures the spread between 10-year Treasury yields and 10-year TIPS, has reached 1.51 percentage points, rebounding after hitting a low of 1.18 on February 11. In other words, investors expect inflation to average slightly over 1.5% in the coming years.

While the level has not reached the ideal 2%, the uptick is an encouraging sign following a sharp drop in inflation expectations after Japan’s central bank introduced negative interest rates at the end of January. Combined with better-than-expected employment data released Friday morning, the increased interest in TIPS could prompt the Fed to consider hiking interest rates sooner than expected. Federal funds futures for November, which measure the betting market’s expectations for rate rises, rose to about even odds following the jobs report.

The iShares TIPS Bond ETF (TIP), the TIPS fund with the most assets under management, has seen a daily inflow of nearly $102 million as of Friday morning and $371 million over the past week, accounting for over 40% of its year-to-date gain of $914 million. The fund’s price has risen nearly 3% year-to-date, nearly erasing a 0.2% twelve-month decline.

The price index for personal consumption expenditures (PCE), the benchmark the Fed uses to track inflation, rose 1.3% year-over-year in January. The core index, which excludes food and fuel, rose 1.7%.

The Bottom Line
Worries about a deflationary environment have dogged markets for much of the recovery, and anxiety has only increased as an unprecedented negative interest rate policy spreads from Europe to Japan. Perhaps the fears are overblown, however, as markets’ inflation expectations appear to have bottomed out last month. As the rout in commodity and fuel prices drops out of comparisons, inflation data is likely to look more encouraging. That, in turn, could prompt action by the Federal Reserve.
TIPS are Hot: Is Inflation Back?

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What Caused the Great Depression?

Posted on March 7, 2016 by Anthony Jerdine

What Caused the Great Depression?
By Anthony Jerdine

What Caused The Great Depression?
Economists may dream of a perfect market where no bubbles, crashes, or recessions occur, but these phenomena are inevitable when the players are human. The Great Depression, one of the worst blows to the world economy, serves as a prime example of how vulnerable markets can be.

The stock market crash of 1929, usually cited as the beginning of the Great Depression, was preceded by the Roaring ’20s, a period when the American public discovered the stock market and dove in head first. The crash wiped out many people’s investments and the public was understandably shaken. When bank failures erased the savings of those who weren’t even invested in the stock market, people were shattered. Although the market crash was unavoidable, the bank failures could have been prevented with better regulation. Read on to find out how the Great Depression occurred.

The Fickle Fed
Twenty-two years earlier, the panic of 1907 offered a similar scenario, as panic selling sent the New York Stock Exchange (NYSE) spiraling downward and led to a bank run to boot. With no Federal Reserve to inject cash into the market, it fell upon investment banker J.P. Morgan to organize Wall Street. Morgan rallied people who had cash to spare and moved that capital to banks lacking funds. The panic led the government to create the Federal Reserve, in part to cut its reliance on financial figures like Morgan in the future. (For more on the Federal Reserve, read How the Federal Reserve Was Formed.)

In the crash of 1929, however, the Fed took the opposite course by cutting the money supply by nearly a third, thus choking off hopes of a recovery. Consequently, many banks suffering liquidity problems simply went under. The Fed’s harsh reaction, while difficult to understand, may have occurred because it wished to give Wall Street some tough love by refusing to bail out careless banks, a response that it felt would only encourage more fiscal irresponsibility in the future. (For insight on the crash of 1929, see The Crash of 1929 – Could It Happen Again?)

Ironically, by increasing the money supply and keeping interest rates low during the roaring twenties, the Fed instigated the rapid expansion that preceded the collapse. In some ways, it set up the market bubble leading to the crash and then kicked the economy when it was down. Although some people, such as Milton Friedman have rightly suggested that the Fed’s mismanagement of the economic situation greatly contributed to the Great Depression, there still would probably have been a minor recession regardless of government involvement.

Presidential Blunders
President Roosevelt rode into office by characterizing a “do nothing” attitude. In truth, however, his predecessor, Herbert Hoover, had done far too much to try to halt the recession following the crash. One of Hoover’s main concerns was that workers’ wages would be cut following the economic downturn. In order to ensure artificially high wages among all businesses, he reasoned, prices needed to stay high so companies would continue producing. To keep prices high, consumers with the money would need to pay more. Yet the public had been burned badly in the crash, and most did not have the resources to overpay for products.

This bleak reality forced Hoover to use legislation, the government’s trump card, to try to prop up wages. Following in the unfortunate tradition of the protectionists, Congress tried to restrict the flow of foreign goods by passing the Smoot-Hawley Tariff Act. Because foreign nations weren’t willing to buy over-priced American goods any more than Americans were, Hoover decided to choke out cheap imports. The Smoot-Hawley Act started out as a way to protect agriculture, but swelled into a multi-industry tariff. Other nations retaliated with their own tariffs, essentially cutting off international trade. Not surprisingly, the economic conditions worsened worldwide and the U.S. economy sunk from a recession into a depression.

Although Roosevelt promised change when he came into office, he continued Hoover’s economic intervention, only on a bigger scale. He created the New Deal with the best intentions, but like Hoover’s wage controls, it backfired. With previous recession/depression cycles, the U.S. suffered one to three years of low wages and unemployment before the dropping prices led to a recovery. Responding to this historical trend of a few hard years followed by a recovery, American industrialist and philanthropist J.D. Rockefeller remarked, “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” By attempting to immediately recover without swallowing the bitter pill of two hard years, Hoover and Roosevelt may have actually prolonged the pain.

New Deal
The New Deal set lofty goals to maintain public works, full employment, and healthy wages through price, wage, and even production controls. The New Deal was loosely based on Keynesian economics, specifically on the idea that government works can stimulate the economy. Occasionally these projects were ideal, but there were just as many cases of mismanagement, political back-scratching and general waste that dogs government-run initiatives. (For related reading, see Can Keynesian Economics Reduce Boom-Bust Cycles?)

One of the most heartbreaking results of the New Deal was the destruction of excess crops to justify the artificially high prices, despite the need for cheap food. In fact, many of the agencies created by the New Deal broke up black markets selling cheap goods. This forced factory workers to stop working and generally halted the production that was needed for recovery. Even unemployment remained high because companies couldn’t afford to keep large payrolls at the rates set by the government.

Eventually, recovery came in the unappealing form of World War II. Although the notion that the war ended the Great Depression is a broken window fallacy, it did open up international trading channels and reverse price and wage controls. Suddenly, the government wanted lots of things made inexpensively, and pushed wages and prices below market levels. When the war finished, the trade routes remained open and the post-war era went from recovery to a bull run in a few short years.

The Bottom Line
The Great Depression was the result of an unlucky combination of factors – a reticent Fed, protectionist tariffs and a Keynesian, government-centered recovery plan. It could have been shortened or even avoided by a change in any one of these. Many supporters of the government’s intervention point out that the quick recovery from other depression/recession cycles may not have occurred as rapidly in 1929 because it was the first time that the general public, and not just the Wall Street elite, lost large amounts in the stock market. Similarly, the Fed can avoid fault because it didn’t know that the government would pass a trade-crushing tariff and take other questionable measures.