The Big Picture | Nasdaq versus 1929 bubble
The second Great Depression
There are many similarities between the pre-Depression era and our own. Paul Alexander Gusmorino says: “The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade. . . . The excessive speculation in the late 1920s kept the stock market artificially high, but eventually led to large market crashes. These market crashes, combined with the misdistribution of wealth, caused the American economy to capsize.”
“[The income disparity] between the rich and the middle class grew throughout the 1920s. While the disposable income per capita rose 9 percent from 1920 to 1929, those with income within the top 1 percent enjoyed a stupendous 75 percent increase in per capita disposable income . . . A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32 percent in manufacturing. During that same period, average wages for manufacturing jobs increased only 8 percent (This ultimately causes a decrease in demand and leads to growth in credit spending)
“The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge’s (pro business) administration passed the Revenue Act of 1926, which reduced federal income and inheritance taxes dramatically . . . (At the same time) the Supreme Court ruled minimum-wage legislation unconstitutional.
“The bottom three quarters of the population had an aggregate income of less than 45 percent of the combined national income; while the top 25 percent of the population took in more than 55 percent of the national income . . . Between 1925 and 1929 the total credit more than doubled from $1.38 billion to around $3 billion.”
Just like now, the growing wage gap has spawned massive speculative bubbles as well as a steady up-tick in credit spending. Wage stagnation forces workers to seek other opportunities for getting ahead. When wages fail to keep pace with productivity then demand naturally decreases and business begins to flag. The only way to spur more buying is by easing interest rates or expanding personal credit, and that is when equity bubbles begin to appear. That’s what happened to the stock market before 1929 as well as to the real estate market in 2007. The availability of credit has kept the housing market afloat but, ultimately, the result will be the same.
On Monday October 21, 1929, the over-valued stock market began its downward plunge. It managed a brief mid-week comeback, but seven days later, on Black Tuesday, it plummeted again; 16 million shares were dumped and there were no buyers.
The game was over.
Confidence evaporated overnight. People stopped buying on credit, the bubble-economy collapsed, and the mighty locomotive for growth, the American consumer, hobbled into the Great Depression. Tariffs were thrown up, foreigners stopped buying American goods; banks closed, business went bust, and unemployment skyrocketed. Ten years later the country was still reeling from the implosion.
Now, 77 years later, Greenspan has led us sheep-like to the same precipice. The economic dilemma we’re facing could have been avoided if the expansion of personal credit had been curtailed by prudent monetary policy at the Federal Reserve and if wealth were more evenly distributed as it was in the ’60s and ’70s. But that’s not the case; so we’re headed for hard times.
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07-16-2007, 09:30 PM
What ever.
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