Parallels: 1920s and 1990s

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" height=35 BGCOLOR="#000099" TEXT="#F7F7FF"> <div> <B>The Next Great Depression</B></div> <div> <A HREF="id63.htm" TARGET="_top" TITLE="Share and housing bust">Share and housing bust</A>   |   <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Crash Index</A>   |   <A HREF="id67.htm" TARGET="_top" TITLE="What to expect?">What to expect?</A>   |   <A HREF="id68.htm" TARGET="_top" TITLE="Biblical Financial Cycles">Biblical Financial Cycles</A>   |   <A HREF="id69.htm" TARGET="_top" TITLE="Conclusion">Conclusion</A>   |   <A HREF="id72.htm" TARGET="_top" TITLE="192931 and 200002">1929-31 and 2000-02</A>   |   <A HREF="boom_and_bust_republicans.htm" TARGET="_top" TITLE="Boom and Bust Republicans">Boom and Bust Republicans</A>   |   <B>Parallels: 1920s and 1990s</B></div> <div> </div> </td> </tr><tr> <td valign="top" height=445 BGCOLOR="#FFFFFF" TEXT="#080000"> <bR> <div> <B>PARALLELS 1920s and 1990s</B></div> <bR> <div> <B>PRIMARY POST WAR RECESSIONS</B></div> <bR> <div> 1920-1921 - following the First World War</div> <bR> <div> 1990-1991 - following the Cold War</div> <bR> <div> <B>PRECEDING WAR PROVIDES IMPETUS</B></div> <bR> <div> <U>1920s</U>: "The [first world] war, moreover, had prompted endless new inventions, some of which were not merely destructive but could afterwards be applied to peaceful service. So a war gave a great new impulse to the spirit of invention. In America, invention became almost a trade..." (Irving Fisher, <I>Booms and Depressions</I>, London: George Allen & Unwin, 1933, p.71).</div> <bR> <div> <U>Today</U>: "In economic terms, the period since 1940 has been equivalent to fifty years of war..." (James Dale Davidson & Sir William Rees-Mogg, <I>The Great Reckoning</I>, Revised Edition, London: Sidgwick & Jackson: 1992, p.330). </div> <bR> <div> "A large part of the explanation of the recovery in America's competitiveness lies with the trillions of dollars that American taxpayers have spent on military and space research over the past 50 years, and the more recent run-down in defence spending [that is, after the Cold War] which has transferred massive, leading-edge knowledge-based skills to industry" (Peter Brain, <I>Beyond Meltdown: The Global Battle for Sustained Growth</I>, Melbourne: Scribe Publications, 1999, p.229).</div> <bR> <div> <B>ACADEMIC IMPACT AND PATENTS</B></div> <bR> <div> <U>1920s</U>: "In America, invention became almost a trade, and something like mass production was brought to bear upon it. Captains of industry who had held the academic life in low esteem began to install laboratories...and hired university professors to run these laboratories... Accordingly, in the decade 1920-1929 more patents were granted in America than in its entire first century - the peak years being 1926 and 1929... Scientific management struck a new tempo. Efficiency engineers came into their own" (Fisher, pp.71-72).</div> <bR> <div> <U>Today</U>: "... America's Bayh-Dole act of 1980 ... is credited with kick-starting America's recent resurgence in technology. This cedes the patent rights that stem from work done using taxpayer' money to the participants involved, whether a university or a private company. The result, in America and elsewhere (the reform has been widely copied in Europe), has seen a surge in new high-tech businesses founded by academics" (The Economist, <I>Japan's technological woes</I>, March 4, 2000, p.91).</div> <bR> <div> "The number of patents granted in the United States has increased 60 percent over the last five years, and the number of patent applications has been far greater, said Brigid Quinn, a spokeswoman for the government's patent office... according to Josh Lerner, an economist at the Harvard Business School ... it seemed that innovation had increased in the United States in recent years and that corporate research labs, like I.B.M.'s, had become more focused on commercially exploitable ideas" (Steve Lohr, <I>I.B.M. Is First Company to Collect Over 3,000 Patents in a Year</I>, nytimes.com, January 10, 2002).</div> <bR> <div> <B>NEW ERA</B></div> <bR> <div> <U>1920s</U>: "John Moody, the financial analyst, gave the term cogency and dignity in 1928 when he argued that "we are living in a new era, and Wall Street, in its present condition and activity,... is simply reflecting this new era". According to Moody, it began around 1923 and owed its momentum to certain fundamental changes in economic and financial life. The war had made the United States a creditor nation and vastly increased production capacity and efficiency; the Federal Reserve had come into its own and stabilized the financial markets; corporations had absorbed principles of scientific management, learned to operate with thin inventories instead of overstocking, and reduced costs, through use of machinery and other devices. "No one", he concluded, "can examine the panorama of business and finance in America during the past half-dozen years without realizing that ... we have been going through an economic revolution of the profoundest character"" (Maury Klein, <I>Rainbow's End: The Crash of 1929</I>, New York: Oxford University Press, 2001, pp.125-26).</div> <bR> <div> "...Paul Clay, of Moody's Investor Service. Speaking on "injurious financial fallacies" on December 28, 1928...observed: First among these fallacies is the new era delusion as typified by the famous dictum, 'This is a new era. Statistics of the past don't count.' Every period of great prosperity is considered to be a new era and so much better fortified to give promise of permanence” (James Dale Davidson & Sir William Rees-Mogg, <I>Blood in the Streets</I>, London: Sidgwick & Jackson, 1988, p.192).