Here is the explanation and parallels:
The parallels between the 1920s and the 1920s are numerous – and ominous. The economy of the 1920s boomed as America recovered from a deadly pandemic, the 1918 flu. Americans used installment plans—the precursor to today’s ubiquitous “buy now, pay later” plans at online checkouts—to spend lavishly on consumer products, and they poured money into speculative new investments. Auto and phone stocks were the high-flying tech investments at the time; Tesla and Apple are two of us.
The prevailing interest rate was around 5 percent, just like now. And just like today, large numbers of Americans took advantage of easy credit and ubiquitous stockbrokers to speculate in the financial world. In 1929, an editor of the New York Times quoted a financial expert from a major newspaper as saying that the “great army that gambles daily in the stock market” included, in the editor’s words, “the female nonprofessional speculator,” whose share of the market’s trading grew by one estimate from less than 2 percent to 35 percent. That influx of purchases from 1919 to 1929 has grown the stock market more than sixfold over the past decade—a growth rate that our market has actually surpassed in the past three years.
I just finished Andrew Ross Sorkin’s new book 1929.1 It’s scary to think how eerily similar investor behavior is between now and then: speculation, the rise of private investors, leveraged, innovation, euphoria, etc.
All these things led to the biggest crash in the history of the American stock markets in the 1930s. Could we actually see a repeat of that situation?
Never say never, but we live in a completely different world today.
Here are some reasons why a 1929 scenario is very unlikely to happen again:
There are rules now. Most of today’s banking regulations, securities laws, and government assistance programs were developed in response to the Great Depression.
It was still the Wild West then.
There was no SEC. No FDIC insurance. No circuit breakers in the stock market to stop panic. No margin requirements or trading rules. No one had any idea of economic data in real time. Big players could manipulate the markets. There was insider trading. The Fed did not act as a lender of last resort.
When people lost their jobs, there was also no unemployment insurance. Social security did not exist.
Now we have all this stuff to act as a stabilizer. We also implement fiscal and monetary policies when things get bad enough.
The stock market is much more important. In his book The Great Crash of 1929John Kenneth Galbraith outlines stock ownership on the road to the Great Depression:
In later years, a Senate committee investigating the securities markets vowed to determine the number of people involved in securities speculation in 1929. The member firms of twenty-nine stock exchanges that year reported having accounts with a total of 1,548,707 clients. (Of these, 1,371,920 were customers of companies that were members of the New York Stock Exchange.) Thus, only one and a half million people, out of a population of about 120 million and from between 29 and 30 million families, had any kind of active involvement in the stock market.
That was about 1-2% of the population at the time.
Of those 1.5 million investors in the stock market, about 600,000 of them used margin to optimize their trades. So there were definitely people going crazy in bucket shops back then, but it was a small portion of the population.
Today, nearly two-thirds of all households own stocks in some capacity.
People rely on the stock market for their retirement planning and financial security. Higher stock prices create an environment where people are willing to spend money more freely in the economy. Companies use their shares as compensation for employees.
Right or wrong, the stock market is much more important in 2025 than it was in 1929.
Policymakers and the rich and powerful will not allow an 86% stock market crash.
It would lead to anarchy.
Policymakers have learned from past mistakes. Galbraith wrote, “The Federal Reserve Board at that time was a body of surprising incompetence.”
Both Republicans and Democrats agreed that the right step for the administration was to balance the budget. During a depression!
The 2008 financial crisis didn’t turn into the Great Depression because the Fed studied the Great Depression. The Covid panic of 2020 has not gotten worse because we experienced the Great Financial Crisis in 2008.
Do you think our society would allow something like this to happen again:
After the Great Crash came the Great Depression, which lasted, with varying degrees of severity, for a decade. In 1933, the gross national product (the total production of the economy) was almost a third lower than in 1929. Only in 1937 did the physical volume of production recover to the level of 1929, and then promptly fall back again. Until 1941, the dollar value of output remained below 1929 levels. Between 1930 and 1940, the average number of unemployed during the year fell below eight million only once, in 1937. In 1933, nearly thirteen million people were out of work, or about one in four of the working population. In 1938, one in five was still without work.
No way!
We would throw so much monetary and fiscal policy at a slowdown of that magnitude that it would never last that long.
Are there any unintended consequences if the left tail is removed in this way? Yes.
Will there still be bear markets? Naturally.
Crashes? Certainly.
Financial crises? Yes, we are still human after all.
But a new Great Depression? I don’t see how this could possibly be anything less than an alien attack.2
We can’t have another Great Depression because the Great Depression has already happened.
Further reading:
10 Things You May Not Know About the Great Depression
1Quick book review: It was excellent. Lots of stories and characters I had never heard of.
2Even that could be bullish because of all the infrastructure spending needed. And once we defeat the aliens, we can steal their technical secrets. It would lead to a wave of innovation.
#wealth #common #sense