Is this the end of the post-Cold War Boom?

This boom survived the mild recession in 2001 and the most severe recession since the Great Depression in 2007-2009 with the stockmarket continuing to drive higher and higher.

But can the boom survive the hysteria and government overreaction to COVID-19?

Can governments counteract the damage that they have done to the economy through counter stimulus packages? or has the damage inflicted been too great to extend the post-Cold War boom?

History suggests, despite what has happened, that the boom may continue and the stockmarket may reach new heights.

The COVID-19 crisis may be the latest crisis where government intervention - monetary and fiscal stimulus - signals the start, or the potential for a start, of the final boom that eventually brings the post-Cold War boom undone.

The chart below provides some precedents.

The potential crisis in Japan in 1987 was due to the Black MondayAmerican stockmarket crash. The American economy and stockmarket of 1987-1990 will also be added to the mix for how the next few years may play out.

Global Crisis - Boom - Bust




Interest rates lowered 0.5 of a percentage point due to a potential international financial crisis

Low interest rate policy continued due to potential global crisis as a result of USA October stockmarket crash
Interest rates lowered three times as a result of a potential global meltdown
Cue for mania stage of stockmarket boom

Cue for mania stage of stockmarket boom

Cue for mania stage of stockmarket boom

Three interest rate increases
DJIA up 48%
Three interest rate increases
Nikkei up 29%
Three interest rate increases
Nasdaq up 86%

New York Federal Reserve Bank proposed an interest rate increase in February; rejected by the Federal Reserve Board in Washington
Interest rates increased one percentage point in March
Interest rates increased 0.25 of a percentage points in February

Interest rates increased 0.25 of a percentage points in March

Interest rates increased 0.5 of a percentage point in August
Interest rates increased 0.75 of a percentage point in August
Interest rates increased 0.5 of a percentage point in May

Dow Jones loses
35 percent*
Nikkei loses
38.7 percent
NASDAQ loses
51 percent*

* from peak

Stockmarket Definitions

"Correction: when your neighbor's portfolio drops in value. Technically a drop of 10 percent.

"Bear market: when your portfolio drops in value. Technically a drop of 20 percent"
(James M. Pethokoukis and Anne Kates Smith, Buy, Sell, or Sit Tight?, September 6, 1998).

Bull market: technically "a rise in value of the market of at least 20%"
(What is a bull and a bear market,

USA  1927-1929

"There was a vigorous cyclical recovery after the trough in mid-1924, accompanied by a real estate boom that leveled off in 1926 and the beginning of a stockmarket boom.Towards the end of 1926, moderate restraining measures were taken before the cyclical peak which occurred in October 1926. The subsequent contraction was mild" (Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, p. 288).

There was a stockmarket high on August 14, 1926 that preceded the mild recession of October 1926-November 1927. The Dow Jones declined 12.6% for a low on October 19, 1926. The international crisis came in the summer of  1927.

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"Winston Churchill was Chancellor of the Exchequer in 1925. Eager for Britain to once again assume world leadership, and viewing the pound sterling as a symbol of Britain's greatness, he insisted on returning the pound to its prewar relationship to the dollar and gold. In that year, the pound was pegged at $4.86.

"The rate was unreasonable, and had the effect of pricing many British goods out of the world market. A flight from the pound to the dollar began at once, as Britain had its first of several financial crises in 1925. Indeed, gold from all parts of Europe came to America in great quantities in the next two years.

"Had the situation continued, most European nations would have had to leave the gold standard. Given the complexities of the reparations situation, the United States would be dragged down with them in a major financial crisis. Accordingly, Secretary of the Treasury Andrew Mellon and Benjamin Strong eagerly accepted invitations from European central bankers to a conference on the question. In 1927 Montague Norman of the Bank of England, Hjalmar Schacht of the Reichsbank, and Charles Rist of the Bank of France met with their American counterparts. The situation might yet be saved, they argued, if the Federal Reserve cut its rediscount rate. Such an action would lower American interest rates in relation to those in Europe, and therefore attract funds to European banks. At the same time, low interest rates would encourage borrowing in America and stoke the speculative furnaces. Strong was unhappy about the latter probability, but in the end proved willing to further stimulate an already active American economy in order to save international stability..." (Robert Sobel, Panic on Wall Street, pp.360-361).

