M*****8
发帖数: 17722 | 1 【 以下文字转载自 Stock 讨论区 】
发信人: MB80528 (肥猫(Contrarian)[食MM而肥]), 信区: Stock
标 题: Is It 1937 All Over Again?
发信站: BBS 未名空间站 (Tue Aug 16 03:34:03 2011, 美东)
Is It 1937 All Over Again?
Background:
Have global events begun to look and sound too familiar in 2011 to a
previous era in the 1930s? In 1937, economic conditions were surprisingly
similar to those at present. Commodity prices were rising, people worried
about inflation and deficits, and so they acted -- and paid the price. Many
who remember history ask: how does the recent stall in major economies
compare to 1937? At that time, the US economy had been growing rapidly for
three years, thanks in large part to government stimulus programs aimed at
ending the deep recession that began in 1929. This gave US policy makers
every reason to believe the economy was strong enough to withdraw government
stimulus. Much like 2011, the US Congress insisted on cutbacks to
government spending in 1937 and passed laws to balance the budget because
President Roosevelt’s policies had cost a bundle and opened a big budget
deficit. As a result of the newly introduced austerity measures:
1. Confidence shook and fell rapidly, a problem worsened by extreme
volatility in financial markets, which added to the woes of a double dip
recession. The budget cuts knocked the economy into a tailspin and it
relapsed into the second phase of the Great Depression.
2. The stock market collapsed. In a few months, the Dow Jones industrial
average dropped 48 percent from its peak in 1937. It kept on falling so
steeply that it:
a. Undermined confidence;
b. Brought back painful memories of the twin financial crashes of 1929 and
1932; and
c. Wiped out the wealth effect of rising prices.
3. US annual GDP fell back more than three percent in 1938.
4. US industrial production fell by nearly 40 percent, this time a much
steeper decline than in 1929-33.
5. Unemployment, which had slowly dropped to a still-depressing 14 percent,
from a peak of 25 percent in the early 1930s, soared by a further 4 million
to nearly 20 percent once again.
6. Price declines swiftly led to deflation.
Clarification added 2 days ago:
7. Not long after that came the build up towards the Second World War.
8. Real growth in employment, manufacturing output, financial markets and
GDP returned only when the government launched the massive spending -- and
budget deficits -- required to win the Second World War.
In 1937, the economy was getting on its feet after the calamity of the
Depression. Did the policy makers move too quickly in 1937 as they may have
done in 2011 to withdraw government support for the US economy? In the long
run, the budget deficits were and are still, clearly not sustainable.
However, as FDR’s closest aide Harry Hopkins famously said, “People don’t
eat in the long run; they eat every day!” And today’s approach, if 1937
is a guide, could create not only more suffering but also less prosperity.
In order to grow, the economy needs people who eat, people who work, people
who produce and people, as well as businesses, that contribute to the
Treasury by paying taxes.
The Federal Reserve did its part to throw the US economy back into recession
by tightening credit. Wholesale prices were rising in 1936, setting off
inflation fears. There was concern that the Fed’s easy monetary policies of
the 1920s had led to asset speculation that precipitated the 1929 crash and
ensuing Great Depression. The Fed responded by doubling banks' reserve
requirements between August 1936 and May 1937, in several stages, leading to
a sharp contraction in the money supply.
Then as now, policy makers were struggling with how and when to turn off the
fiscal stimulus and monetary easing that had been used to combat the
initial crisis. Does this sequence of events suggest that we are facing
similar risks today not just in the US but also in Europe? Is there a
possibility that the United States and certain European nations could face a
recession possibly as bad as the contraction in 1937-38? Squeezed in the
middle are tens of millions of unemployed, hundreds of millions of investors
in financial markets, and billions of people the world over who depend on
demand generated by consumption and physical investment.
Conclusion
Are we preparing for the 75th anniversary of the Great Depression’s double
dip in 1937-38 by inadvertently concocting a second wave of the financial
crisis within The Great Unwind in 2011-12? With 20/20 hindsight, the mistake
of 1937 was a pre-emptive policy tightening in a fragile economic
environment.
The most damaging outcome of the 1930s was the collapse of investor
confidence and its effect on raising new capital for businesses. That
destruction of wealth had profound and long-lasting repercussions for the
markets lasting more than two decades. No one was interested in investing in
a new issue of stocks or new bonds as long as the untrustworthy Wall Street
underwriters were involved. On the face of it, the financial crisis began
in 1929 and lasted a decade, until the outbreak of the Second World War in
1939. But the lingering effects of that crisis lasted until the Korean War
in the early 1950s and the early years of Eisenhower's presidency which
began in 1953.
In 2011, investor confidence in the stock market has once again been badly
shaken while the market for quality sovereign bonds has benefited. This is
where the parallels between the 1930s crisis and today's crisis become
unsettling. Future growth in all sectors of the economy ultimately depends
on investors and their willingness to invest in risky assets like equities
and corporate bonds. The exact reverse appears to be happening at present if
one witnesses investors' votes on this crisis manifest via:
1. Sharply declining government bond yields of top sovereigns;
2. Rapidly declining and volatile financial markets; and
3. The high price of precious metals like gold and silver.
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