Economic Growth In The 1920s – I’ve had this problem for a long time: Why didn’t stocks do well before the 1930s when we had the gold standard. Looking at the logarithmic table below, we can see that the Dow did not advance for decades, from the century to the early 1940s. For four decades, you will make a lot of money investing in US Treasuries. Of course, we had the World War and the beginning of another war, but they did not affect America much and did not cause the fall of 1929. There must be another reason.
So I came across another chart, as seen below, that makes more historical sense and starts to connect some dots.
Economic Growth In The 1920s
The map may not be very accurate, as it refers to very old data, and I’m not sure who made it first, but it (and other slightly modified ones) can be found in many places on the Internet. It shows that there was a period of debt accumulation (both private and public) that ended with the crash of 1929, and that the ratio of public debt to GDP peaked in 1933, at the height of the Great Depression, from the sharp agreement. in GDP between 1929 and 1933. As can be seen, there was a smaller peak in the late 1870s (caused by the Panic of 1873), which coincided with what was once known as The Great Depression. until the 1920s.
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The graph is correct in that there are two debt collection cycles that end in a crash. These two historic economic depressions were felt in the industrialized world. One thing is certain, both have been driven by the growth of large investments, which are mainly, of course, financing from debt. Therefore the growth of all debts seen above. However, in the 1930s, the total debt exceeded the previous peak of the 1870s, and has now eclipsed the previous record of the boom of the late 1920s. In short), as in the 1970s and 1930s, the overall debt/GDP ratio will be higher than it appears. In this table (due to the decline in GDP).
The reason we were able to get to this point with the debt is because of the banking reform, as it was the last time public debt reached such a high level. The Federal Reserve was established on December 23, 1913. This made commercial banks more reliable and liquid, as they were supported and controlled by the central bank. And this helped to expand the number of loans that followed. Since then, things have changed a lot in different phases. The gold standard was replaced in 1933, and then completely abandoned by the Nixon administration in the early 1970s. Apparently, as can be seen in the chart, actual borrowing increased after the gold standard was completely abandoned in the 1970s.
We don’t know for sure when the current debt cycle will end, but it will. Sometime. I think many people wonder that you can not borrow more than that you produce. But that’s what we did. Debt is growing faster than GDP. And there are some worrying signs that the end of the current debt cycle may not be far off. What we do know is that the last crash of 1929 preceded the so-called Panic of 1907, which eventually led to the creation of the Fed. And there was a depression in 1920-1921 which was a severe economic contraction.
But neither the crash of 1907 nor the depression of 1920-1921 started the economic disaster that caused the crash of 1929. A simple explanation might be that there was still room for more investment and borrowing. After all, every economic cycle, and in this case every debt cycle, will just run its course. Just as a bear market is said to grow out of anxiety, a debt collection cycle will easily build up no matter how much you blame it, until it reaches its limits. Government and private lenders tend to borrow until they can no longer pay. Past and present debt also clearly shows that despite the obvious danger of excessive debt, we tend to pass.
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And of course, as we all know now, the fact that the economy proved resilient enough to withstand the collapse of 1907 and 1920-1921 encouraged investors to pour all their resources and, of course, the ability to borrow, to invest more. and create extraordinary economic growth and drive the stock market to the level of the bubble of the end Year 20. However, stocks were generally not considered expensive in the late 1920s, as the economy was very strong, especially compared to the rest of the world, which was in very bad shape. Yes, as now, in the late 1920s, the rest of the industrial world did not have the economic miracle that the United States had. While Europe was recovering from the ravages of World War I, the American economy increased by 42 percent in 1920.
Also, of course, there are significant differences between the economy or the market between now and the late 1920s. However, despite the fact that almost 90 years have passed, the similarities are remarkable. In 2008-2009 we had the so-called “Great Recession”, just like in 1920-1921 we had the so-called Great Depression of 1920. Then there was the crash of 1907, and we had the stock market crash (mainly technical) of 2000. Two smaller crashes before the final crash of 1929. Recently we had two crashes, the second one was worse. The first, which occurred at the beginning of the 20th century. There was an unprecedented accumulation of debt that began in the late 1870s, which eventually reached its peak after the crash of 1929. This time, there was a much larger accumulation of debt that took place in the early 1950s. 1920, when the world was in turmoil. It’s the same now. While Chinese, Japanese and European stock markets (all of Europe) are still below record highs, the S&P 500 is nearly double its 2007 peak.
One problem, or obstacle, to the expansion of the current debt cycle – which, as mentioned, began in the 1950s – is that the central bank does not have ammunition after the collapse of 2008. Section lending and investment as they did in the previous downturn by reducing interest rates significantly.
The central bank of Japan lost this ability in the 1990s (graph) and its poor economic growth has been linked to the rest of the world because it has continuously reduced its currency (by printing new money – Quantitative Easing, or QE) to make exports go. The rest of the world. Japan has run an almost constant current account surplus over the past decade, so it sells more to the rest of the world than it buys, a situation made possible by the artificially cheap yen (chart). Keeping interest rates slightly below zero has not helped the Japanese economy recently.
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Europe lost the armor of its central bank last time, shortly after 2008, but probably more after the problems it faced from its southern member in 2010-2012. The European Central Bank has also set interest rates below zero. Europe and Japan can not really encourage debt collection. Maximize your debt collection potential. Recently, Europe has become dependent on exports for economic growth and, like Japan, has used QE (new money printing) to devalue its currency, the euro. As can be seen in the chart below, Europe began to rely on exports to generate economic growth, as the domestic market could no longer absorb the debt. Europe is not in the habit of running too much current account. It has been going on for years.
It is clear that the United States is still not out of the arsenal, as the Fed just increased its benchmark rate to 2-2.25%. And this may be the main reason why it has become such a “miracle” place to invest. Now the Fed can lower its index rate to zero and stimulate the economy if necessary, but that is not enough. The recent recession required a reduction of at least 5 percent in the Fed funds rate to stimulate the economy and stabilize financial markets (table below). As can be seen, the mild recessions of 1991 and 2001 prevented the severe recession of 2008 from forcing interest rates lower.
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