"Not long before the cyclical trough in November 1927, easing measures were taken. The buying rate on banker's acceptances was reduced ¼ of 1 percentage point from July to August 1927, and the System's bill holdings rose by $200 million; the discount rate was reduced by all Banks from 4 to 3½ between July and September 1927; and open market purchases of government securities totaling $340 million were made between late June and the middle of November 1927..." (Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, Princeton: Princeton University Press, 1963, p. 288).

"Wall Street greeted the lowered rate. It meant businesses could borrow funds more easily, and so expand operations and profits. More important, it assured a continual flow of cheap credit for the call-money market. Member banks were able to borrow money from the Federal Reserve at 3.5 percent and then lend it as call money at 5 percent, making an easy profit of 1.5 percent. Thus, the international situation was resolved in such a way as to encourage speculation on Wall Street" (Robert Sobel, Panic on Wall Street, (New York: Macmillan, 1968), pp.360-361).

"Adolph C. Millar, a dissenting member of the Federal Reserve Board, subsequently described this as 'the greatest and boldest operation ever undertaken by the Federal Reserve System, and...[it] resulted in one of the most costly errors committed by it or any other banking system in the last 75 years'. The funds that the Federal Reserve made available were either invested in common stocks or (and more important) they came available to help finance the purchase of common stocks by others. So provided with funds, people rushed into the market. Perhaps the most widely read of all the interpretations of the period, that of Professor Lionel Robbins of the London School of Economics, concludes: 'From that date, according to all the evidence, the situation got completely out of control' " (John Kenneth Galbraith, The Great Crash 1929, pp.38-39).

JAPAN  1987-1989

There was a high on the Nikkei 225 stockmarket index on October 14, 1987, four days before the America Black Monday crash. The crash was the trigger for a Nikkei  bear market decline of 21.05%, with the low on November 11, 1987.

Paintbrush Picture
Paintbrush Picture
"...Dr Yoshio Suzuki, explains... 'In 1987 the Japanese economy had already started to recover so we thought our low monetary policy should be raised. We led call rates [short-term money market rates] up and we thought about raising the official discount rate towards the end of 1987. But then Black Monday [the stockmarket crash of October 1987] occurred. Then the Ministry of Finance people said, again and again, "A Bank of Japan decision to raise the official discount rate in late 1987 would be accused of ignoring the international circumstances." That was the pressure on us - it originated with US authorities but the Ministry of Finance was the messenger.'

"The Black Monday stockmarket crash, which began on Wall Street but provoked a staccato echo of crashes on markets around the world, persuaded the United States, Japan and others that easy money was the best policy. This created a cushion of liquidity to absorb financial shock and prevented the trauma from being transmitted to other parts of the economy. The policy was largely successful. But in the United States and Germany this was only a short-term response. Within five months the United States raised official interest rates and Germany followed four months after that. Japan's central bank waited much longer under the combined pressure of the Okurasho [the Ministry of Finance] and the Americans - until May 1989, allowing the bubble to bloat further.

"Dr Yoshio Suzuki continues: 'So we kept our low interest-rate policy through the essential period of October 1987 to May 1989. During that time of about one and a half years the economy was rising vigorously, so there was no reason we had to keep the low-interest rate policy and we should have raised the official discount rate... But the judgment we made at the time was incorrect. Because, though prices were stable, asset prices rose too quickly and it would create much trouble later..." (Peter Hartcher, The Ministry, (Sydney: HarperCollinsPublishers, 1997), p.74).

"...Geoffrey Miller, the director of the Center for the Study of Central Banks at New York University, who has studied Japan's bubble, reckons that with hindsight it is clear that monetary policy was too lax. The Bank of Japan started to fret about rising property and share prices and rampant bank lending in 1987. If it had tightened policy then, the economic damage would have been considerably less. So why did the bank wait two more years?

"Uncertainty about whether it really was a bubble and how asset prices would respond to higher interest rates both played a part. And as in America today, CPI inflation was low (in part because of a strong yen), so politically the bank would have found it hard to take action..." (The Economist, Survey: The World Economy, September 25, 1999, pp.17-18).

