Before I try to explain what a Depression is, let me explain what a bubble is. A bubble is a self-reinforcing boom in the price of an asset class, typically caused by cheap financing, with the term of liabilities usually shorter than the lifespan of the asset class.
But, before I go any further, consider what I wrote in this vintage CC post:
Bubbling Over
1/21/05 4:38 PM ETIn light of Jim Altucher’s and Cody Willard’s pieces on bubbles, I would like to offer up my own definition of a bubble, for what it is worth.A bubble is a large increase in investment in a new industry that eventually produces a negative internal rate of return for the sector as a whole by the time the new industry hits maturity. By investment I mean the creation of new companies, and new capital-raising by established companies in a new industry.This is a hard calculation to run, with the following problems:
1) Lack of data on private transactions.
2) Lack of divisional data in corporations with multiple divisions.
3) Lack of data on the soft investment done by stakeholders who accept equity in lieu of wages, supplies, rents, etc.
4) Lack of data on corporations as they get dissolved or merged into other operations.
5) Survivorship bias.
6) Benefits to complementary industries can get blurred in a conglomerate. I.e., melding “media content” with “media delivery systems.” Assuming there is any synergy, how does it get divided?This makes it difficult to come to an answer on “bubbles,” unless the boundaries are well-defined. With the South Sea Bubble, The Great Crash, and the Nikkei in the 90s, we can get a reasonably sharp answer — bubbles. But with industries like railroads, canals, electronics, the Internet it’s harder to come to an answer because it isn’t easy to get the data together. It is also difficult to separate out the benefits between related industries. Even if there has been a bubble, there is still likely to be profitable industries left over after the bubble has popped, but they will be smaller than what the aggregate investment in the industry would have justified.
To give a small example of this, Priceline is a profitable business. But it is worth considerably less today than all the capital that was pumped into it from the public equity markets, not even counting the private capital they employed. This would fit my bubble description well.
Personally, I lean toward the ideas embedded in Manias, Panics, and Crashes by Charles Kindleberger, and Devil take the Hindmost by Edward Chancellor. From that, I would argue that if you see a lot of capital chasing an industry at a price that makes it compelling to start businesses, there is a good probability of it being a bubble. Also, the behavior of people during speculative periods can be another clue.
It leaves me for now on the side that though the Internet boom created some valuable businesses, but in aggregate, the Internet era was a bubble. Most of the benefits seem to have gone to users of the internet, rather than the creators of the internet, which is similar to what happened with the railroads and canals. Users benefited, but builders/operators did not always benefit.
none
Bubbles are primarily financing phenomena. The financing is cheap, and often reprices or requires refinancing before the lifespan of the asset. What’s the life span of an asset? Usually quite long:
- Stocks: forever
- Preferred stocks: maturity date, if there is one.
- Bonds: maturity date, unless there is an extension provision.
- Private equity: forever — one must look to the underlying business, rather than when the sponsor thinks he can make an exit.
- Real Estate: practically forever, with maintenance.
- Commodities: storage life — look to the underlying, because you can’t tell what financing will be like at the expiry of futures.
Financing terms are typically not locked in for a long amount of time, and if they are, they are more expensive than financing short via short maturity or floating rate debt. The temptation is to choose short-dated financing, in order to make more profits due to the cheap rates, and momentum in asset prices.
But was this always so? Let’s go back through history:
2003-2006: Housing bubble, Investment Bank bubble, Hedge fund bubble. There was a tendency for more homeowners to finance short. Investment banks rely on short dated “repo” finance. Hedge funds typically finance short through their brokers.
1998-2000: Tech/Internet bubble. Where’s the financing? Vendor terms were typically short. Those who took equity in place of rent, wages, goods or services typically did so without long dated financing to make up for the loss of cash flow. Also, equity capital was very easy to obtain for speculative ventures.
1998: Emerging Asia / Russia /LTCM. LTCM financed through brokers, which is short-dated. Emerging markets usually can’t float a lot of long term debt, particularly not in their own currencies. Debts in US Dollars, or other hard currencies are as bad as floating rate debt, because in a crisis, it is costly to source hard currencies.
