1929: Are There Similar Trends Today?

by Jay Deragon on 11/25/2008

The 1920’s were a time of peace and great prosperity. After World War I, the “Roaring Twenties” was fueled by increased industrialization and new technologies, such as the radio and the automobile. Air flight was also becoming widespread, as well. The economy benefited greatly from the new life changing technologies.

As the Dow Jones Industrial Average soared, many investors quickly snapped up shares. Stocks were seen as extremely safe by most economists, due to the powerful economic boom. Investors soon purchased stock on margin

From 1921 to 1929, the Dow Jones rocketed from 60 to 400! Millionaires were created instantly. Soon stock market trading became America’s favorite pastime as investors jockeyed to make a quick killing. Investors mortgaged their homes, and foolishly invested their life savings in hot stocks, such as Ford and RCA. To the average investor, stocks were a sure thing. Few people actually studied the fundamentals of the companies they invested in. Thousands of fraudulent companies were formed to hoodwink unsavvy investors. Most investors never even thought a crash was possible. To them, the stock market “always went up”. Sound familiar?

Are There Similar Trends Today?

John Cassidy , of Portforlio.com writes: But even if another Great Depression is now “off the table,” to quote the sage Jim Cramer, several other parallels with the 1930s still worry me greatly, beginning with the continuing threat of international contagion. Perhaps the most remarkable aspect of the September financial earthquake was how rapidly it spread to places far from the epicenter, such as Iceland and Ireland, and how much damage it did there. Even now, the aftershocks are being felt in countries like Brazil, Hungary, and South Korea. Not since the collapse of the Viennese bank Creditanstalt in the spring of 1931, which unleashed a wave of instability that culminated in the decline of the gold standard, has the international monetary system seemed so fragile. For the U.S. economy, this matters for a couple of reasons. Another big financial collapse in Europe or Asia could well generate more carnage on Wall Street. Even if this doesn’t happen, as economic weakness spreads around the world, American exports suffer.

Second, even after the current round of capital injections, many big banks will be thinly capitalized relative to the quantity of potentially bad loans on their books. In their most recent reporting periods, Goldman Sachs and Morgan Stanley each had on their balance sheets more than $60 billion worth of level-three assets—the ones that can’t currently be valued properly and haven’t yet been written down.

Third, once the recent collapse in commodity prices makes its way through the system, a real danger of deflation could emerge—not on the scale of the 1930s but significant enough to greatly slow a recovery. Oil prices, which I predicted would tumble from their triple-digit highs, have begun falling faster than most people thought; OPEC is now scrambling, belatedly, to rein in production.

The threat of rising inflation, which Bernanke and his colleagues were citing as recently as the summer, has already disappeared. In September, the annualized rate of consumer price inflation fell to zero. (The core rate of inflation, which excludes energy and foodstuffs, was just 0.1 percent.) As unemployment continues to rise, wages and prices are sure to be trimmed in many other parts of the economy, which will only add to the incipient deflation.

What Is Different Today?

President Elect Barack Obama said today “We are facing economic challenges of historic proportion and we must pass a package to stimulate this economy” Consider the differences between 1929 and 2009 and ask yourself if a package aimed at stimulating the economy will work.

While some of the dynamics are similar the influences and conditions are totally new. Who can predict outcomes of any actions? Who knows what will work vs. what will fail? Are we in a global recession or on the verge of a global depression? Our guess is as good as theirs.

What say you?

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