USA  1997-2000

"Faced with a serious liquidity crisis ... on July 2, 1997. Thailand's central bank stopped defending the baht's peg to the dollar. The baht lost 16 percent of its value, and this plunged Thailand into a serious recession. The substantial devaluation of the baht and Thailand's economic troubles triggered a panic in neighbouring economies with similar problems. Like Thailand, the economies of Malaysia, Indonesia, and others were afflicted by heavy foreign borrowing and banking systems weakened by large numbers of unpaid or nonperforming loans" (Robert Gilpin, The Challenge of Global Capitalism, pp.145-146).

In October 1997 "the drop of stock prices on the Hong Kong stock market (Hang Seng) by 24 percent in four days sent shock waves round the world. Spreading recognition of the very serious nature of East Asia's troubles threw panic into investors everywhere. On October 27, 1997, the tenth anniversary of the 1987 crash of the American stock market, the Dow Jones plunged 554 points (somewhat more than 7 percent), the largest [now third largest] one-day loss ever. Similar declines took place in Western Europe, Brazil, and elsewhere. Investors were panicking and abandoning the emerging markets" (Robert Gilpin, The Challenge of Global Capitalism, p.147).

In November 1997 "attention shifted to Korea... the possibility or even probability that the Korean economy would collapse finally jolted the United States into action. ...the most important consideration was the fear that Korea's default on its huge international debts would trigger a much larger international crisis. Collapse of the Korean economy could also have brought down the weakened Japanese economy, and that in turn could have produced disastrous consequences for the United States and the rest of the world.

"In response to these dangers in Korea, the United States in mid-December 1997 engineered the largest-ever IMF rescue package..." (Robert Gilpin, The Challenge of Global Capitalism, pp.148-149).

Three IMF rescue loans - to Thailand in August, Indonesia in October and South Korea in December - were the defining responses to the international crisis of 1997, in the following year it was to be three interest rate cuts in America in September, October and November.

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"In August [1998] the Russian devaluation of the ruble and other financial troubles triggered a sharp decline in the American and other stock markets. Capital flight and the threat of currency collapse engulfed Brazil and other countries. The world was plunged into the worst economic crisis since the Great Depression" (Robert Gilpin, The Challenge of Global Capitalism, p.162).

On August 31, 1998, the Dow Jones plunged 512.61 points. Then came the near-collapse of the Long Term Capital Management hedge fund in September.

"...the Federal Reserve began a series of rate cuts ... by a quarter point in September, October, and November [1998] to avert a global economic meltdown and in the process sparked a 191% jump in the Nasdaq over the next 18 months, and a 46% rise in the Standard & Poor's 500 Index" (Nasdaq falls to year low,, December 19, 2000).

USA 1987-1990

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There was a high on the Dow Jones Industrial Average on August 25, 1987. The Dow entered a bear market, declining 36.13% percent to October 19, 1987. October 19 experienced a decine of 22.6% from the previous day's close.

The Dow would rally from here, surviving a stockmarket scare in October 1989, for a 72.52% increase on August 16, 1990. The August 16, 1990 high was 10.8% higher than the high that precedent the crisis of 1987. This stockmarket peak was in the recession that ran from July 1990 to March 1991.

"Why, then, did the market fall in 1987? To say "the computers did it" is too easy - or not easy enough. Gravity is the simplest answer: the market fell because it had climbed too high, too fast.

"Markets, after all, are only as rational as we are. Often, they overshoot - and the result is a boom that leads to a bust as prices revert to a mean. In 1987, stocks were overvalued. Many investors new it, and once prices began to slide, they headed for the exits. What seemed as irrational sell-off was, in fact, a perfectly reasonable response: when risk becomes too steep, the market has a nervous breakdown.

"The crash was not caused by some external event. Booms and busts are built into the system... But not all downturns signal the beginning of a cataclysmic bear market. Sometimes, if prices have not strayed too far off course, the market is able to wring out the excesses and move forward in a matter of months. On other occasions, it takes years for the market to retrench and build a solid foundation for a new bull market" (Maggie Mahar, Bull! A History of the Boom, 1982-1999, p.69).

"Following the stock market crash of October 1987, forecasters reduced their GNP growth estimates for 1988 over 1987 from 2.8 to 1.9 percent, the largest drop in the 11-year history of the survey. Instead economic growth in 1988 was nearly 4 percent because the economy failed to falter following the stock market collapse" (Jeremy J. Siegel, Stocks for the Long Run, (New York: McGraw-Hill, 1994), p.213).