1994: Residential mortgages / Mexico: Mexico financed using Cetes (t-bills paying interest in dollars). Mortgages? As the Fed funds rates screamed higher, leveraged players were forced to bolt. Self-reinforcing negative cycle ensues.
I could add in the early 80s, 1984, 1987, and 1989, where rising short rates cratered LDC debt, Continental Illinois, the bond and stock markets, and banks and commerical real estate, respectively. That’s how the Fed bursts bubbles by raising short rates. Consider this piece from the CC:
Gradualism
1/31/2006 1:38 PM ESTOne more note: I believe gradualism is almost required in Fed tightening cycles in the present environment — a lot more lending, financing, and derivatives trading gears off of short rates like three-month LIBOR, which correlates tightly with fed funds. To move the rate rapidly invites dislocating the markets, which the FOMC has shown itself capable of in the past. For example:
2000 — Nasdaq 1997-98 — Asia/Russia/LTCM, though that was a small move for the Fed 1994 — Mortgages/Mexico 1989 — Banks/Commercial Real Estate 1987 — Stock Market 1984 — Continental Illinois Early ’80s — LDC debt crisis
Bubbles end when the costs of financing are too high to continue to prop up the inflated value of the assets. Then a negative self-reinforcing cycle ensues, in which many things are tried in order to reflate the assets, but none succeed, because financing terms change. Yield spreads widen dramatically, and often financing cannot be obtained at all. If a bubble is a type of “boom phase,” then its demise is a type of bust phase.
Often a bubble becomes a dominant part of economic activity for an economy, so the “bust phase” may involve the Central bank loosening rates to aid the economy as a whole. As I have explained before, the Fed loosening monetary policy only stimulates parts of the economy that can absorb more debt. Those parts with high yield spreads because of the bust do not get any benefit.
But what if there are few or no areas of the economy that can absorb more debt, including the financial sector? That is a depression. At such a point, conventional monetary policy of lowering the central rate (in the US, the Fed funds rate) will do nothing. It is like providing electrical shocks to a dead person, or trying to wake someone who is in a coma. In short: A depression is the negative self-reinforcing cycle that follows a economy-wide bubble.
Because of the importance of residential and commercial real estate to the economy as a whole, and our financial system in particular, the busts there are so big, that the second-order effects on the financial system eliminate financing for almost everyone.
How does this end?
It ends when we get total debt as a fraction of GDP down to 150% or so. World War II did not end the Great Depression, and most of the things that Hoover and FDR did made the Depression longer and worse. It ended because enough debts were paid off or forgiven. At that point, normal lending could resume.
We face a challenge as great, or greater than that at the Great Depression, because the level of debt is higher, and our government has a much higher debt load as a fraction of GDP than back in 1929. It is harder today for the Federal government to absorb private sector debts, because we are closer to the 150% of GDP ratio of government debts relative to GDP, which is where foreigners typically stop financing governments. (We are at 80-90% of GDP now.)
We also have hidden liabilities through entitlement programs that are not reflected in the overall debt levels. If I reflected those, the Debt to GDP ratio would be somewhere in the 6-7x GDP area. (With Government Debt to GDP in the 4x region.)
We are in uncharted waters, held together only because the US Dollar is the global reserve currency, and there is nothing that can replace it for now. In the short run, as carry trades collapse, there is additional demand for Yen and US Dollar obligations, particularly T-bills.
But eventually this will pass, and foreign creditors will find something that is a better store of value than US Dollars. The proper investment actions here depend on what Government policy will be. Will they inflate away the problem? Raise taxes dramatically? Default internally? Externally? Both?
I don’t see a good way out, and that may mean that a good asset allocation contains both inflation sensitive and deflation sensitive assets. One asset that has a little of both would be long-dated TIPS — with deflation, you get your money back, and inflation drives additional accretion of the bond’s principal. But maybe gold and long nominal T-bonds is better. Hard for me to say. We are in uncharted waters, and most strategies do badly there.
