Everyone knows that there are some parellels between 1929 Crash and 2009 Crash. While the stock market touched its low in 1929 Oct, 2009 Mar was the lowest point of Dow in the US market in the recent years.
What caused these downturns? A lot of reasons are similar. The downturn in 1929 and 2008/2009 have common features such as -the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc were some of them.
The US Govt did not sit idle in 1929. They took steps and as a result the stock market moved up in 1930. But consumer spending dropped due to deleveraging, unemployment, erosion in networth due to fall in asset values, which in turn was due to the stock market crash / real estate crash. Lower consumer spending meant lower demand for goods and services. Business dropped leading to more shutdowns and more unemployment, which reached 25% in early 1930s. Stock market crashed below 1929 levels.
Linked to gold standard, the dollar printing was restricted and US Govt/Fed did not inject liquidity into the economy in 1930s. International trade dropped due to protectionism. Overall, the deflation set in causing drop in prices, translating into losses for businesses, that managed to survive. More unemployment. And for some weird reason, Fed kept interest rates high. All of the above ensured the recession continued into a decade.
As a student (got PhD) of 1929 rececession, Ben Benarke is trying to avoid deflation at all costs. Hence, he plans more quantitative easing in the US economy which will pump up to USD 2 trillion dollars (or USD 2000,000,000,000/- dollars).
Ben Benarke should have taken a PhD on Japan's lost decade as well.
Japan after the envious economic growth in the 1970s and 1980s, witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy of the Central Bank (CB). Panicing one day, CB increased the interest rates (this reminds the action of Ben Benarke in 2006/07 where he constantly pushed up the interest rates till economy collapsed). What followed is well documented in the history. The asset bubbles got pricked, stock market crashed, bad debts zoomed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt. It is clear that US did not learn from Japanese folly.
What is the conclusion from the above? History repeats itself and P.hDs do not help always; but common sense will; however common sense is not very common.
Let us hope the future will be rosy and everything will be fine. But also be prepared for 1932 in 2012 or a lost decade in 2010s. G20 is meeting to avert mistakes of 1929 but the looming currency war between China/Japan/US/other countries does not have appropriate historical parallels and may make a history of its own for future generations.
What this mean to you and me? Well Be on Guard. Your hard earned money could be under attack. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. It is a tough job; but very little alternatives.
1 comment:
Good thoughts.
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