"Stock markets quickly recovered a majority of their Black Monday losses. In just two trading sessions, the DJIA gained back 288 points, or 57 percent, of the total Black Monday downturn" (Donald Bernhardt and Marshall Eckblad, Stockmarket Crash of 1987,

"Less than six months after the debacle, the Dow was again floating close to 2000 - just where it had been a year earlier..." (Maggie Mahar, Bull! A History of the Boom, 1982-1999, p.72).

"Less than two years later, US stock markets surpassed their pre-crash highs" (Donald Bernhardt and Marshall Eckblad, Stockmarket Crash of 1987,

"When all is said and done, what was most remarkable about the crash of 1987 was the aftermath. Nothing happened. The economy did not collapse [and there was no banking crisis]. The first phase of the bull market had reached its climax - the rest of the decade would be denouement..." (Maggie Mahar, Bull! A History of the Boom, 1982-1999, p.72).

"But while the bull market was resuscitated, public enthusiasm for the market did not revive... The second leg of the People Market would not begin in earnest until 1991, when the economy was in recession and interest rates of money market funds had slipped to well below 5 percent..." (Maggie Mahar, Bull! A History of the Boom, 1982-1999, pp.72-72).

"As the expansion continued, belief that a recession was imminent turned into the belief that prosperity was here to stay..." (Jeremy J. Siegel, Stocks for the Long Run, (New York: McGraw-Hill, 1994), p.213).

Conclusions from the above

"Bubbles are NOT created solely by interest rates nor by changes in money supply. The driving force is always international capital flows ... any country can be overwhelmed by external forces" (Martin Armstrong, Stockman v Greenspan - Just Absurd,, July 26, 2014).

"The major stock market boom on Wall Street coincided with a virtual suspension of new international lending and a retreat of capital. New money from America stopped going to Germany, Latin America, or Central Europe in June 1928. All the hot money went to Wall Street instead. And much more foreign money, especially English money, was also attracted by high returns as compared to bleak prospects elsewhere" (James Dale Davidson & William Rees-Mogg, Blood in the Streets, (New York: Summit Books, 1987), p.207).

Bleak prospects, especially in Europe, will drive the US stockmarkets higher - capital will flee to US equities sending indices to record highs.

Pre-crisis high (P-C H)
Crisis low
Low to pass pre-crisis high
Pre-crisis high to be passed  
Post-crisis high
Gain from Crisis low
Gain from
Low to post-crisis high
High to low
USA 1927-1929
Aug 14, 1926
Oct 19, 1926
6 months
8 months
Sep 3, 1929
2 years, 11 months
2 years, 10 months
August 1929-March 1933
Japan 1987-1989
Oct 20, 1987
Nov 11, 1987
5 months
6 months
Dec 29, 1989
2 years
2 years, 7 months
February 1991-October 1993
USA 1998-2000 (D)
Jul 17, 1998
Aug 31, 1998
3 months
4 months
Jan 14, 2000
1 year, 4 months
3 years, 2 months
March 2001-November 2001
USA 1998-2000 (N)
Jul 20, 1998
Oct 8, 1998
2 months
4 months
Mar 10, 2000
1 year, 5 months
3 years
March 2001-November 2001
USA 1987-1990
Aug 25, 1987
Oct 19, 1987
1 year, 10 months
2 years
Jul 16, 1990
2 years, 9 months
3 months
July 1990-March 1991

"The Central Bank has launched countless SPVs (Special Purpose Vehicles) with the purpose of providing liquidity to stressed markets, including the purchase of corporate bonds. The undertaking of these programs, as well as the initiation of QE4 (Quantitative Easing), have led to the Fed's balance sheet growing by a record $2.5 TRILLION over the past three months. The total amount of assets held by the Federal Reserve is now 27% of U.S. GDP, which is more than any other time in history" (James Stack,  Interim Bulletin - Subscription,, May 1, 2020, p.2).

"Unprecedented monetary intervention from the Federal Reserve in addition to trillions of dollars in fiscal stimulus have essentially rendered the economic fundamentals irrelevant for the time being. There is no telling when the fundamentals will matter again, but history is clear that it is a matter of when, not if" (James Stack,  Interim Bulletin - Subscription,, June 5, 2020, p.2).

See also Biblical Financial Cycles

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