Last note: if you invest in stocks, emphasize the ability to self-finance. Don’t buy companies that will need to raise capital for the next three years.
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This article has 47 comments:
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Hutch
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17 Comments
Nov 12 12:32 PM"Mister, I ain't sure you can get there from here in that contraption."
We've got lots of contraptions that can't take the rough road ahead.
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Sophisse
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52 Comments
Nov 12 12:41 PM-
Consider_this
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91 Comments
Nov 12 12:45 PMI would submit to add to this analysis a global angle.
USA is not the only one in trouble. Add in the debt/gdp ratio analysis to other countries; and add in those hidden liabilities like you said (include the hidden bailout liability that could wipe out foreign governments if they ever had to fulfill even 1% of their guarentee/insurance) and it's easy to see that we're not in this on our own.
This is a global problem.
Another thing that spells out is that: there is nowhere for money to run.
This is a nightmare for anyone with wealth and money that they want to store.
The real issue is a major "sins of the fathers" type fight between old-capital (that has already evaporated, but refuses to let go and face reality), and new-capital that is not allowed to grow/deploy without first used to deflate, repay or compensate for prior capital loss. Thus, we end up old money strangling new money.
Major actions would be needed to clear this up. Wipe off the old corpses of capital-claims aka Debt; Realign the imbalance of currency and world order; respect the value of whatever remaining currency still in the system, and not pass laws and motions to continue to debase and punish it by trying to save the old economic structures.
Sadly, we're not doing any of that.
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Smarty_Pants
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1095 Comments
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Nov 12 12:58 PMVery badly. Things are quite bad now, but could easily get much, much worse. Let's hope not. Still it wouldn't be a bad idea to prepare for the worst.
Those who expect the gub'mint to 'fix' things are going to be sadly disappointed.
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Chris B
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527 Comments
Nov 12 01:02 PMWill interest rates have to rise dramatically? Will the dollar collapse?
The TIPS market is predicting deflation - but Helicopter Ben ruled out that possibility way back in 2003 with a threat to flood the markets with currency. We are now seeing the execution of that threat via bailouts, but the markets don't realize it yet.
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mathgeek2
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5 Comments
Nov 12 01:21 PMYour first quote references new industries as the source of bubbles. I don't think this is an essential component. I do strongly agree that bubbles are often a credit phenomenon, but I think you miss some key aspects of the self-reinforcing mechanisms.
At least in theory, any asset could be subject to a bubble, so long as there is some plausible way to belive in a very high future value of the asset. New industries have historically fit the bill, but so have assets which are belived to be functionally finite. What this allows is plausible speculation of very high future values. "The amount of land in California is fixed, demand will continue to grow, so prices will always go up."
I agree that a loose monetary environment often is a crucial trigger for the bubble. It is easy to obtain credit to invest in the bubble asset.
But this is where the truly pernicious aspects of an asset bubble kick in.
- The price appreciates rapidly. So much so that a wider and wider pool of potential investors begins to belive that any inherent economic value is irrelevant, and they buy on the simple anticipation of the asset rising in value. In other words, people start to buy the asset for no reason other than the expectation it will continue to go up in value. This drives the price up, which reinforces their viewpoint.
- Crucially, the asset also absorbs liquidity. An actively investable asset that is rising rapidly can readily absorb liquidity. What this literally means is that, as money supply expands, that excess money is sunk into purchases of the bubble asset. From the point of view of the central bank, all is well, because the economy is humming along, but yet there is not execessive inflation in the economy at large... all of the "inflation" is taking place in the bubble asset.
- Finally, the growth of the asset bubble reduces apparent risk. Loans made using the bubble asset for collateral are rarely or never incurr losses. Institutions or persons under financial stress can readily paper over their challenges either by selling any of the bubble asset they hold or by borrowing against it. This reduction in apparent risk leads to further increases in leverage.
