Crash, Bang, Wallop (Today's economy reminds me of the 1930s)

The Wall Street Journal ^ | January 5, 2004 | EDMUND S. PHELPS

[presidio9]

Booms are not all alike. Nor slumps. Shocks and institutions are never exactly the same. Yet the late 1990s boom, the slide into slump and recent rebound has a striking similarity to the boom of the roaring 1920s, the deep decline in the early '30s and initial rebound. I see the two experiences as primarily driven by analogous forces and common mechanisms -- both non-monetary. And I believe that the rest of the present decade will tend, barring new shocks, to resemble the rest of the '30s -- a recovery with investment and employment below historical norms.

[RiflemanSharpe]

I had this same thought in passing a few months ago.

[sarcasm]

ping

[arete]

Ping to the (un)usual suspects.

Richard W.

[the gillman@blacklagoon.com]

Does anyone have any thoughts on the spike in gold this morning?

[steve50]

I was wondering about that myself. Silver was going to the moon as well. Have the PTB given up on manipulating PM's, or are they positioned to take advantage of the rise.

[Mitchell]

Bump.

[Vineyard]

So did I, but this author neglects discussing one of the biggest factors in the investment cycle: the effect that government can have through taxation and regulations!

When the government increases taxes and regulations, it can remove all incentives to invest - and the economy can go belly-up (or stay in the dumps).

Much of the 1930's recession/depression was "helped" by FDR's wonderful socialists schemes that would have the U.S. emulate U.S.S.R. Some economists argue that the depression would have ended years earlier (it ended only because of WWII and the need for a war-time economy) and without a war, if the government had not intervened!.

Mike

[theDentist]

Does anyone have any thoughts on the spike in gold this morning?

Yeah, I wonder if that golden spike driven into the railway way back when is still there?

[Orangedog]

Booms are not all alike. Nor slumps. Shocks and institutions are never exactly the same. Yet the late 1990s boom, the slide into slump and recent rebound has a striking similarity to the boom of the roaring 1920s, the deep decline in the early '30s and initial rebound. I see the two experiences as primarily driven by analogous forces and common mechanisms -- both non-monetary. And I believe that the rest of the present decade will tend, barring new shocks, to resemble the rest of the '30s -- a recovery with investment and employment below historical norms.

The author makes a good point about things not being the same, but I think he's overlooking what happened in the stock market in the 30's. After the initial drop in the Dow in 1929, the stock market made what, at the time, appeared to be a decent recovery in the months that followed. But right at the time when investors had recovered a good part of their losses and it looked like another bull market had started, the bottom dropped out. The initial drop in 1929 was nothing compared to the way the market cratered in the following years. Maybe that won't happen this time, but my gut is telling me that we could see a another big drop, not just mild correction from todays levels.

[blam]

"I had this same thought in passing a few months ago."

Yup, me too but, it was due to the 'war' situation around the world, a lot of festering unrest, everywhere.

[q_an_a]

can anyone of these rear window people see the world as it is today with billions of people trying to get the "comfort" that goes with the American lifestyle? that is why nike, coca cola etc are everywhere and there would be a couple of home builders out there with equally recognizabel names if the world built more houses using wood instead of mud as found in Iran.

[gipper81]

Edmund Phelps

Ok, here's the deal in an economic nutshell. Keynesians like Phelps have been wrestling and looking at the 1930s (for decades) from a demand driven prism and still haven't figured it out. Witness this article.

The depression was a MONETARY (read Milton Friedman) and TRADE (Smoot-Hawley tarrif) driven economic event. End of story.

[presidio9]

The depression was a MONETARY (read Milton Friedman) and TRADE (Smoot-Hawley tarrif) driven economic event. End of story.

Shhhh. You'll wake the protectionists. Globalism is BAD! Haven't you heard?

[thoughtomator]

If WW2 had started in 1934, and we had a non-socialist as President, it would be a better comparison.

[1Old Pro]

A stock market crash and the fallout from huge financial losses are unlikely now. Short selling on down ticks is no longer allowed and margin purchaes are much lower now. Nt to mention the incredible diversity of the markets and investments today as compared to then.

[djreece]

marking

[expatpat]

Yeah, the biggest run-ups in stocks occurred in 'sucker's rallies' in the years following 1930.

[Orangedog]

Nt to mention the incredible diversity of the markets and investments today as compared to then.

Diversity in the markets is always a good thing, but some of the investment vehicles that have become widespread, like derivatives, can be dangerous to the market as a whole. Long Term Capital Management comes to mind. They wound up on the wrong side of the market and may have taken the whole thing down if Greenspan had not orchestrated a bailout.

[libstripper]

Exactly. The really important thing about this recovery is how it's being driven by the Bush tax cuts, especially the dividend tax cut. That's changed the environment in a very important way. By cutting the tax on dividends 50% Bush has made equity investing vastly more attractive than it was immediately befroe the cut.

The wonderful effects of this are obvious. Many people are encouraged to invest in equity securities instead of debt issues, thereby pushing up the market and causing thousands more investors to enter the equity markets. People whose holdings appreciate are more llikely to spend some of those gains on large, expenseive goods like new cars and boats, increasing employment for thousands of others. Finally, the change in investing emphasis to equity will mean the economy and businesses are less burdened by debt than earlier, thereby strengthening the recovery.