Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Joan Osland Graffius who wrote (10064)	12/3/1997 5:21:00 PM
From: Bilow	Read Replies (1) \| Respond to of 18056

Galbraith's opinions on 29 Crash & Depression causes. He feels that the economic problems were caused by (1) The rich having too much money. (2) Corporations having too much debt. (3) The banks lending long to people who couldn't pay back while borrowing short. (4) Excessive foreign trade surplus causing excessive lending to uncreditworthy foreign nations. (5) The inability know what was really going on in the economy. All in all, while some of these hit close to home, the majority of them would better describe those miracle economies in southeast asia. But it is in the nature of a world-wide debt/over-capacity deflation that the effects reach all nations. I typed in the first couple of his paragraphs: There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound. This is a circumstance of first-rate importance. Many things were wrong, but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are: 1) The bad distribution of income. In 1929 the rich were indubitably rich. The figures are not entirely satisfactory, but it seems that 5 per cent of the population with the highest incomes in that year received approximately one third of all personal income. The proportion of personal income received in the form of interest, dividends, and rent - the income, broadly speaking, of the well-to-do - was about twice as great as in the years following the Second World War. This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects. Both investment and luxury spending are subject, inevitably, to more erratic influences and to wider fluctuations than the bread and rent outlays of the $25-a-week workman. This high bracket spending and investment was especially susceptible, one may assume, to the crushing news from the stock market in October of 1929. 2) The bad corporate structure. In November 1929, a few weeks after the crash, the Harvard Economic Society gave as a principal reason why a depression need not be feared its reasoned judgement that "business in most lines has been conducted with prudence and conservatism." The fact was that American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, impostors, and frauds. This in the long history of such activities, was a kind of flood tide of corporate larceny. The most important corporate weakness was inherent in the vast new structure of holding companies and investment trusts. The holding companies controlled large segments of the utility, railroad, and entertainment business. Here, as with the investment trusts, was the constant danger of devastation by reverse leverage. In particular, dividends from the operating companies paid the interest on the bonds of upstream holding companies. The interruption of the dividends meant default on the bonds, bankruptcy, and the collapse of the structure. Under these circumstances, the temptation to curtail investment in operating plant in order to continue dividends was obviously strong. This added to deflationary pressures. The latter, in turn, curtailed earnings and helped bring down the corporate pyramids. When this happened, even more retrenchment was inevitable. Income was earmarked for debt repayment. Borrowing for new investment became impossible. It would be hard to imagine a corporate system better designed to continue and accentuate a deflationary spiral. The Great Crash 1929 by John Kenneth Galbraith page 177-179 -- Carl P.S. I bot some JBIL puts this morn...