This is an asset bubble, and we have yet to develop a method for dealing with them effectively in our economy. Nonetheless, this is an old problem.
Eventually of course, often triggered by an exogenous shock or a decrease in available credit / money supply / liquidity, there are no more buyers to sustain the ponzi scheme of ever-increasing prices, and the asset value goes into free-fall. This leads to removal of credit, demand for (non-bubble!) collatoral, and eventually forced liquidation, driving prices down further.
Depending on the amount of leverage involved, the net effect can be a severe contraction of the money supply, deflation, and a credit freeze. The intensity of the housing bubble collapse compared to the internet bubble is a direct correlate to the size of the asset and the degree of leverage employed.
Depending on what specific actions David Merkel is referring to, it can be argued that Herber Hoover certainly and FDR probably made the Depression much worse.
Specifically, allowing runs on banks is disasterous. Cutting government spending and raising taxes (as Hoover did, and FDR did in 34-35) is a huge mistake. And of course onerous trade restrictions made things much worse.
If, on the other hand Merkel is suggesting, as Herbert Hoover's economic advisors did, that the answer is "liquidate, liquidate, liquidate" then I must beg to differ. While that is part of the answer, government actions to counteract the contraction of credit and the money supply, and in extreme cases, directly support aggregate demand, are the appropriate responses to the threat of a major deflation-led depression in the wake of a major bubble.
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moonbat1775
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705 Comments
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Nov 12 01:39 PMI'm not crazy after all in calling for a massive debt amnesty for fractional reserve loans. And then abolishment of fractional reserve lending UNLESS we move to free banking with competing currencies.
The banks will try to seize the moral high ground by "generously" forgiving or reducing SOME loans. However, on moral grounds alone and to quickly prevent a depression a TOTAL amnesty would be justified. Fractional reserve banking with a monopoly currency is simply theft from non-borrowers to banks and borrowers. Repayment of FRB loans does NOT compensate the victims of the theft; it compensates the original thieves.
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cyclingscholar
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59 Comments
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Nov 12 01:45 PM" A bubble is a self-reinforcing boom in the price of an asset class, typically caused by cheap financing, "
Sorry dude that is not a definition which is empirically testable and falsifiable, so the rest of your longwinded post is complete drivel more suited for a Joe Biden speech than an entry on a classy website like Seeking Alpha. What is a "boom"....a 20% surge? a 200% surge? A 2000% surge? Is it like love..ya know it when you see it?
Junk science is bad enough. Junk SOCIAL science...well, I always thought finance was immune to it.
cyclingscholar
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User 296830
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1 Comment
Nov 12 02:07 PMI'm so glad to finally hear someone else make this point:
"It is harder today for the Federal government to absorb private sector debts, because we are closer to the 150% of GDP ratio of government debts relative to GDP, which is where foreigners typically stop financing governments. (We are at 80-90% of GDP now.)"
Tell me if I'm crazy......
IF GDP drops 30% or IF Government debt increases 50%, or some combination of the two, then foreign countries stop financing the US. Of course, before it gets that extreme, the rates on T-bond will go through the roof to attract buyers/investors? Which just causes more problems !!!!!!!!! THIS IS A REAL POSSIBILITY IF THE GOV'T FOCUSES ONLY ON SPENDING OUR WAY OUT OF THIS RECESSION!!!!!!!!!!
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Broken
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16 Comments
Nov 12 02:18 PMAnybody who bases their "analysis" of the Great Depression on wing-nut rags like "FDR's Folly".
It drives free market true-believers and gold-standard nutjobs crazy that FDR turned an economic basket-case in the the world's premier superpower with policies which violate much of what they believe in. Hence the last 60 years of right-wing revisionist histories attempting to prove that FDR's succress didn't really happen.
FDR's economy grew by an average of over 8% per year in the 1930s. GDP had recovered to 1928 levels by 1936, at which point many government programs were cancelled, leading to another slowdown, a new set of government programs and continued recovery. There is no better refutation of pure free market capitalism than the laboratory results of the 1920s-30s.
