i can tell you that in '29, the economy had already begun to deteriorate a few months before the BK...initially, even after October '29, this was viewed as a temporary downturn that would soon be fixed again with the help of the Fed. throughout 1930, optimism prevailed, in spite of the economy tanking sharply, and faster than anyone had thought possible. the WSJ and most eminent mainstream economists of the time insisted that things looked just great going forward...they simply couldn't believe that the tenets of the 'new era' (a term coined in the 1920's) could be so completely wrong.
to illustrate the magnitude of the contraction, consider that industrial output in 1932 had fallen back to the level of 1886.
by 31 optimism had given way to a more sober assessment...and yet, it was still not considered possible that the depression would drag on and on...
the stock market's performance during this period was as bleak as it could possibly get...however, there were several rally attempts that lured dip buyers, who subsequently got their heads handed to them.
it is still not clear whether we are in a situation comparable to the above, or rather one comparable to Japan's post bubble experience. while in the 30's bank credit began to contract severely by mid '31, Japan's bank credit growth only peaked in '96, a full 6 years after the bursting of the asset bubble. my guess is this has to do with the Japanese reluctance to declare a dud loan a dud loan. one peculiarity about Japan is of course the huge real estate bubble that went down the drain along with the stock market...lots of banks got burned by its denouement, and there's still no relief in sight on that front 11 years later.
i often hear the argument that because of Japan's unique situation (the cultural inhibitions regarding firing people, or letting bankrupt firms go under are also often cited) we can't expect a replay in the US post bubble. it is true that it will be somewhat different...it is however by no means certain that it will be less severe. for all we know the huge telco debt bubble may in fact have even graver consequences.
so we either are in '30, or in '91...my guess would be we're really somewhere in between. the excesses of the roaring '90's will be corrected...and considering that the authorities have already declared their intent to fight the corrective process every step of the way, we can rest reasonably assured that the process will last a very long time.
as an aside, it is an absolute certainty that the consensus of mainstream economists will be wrong in every single respect. |