</div> <bR> <div> <U>Today</U>: "Then, as now, there was talk of a new era, with electricity and the motor car playing the role of the Internet and the computer..." (The Economist,<B> </B><I>Wall Street Crash</I>, October 27, 2001, p.84).</div> <bR> <div> "... newspapers and magazines overflowed with stories about the "new paradigm" - the notion that thanks to increased global competition (holding down prices) and technological advances (raising productivity), inflation and the business cycle are dead. The advanced economies, in other words, could look forward to uninterrupted years of strong growth and low inflation, and the exuberance of equity prices around the world was thereby explained" (The Economist, <I>Will the world slump?</I> November 15, 1997, p.15).</div> <bR> <div> ""The surprising thing is just how strong the markets are," said Merrill Lynch equity strategist Hugh Dougherty. "We are genuinely in uncharted territory - there are no chart points or critical levels we can refer to"" (Nic Hopkins, <I>Markets reach for highs</I>, WEA, March 13, 1999, p.51).</div> <bR> <div> <B>CAPITAL INVESTMENT</B></div> <bR> <div> <U>1920s</U>: "Throughout the twenties production and productivity per worker grew steadily: between 1919 and 1929, output per worker in manufacturing industries increased by about forty-three per cent. Wages, salaries, and prices all remained comparatively stable, or in any case underwent no comparable increase. Accordingly, cost fell and with prices the same, profits increased. These profits sustained the spending of the well-to-do, and they also nourished at least some of the expectations behind the stock market boom. Most of all they encouraged a very high level of capital investment. During the twenties, the production of capital goods increased at an average annual rate of 6.4 per cent a year... A large and increasing investment in capital goods was, in other words, a principle device which the profits were being spent..." (John Kenneth Galbraith, <I>The Great Crash 1929</I>, (London: Penguin Books, 1992), pp.192-193).</div> <bR> <div> "...the phenomenal growth of productivity ... was made possible by a staggering increase in capital investment..." (Paul Johnson, <I>Modern Times</I>, (London: Weidenfeld & Nicolson, 1994), pp.237-241).</div> <bR> <div> <U>Today</U>: "Several unsustainable imbalances are evident today in America ... [including] ... an unusually high level of investment, which has been growing at its fastest rate since the 1920s" (The Economist, <I>America's long business cycle</I>, December 5, 1998, p.100).</div> <bR> <div> "For the last decade, even as the United States economy has soared, corporate profit has paled next to the boom in companies' spending on new computers and software, industrial machinery and buildings. With the help of bank loans, bonds and most of the time, a willing stock market, companies since 1991 have bought almost $9 trillion worth of equipment, lifting productivity and sustaining the longest economic expansion in American history" (David Leonhardt, <I>Corporate Capital Spending Is Slowing Broadly</I>, nytimes.com, November 30, 2000).</div> <bR> <div> "Andrew Smithers, a London-based economist, points out that, contrary to received wisdom, it is investment from firms rather than individuals that has been the mainstay of America's stockmarket boom. That situation is reminiscent of Japan in the late 1980s, just before its bubble burst" (The Economist, <I>Brazil scares the market</I>, January 16, 1999, p.69).</div> <bR> <div> "For the past five years, business investment has shot up at an average of 10% a year in real terms, as fat profits and easy finance have encouraged firms furiously to retool and expand... As a result, borrowing by firms has shot up" (The Economist, <I>How slow a slowdown</I>, October 17, 1998, p.33).</div> <bR> <div> "America's economy is now especially vulnerable to a sharp reduction in investment by firms. Much attention has been lavished on American consumers' alarming recent habit of spending more than they earn. But American companies also have a "negative savings ratio", points out David Mackie, an economist at J.P Morgan, because they have been borrowing so much to invest. British and continental European companies, in contrast, have not paid for capital spending in the 1990s by getting deeper into debt" (Economist, <I>Company profits in trouble</I>, January 2, 1999, p.68).</div> <bR> <div> "New data from the Fed shows that America's financial sector borrowed a record $1.1 trillion last year, up from $653 billion in 1997" (The Economist, <I>Record American share prices</I>, March 20, 1999, p.78).</div> <bR> <div> "That might be fine if the debt had been used mainly to finance investments that would boost future productivity and profits. But about half of all corporate borrowing over the past two years has been used to buy back shares, which has helped prop up the stockmarket" (The Economist, <I>Would a stockmarket crash bring recession?</I> April 22, 2000, p.80).</div> <bR> <div> "Running up debts to finance investment may make sense in conditions of rapid economic growth. But, when growth slows and profitability tumbles, heavy indebtedness will force companies to make ferocious cuts in capital spending. Mr Mackie thinks this could be severe enough to push the American economy into a deep recession. A similar thing happened in Japan, that other "miracle economy", in the early 1990s. Companies had been borrowing and investing as though the economy would grow for ever. Its economy is still paying the price. Japan's problems have mired Asia in recession; if America's economy went down the plughole, the rest of the world would probably follow suit" (The Economist, <I>Company profits in trouble</I>, January 2, 1999, p.68).