International trade was the one area of the economy which did not recover, costing roughly 15% in lost output and employment. Not until the end of WWII was a new international trade system put in place.
Perhaps FDR should have put more effort into reviving trade in the 1930s.
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frflyer
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134 Comments
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Nov 12 02:24 PMI find it amazing that you have nothing to say except to bash Al Gore and Joe Biden, when the current mess is a result of Republican economic policies. Reaganomics doesn't work! Reaganomics doesn't work. Reaganomics doesn't work. PERIOD
Someday, you may understand this simple truth.
When Reagan was elected we had a $1 trillion federal deficit. Since then Republican administration have ratcheted up that figure to $10 trillion. When Reagan was elected, corporate executives were paid about 25 times what their workers earned. They now make 250 to 400 times as much. At the same time, workers wages have actually gone down. A middle age worker now makes 12% less than his father did in real buying power.
Between 1983 and 2004, the top 1% got 33% of the growth in wealth. The next 4% got over 25%.
The bottom 80% of us got 11% of the growth. The bottom 40% got negative growth.
That my friend is not the American dream. Regressive tax schemes never have worked and never will work.
Now those of you who love this giveaway to the rich, complain that giving a tax break to the working people is socialism. Wow.
None of you seem to understand the simple truth that every successful economy in the world is a mixed economy. It's what works. But that isn't good enough for you because you are stuck on labels like socialism. You are stuck on ideology that has proven not to work. Reaganomics has had over 25 years to prove itself and it is a complete failure for 80% of Americans.
The claim that Reaganomics created wealth is not true to begin with. What created wealth was the revolution in technology, computers, internet, robotics, telecommunications, biotechnology etc.
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moonbat1775
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705 Comments
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Nov 12 02:37 PMWhat part of "government backed fractional reserve banking cartel" sounds like "pure free market capitalism"?
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thedozer
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162 Comments
Nov 12 02:46 PMBroken: I enjoyed your biased analysis of the GD. However, your praising of FDR failed to recognize the truth. Herbert Hoover (REP) had the same protectionism policies of his Dem. successor, FDR.
FDR was Hoover on steroids. So if you want to give one 'credit' for the recovery, it is only fair to recognize the other.
This is beyond the fact that you are severely disillusioned to the truth. The GD got better over time true... but if you insist that FDR was the 'saviour'... then why did it take 10 years to recover?
What policies did it? the first 20 government programs? or the last 20 fed programs?
I'd like to hear it from a man as bright as yourself!
Smartypants: "How does it end?"
NORTHCOM 09
good luck boys
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marcumw
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3 Comments
Nov 12 03:03 PM-
Socialism cannot compete!
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470 Comments
Nov 12 03:10 PM"But what if there are few or no areas of the economy that can absorb more debt, including the financial sector? That is a depression."
I fear that is exactly our case.
One thing I take possible exception to though...the thought that there is no replacement for the U.S. dollar as a reserve currency. Why hold dollars -- is it not better to hold useful hard assets in the current scenario? You've got your usual gold bugs...I will maintain that gold is a better store of value than the dollar right now...but I'd also maintain that there are even better stores of value for what lies ahead -- hard assets that will feed you when your gold can't buy anything. Let's think on that.
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Smarty_Pants
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1095 Comments
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Nov 12 03:21 PMNORTHCOM 09 " - thedozer
I believe that moonbat is heading up the effort for collecting bits of lead for just such an emergency. With the BHO administration coming soon, I'm thinking that there will be a large number of good ol' boys doing likewise very shortly. Let us hope it doesn't come to that.
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Smarty_Pants
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1095 Comments
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Nov 12 03:26 PMYep. Beside hard rations there are booze, cigarettes, and soap. You will find they are quite liquid assets if things get really bad. Booze is 'medicinal' too. ;-)
Flint and steel wool come in handy on occasion as well.
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H.J. Huneycutt
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121 Comments
Nov 12 03:33 PMI do like that last bit of advice, too.
