To: John Pitera who wrote (52910 ) 7/23/1999 12:27:00 PM From: pater tenebrarum Read Replies (3) | Respond to
John, unfortunately the '29 analogy is very compelling. most people are not even aware of the many parallels between the'20's and the '90's. back then there was 40% productivity growth from '20-'29, low inflation, easy money and a growing credit and asset bubble. even analogies to the internet craze can be found with RCA and the investment trusts. and of course margin debt was hitting record after record, just as it is doing now. interestingly, shortly before the bursting of the '20's bubble, the economy looked great and the Fed felt compelled to raise rates to keep it from overheating... only in hindsight did people realize that the first signs of economic deterioration had already started to show up in the data. another interesting factoid is the performance of the bond market after the crash - counter to intuition, it was after all a deflationary depression, bonds actually performed awfully. the urge to raise cash led to a crushing sell-off in bonds, as they were the only asset class left that hadn't collapsed along with everything else. will today's Fed be able to deal with the fallout from a cataclysmic crash if one should occur? my guess is yes in terms of avoiding a seizing up of the financial system and no in terms of preventing an economic depression. once a deflationary spiral starts to destroy asset prices - and there is no doubt in my mind that a crash would lead to deflation in view of the debt mountain - no amount of intervention by the authorities can really stop it. at least there are no historic examples to suggest otherwise. once deflation rages, one can only wait for it's destructive force to be spent, then a new upswing can begin. AG's confidence with regards to the Fed's ability to deal with a bursting of the bubble is misplaced imo. hopefully a crash and the resulting consequences can be avoided - but once again history suggests that all manias end in the same way - if this bubble deflates slowly it would be a first.
