1929 could certainly happen again, if fact it already has, on October 17, 1987
the market declined by 28%, twice as bad as the worst day in 1929, and yet in
retrospect we can say that 1987 was no big deal. The real question is if the
unprecedented 1929 to 1933 bear market could ever happen again.
Forget about head and shoulders tops, triple bottoms, or high PE ratios, a disaster
of that magnitude could only happen if we entered a catastrophic global depression,
and that could only happen if government regulators get too creative.
The stock market crashed in October of 1929 but that's not when the depression
started. In April of 1930 the economy was bad but there was still no reason to think
the downturn would be any worse than other stock crashes in 1890, 1893, or 1907 .
The difference was that then the Federal Reserve did not exist and this time the Fed
had a brainstorm. The Fed figured that several high profile banks failures must be
caused by excessive speculation, so instead of dramatically increasing the money
supply as you might expect they actually decreased it by 3%. Somehow that didn't help,
but not to worry they were just getting warmed up. The civil servants at the Fed had
another theory, the most important thing about a country's economy was the size of it's
gold reserve. Gold had been flowing into the USA for 2 years so reserves were at a
record level, but in September of 1931 the flow started to move into other countries,
especially England. The Fed was determined to do whatever it took to stop this trend,
so even though we were 2 years into a bad recession (though still not yet a full blown
depression) they increased interest rates more quickly than they had ever done before,
or since. It worked, by March 1933 the gold reserve started to grow again. Hurray!
The cure had another effect, the money supply shark by an incredible 35% and the
economy of the USA disintegrated.
Physicists Chemists and Biologists are always quick to tell you that there is a lot they
don't know and they could always be wrong about a lot of stuff, I think economist's
need to learn a little humility too. In the 1930's their theories were wrong, dead wrong,
they slammed on the brake just when they should have hit the accelerator turning a
local short lived garden variety recession into a decade long global depression.
John K Clark jonkc@att.net
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