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Cesar
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24 Comments
Nov 12 03:56 PM-
dandy
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4 Comments
Nov 12 03:58 PMCrash and Burn. There is over a hundred trillion dollars right now in money markets and on the sidelines, scared to death to use it, until it really makes sense. It will make sense again. Prices were driven up quickly without sound fundamentals but instead propped up evaluations, so much so that it brought about a world wide crisis, collapse,(Bursted Bubble) Everything becomes lunchmeat and becomes even more deflated and oversold than it was inflated and overbought. Thus comes in a hundred trillion dollars of taken out funds (largely from hedge funds that quickly took the money out.) They typically start buying in January, and this next year is going to be the biggest incline in history, though, admittantly, all does appear to be a massive depression. (CrasH)
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Alex Filonov
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331 Comments
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Nov 12 04:08 PM-
Tawny Angel
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14 Comments
Nov 12 04:20 PMSo I would offer my simplistic and unscientific observation to augment Dave's:
Stories about the 2003-2006 Housing Bubble
One day in the hot summer of 2006 I was having lunch with some out-of-town business folks in an upscale suburb in Metropolitan DC area. One older and wiser guy commented: "You know, I heard that the real estate market in this area is really hot...you know... I heard that when a single-family house was put up for sale, the agent had to have witnesses present to open the dozen of bids...you know...And one of my friends in the bidding process actually gave instructions privately to the agent in confidence --- Open up all the bids including mine. When my bid is not the highest bid, just up my bid by $2000 and override the highest bidder..."
Stories about the 1929-1933 Stock Market Bubble
There was a well-known story that was I believe portrayed in one of those black and white Frank Sinatra movies. Frank was in NYC and taking a cab...you know... one of those old style motor vehicles with the door opening on the other sides...And Frank started to chat with the cab driver. You know... after a while the cab driver got interested and started to talk...He said to Frank:"...Hey.. have you been buying stocks lately?....You know, last night I just pawned my underwear and invested the proceeds in the stock market...it is the real game in town... you know...after all... everyone is IN..."
You you could figure it out for yourself when a Bubble is a Bubble and when a Bubble is about to Burst. It is like the classical symphony. The Great Masters had it made in the last (most Third) movement when the tempo becomes quicker and quicker, the sounds louder and louder until that finale...When the music stops, the curtain goes down.
OPEN Question: How does the 1837 Panic compared with the present situation?
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Socialism cannot compete!
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470 Comments
Nov 12 04:50 PM[quote]
Price fixing is not the answer, so home prices should be allowed to fall. Banks should be allowed to fail, so should GM and other poorly managed businesses.
[end quote]
Wholly agreed.
[quote]
Taxes should be lowered for the middle and lower classes. The whole "the rich create jobs" myth needs to be revalued. Good ideas create jobs. A strong consumer base creates jobs.
[end quote]
Why do you believe it is a myth? Present the proof!! Why should anyone pay a higher percentage than another group? I think that is a fundamentally wrong way to view taxation!! The real question is why we've allowed ourselves to be coaxed into a class-warfare to begin with!! The income tax is dividing us...and that's how THEY want it!! The income tax is THEIR tool to retain control of ALL OF US!! When (not if) we finally abolish it and move to solely the sales tax, EVERYONE will gain the rights to their OWN money, rather than the government deciding how much we get to keep of our own property!! We ought to decide WHEN and IF we pay tax...and we do that by going with sales tax instead of income taxes! We know better than the government how to spend our own money. We know how much we can afford. No sales tax on food, housing, & energy -- only on discretionary purchases. Put the people back in control, rather than government!!
Good ideas don't create jobs -- they are only good ideas until you can implement them. Implementing them takes capital. Try reading up on "venture capital"...the companies that fund startups.
[quote]
The convenience store owner down the road is not going to move his convenience store to another country because he can get better tax treatment.
[end quote]
Wrong analogy -- the convenience store owner is not a *producer*!! He's just a middle-man!! The producers are the ones moving so they can get cheaper labor and cheaper raw materials. Then again, why do you suppose direct sales and factory outlets thrive during times like this? Taxes press hard upon those who are "middle men"!!
[quote]
What America needs to do is put money in the hands of the people that will actually buy goods and services that will lubricate the economy. Not to people that will buy a 100K + European car, a $1000000 + condo, and stash the rest in some sort of financial instrument that will do nothing for GDP.
[end quote]
Again...you're thinking in class-warfare terms...step back, and ask, why not let ALL Americans keep their own money?!? You need to define "put money into the hands of the people"...whose money? The only right way and the only way that works, is to put THEIR OWN money back in their hands -- i.e., totally revamp the tax system.
What financial instruments do the "rich" use that "do nothing for GDP"??? The rich are typically heavily invested in stocks and other financial instruments precisely in order to outpace inflation and make more money. Any financial investment that "does nothing for GDP" is NOT making them any money!! Because that is essentially putting it into a savings account. Everything else is an investment related to GDP (whether it ends up growing or not...GDP is shrinking at the moment!!). So you are not making sense in your rip on the "rich" and their "financial instruments"!!! Capital IS NEEDED, and the wealthy ARE the ones providing it to implement these creative new ideas you mention!!
The bottom line is, for real and lasting prosperity, and opportunity for ALL...the ONLY WAY TO HAVE THAT is to have small government and quit playing the class warfare card -- kill the income tax ENTIRELY: go sales tax, and everyone decides how much they pay by deciding if and when to buy things!! That's fair for everyone, and it restores power to the people. Big Government is hindering opportunity by taxing creativeness and hard work!!! You don't tax success -- by definition, that is a barrier to increasing success!! Get it?? tax on the *back end*, not the front!! Then its not a barrier to business or personal success -- WE decide what to do with the proceeds of our labor. If we are lazy, we have no proceeds. If we work hard...we decide how much to keep vs. spend (and be taxed).
Please...show us how trickle-down is false? Taxing the rich results in trickle-up poverty by killing the capital that allows new startups to get going. Refute it if you can -- give logic and facts, not just assertions.
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thedozer
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162 Comments
Nov 12 04:57 PMsocialism cannot compete 1
Cesar 0
final
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Reddleman
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2 Comments
Nov 12 05:01 PM> OPEN Question: How does the 1837 Panic compared with the present
> situation?
1837 was quite different.
Similar- You had the same presence of speculative "bubbles"- mostly western land sales, railroads, and other internal developments, some driven up by individuals, some by early chartered corporations.
Somewhat similar- One of the big issues was the Bank of the U.S.- a public/private institution that provided relatively cheap (for the time period) financing to encourage speculation and the inflation of the "bubble".
Different- The government was *MUCH* smaller in terms of direct impact on the economy. For the most part the Jackson administration had gutted a lot of the federal gov'ts power to influence the economy through an all-out war with the Bank (he, much like Jefferson, thought it mostly served the wealthy, old-money, aristocratic, elites). As a partial consequence, the gov't for the first time actually had a surplus! How to give this surplus back to the people, and who would benefit from it was a big source of contention. But alas, with the panic, this was no longer a problem, as gov't receipts went down accordingly.
So in many ways, such as the surplus and speculation, 1837 looks a bit more like the dot-com bubble than today. The extent of gov't intervention, and of course global nature of today's crisis is quite a bit different. For the most part in 1837 the market was left to work itself out- painfully but inevitably.
The only groups that were not really harmed by the crash were ironically northern subsistence farmers and southern exporters who didn't speculate or over-leverage. In fact, the crash made the South look pretty smart with their slave-dependent traditional agriculture compared to the complex market economy developing in the North at the time.
As for lessons?
1. Don't wildly speculate.
2. Commodities (particularly consumables) that still have a strong market are the only investment class.
3. 2. Be a subsistence farmer?
All of which I've read as advice on SeekingAlpha in the past few weeks.
Being a History teacher, I could go on and on, but I'll leave you to make your own conclusions.