</div> <bR> <div> <B>FOREIGN INVESTMENT</B></div> <bR> <div> <U>1920s</U>: "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" (Davidson & Rees-Mogg, p.207).</div> <bR> <div> <U>Today</U>: "... global investor's seven-year ardour for the American economy ... helped to propel the United States' bull market of the late 1990s...</div> <bR> <div> "Foreigners sent money to the US assuming they could get better returns than anywhere else... In 1997, the US imported a net $254 billion in foreign capital in all forms, according to the Commerce Department, twice the record set during the 1980s expansion. And last year, foreigners sent $US455 billion net to the US. The seemingly invincible dollar encouraged foreigners to keep buying US stocks, bonds, companies, factories and real estate...</div> <bR> <div> "Today [foreign] investors hold 40 per cent of US Treasury marketable debt, 24 per cent of the US corporate bonds and 13 per cent of US equities, according to estimates by money manager Bridgewater Associates of Westport, Connecticut" (Jacob Schlesinger & Craig Karmin, <I>$US all out of love</I>, from The Wall Street Journal, reported in the AFR, June 5, 2002, p.61).</div> <bR> <div> <B>CONSUMER SPENDING</B></div> <bR> <div> <U>1920s</U>: "The easy conditions in consumer credit markets...had been one of the hallmarks of the prosperity of the twenties..." (Michael A. Bernstein, <I>The Great Depression, Delayed Recovery and Economic Change, 1929-1939</I>, Cambridge: Cambridge University Press, 1987, p.171).</div> <bR> <div> "This new social arms race ["keeping up with the Joneses"] required a steady flow of money or new forms of credit like installment buying. In effect, advertisements created an appetite that installment buying made it possible to satisfy at once. The practice of buying on time had been around since the late nineteenth century, but it had been used mainly by the poor or to handle large purchases. However, even proper middle-class people who had shunned debt because if violated the Protestant work ethic of saving were enticed into using the credit offered by department stores long before the war. During the 1920s people of all classes happily bought items of every kind on the installment plan. Economist R.A. Seligman estimated in 1927 that more than 75 percent of automobiles were purchased this way and that by 1925 more than 70 percent of furniture, 75 percent of radios, 90 percent of pianos, 80 percent of phonographs, and about 80 percent of household appliances were acquired by time payments.</div> <bR> <div> "This ingenious device did more than solve the problem of providing buyers with the mean of keeping up with a never-ending parade of goods and changing fashions. It also elevated credit into a sizable industry. Prior to World War I the sources of consumer credit consisted of a few banks and lending societies, pawnbrokers, department stores, some merchants, and purveyors of expensive goods like furniture, pianos, and sewing machines. During the 1920s a specialized new breed of financial institutions, the sales finance company, emerged to dominate consumer credit. Fewer than a hundred firms existed in 1920; by 1928 there were more than a thousand...</div> <bR> <div> "As the old inhibitions against installment buying broke down and the new credit companies reaped large profits, traditional banks soon got the message. Charley Mitchell led the charge into the new era when National City Bank established in 1928 a Personal Loan Department to lend up to $1,000 "without collateral to a salaried men and women" at 6 percent interest, repayable within a year... One observer hailed it as "a new instrument of credit ... like the installment purchase plan, another encouragement to average men and women to go into debt and then work themselves out again" (Maury, pp.11-12).</div> <bR> <div> "Millions of families were in debt for the first time, buying on the installment plans: personal debt had more than doubled, from $3.1 billion in 1921 to $6.9 billion in 1929. The incipient recession in 1929 had already made consumers think twice about taking on more debt, because suddenly incomes began to look less assured... In 1930, even before earnings declined, and while government spending and investment were still rising, consumer spending suffered a spectacular 10 percent fall" (Harold Evans, <I>The American Century</I>, New York: Alfred A. Knofe, 1999, p.223).</div> <bR> <div> "It was painfully clear that the health of the economy depended on installment buying, which by one estimate totaled $8 billion in 1929 and gave employment to several million people" (Maury, p.259).</div> <bR> <div> <U>Today</U>: "Consumer spending has risen almost twice as fast as income over the past four years, as capital gains have encouraged consumers to run down past savings and to expand their borrowings" (The Economist, <I>Charge-card monopolies</I>, October 10, 1998, p.37).</div> <bR> <div> "...consumer installment debt outstanding - $1.437 trillion - remains high" (Henry J. Pulizzi, <I>Increase in consumer Credit in May was biggest since January</I>, dowjones.com, July 10, 2000).</div> <bR> <div> "Consumer borrowing has soared from $770 billion outstanding in 1992..." (The Economist, ibid.).</div> <bR> <div> "The psychology of richer Americans, who own most of the shares, is particularly important: families earning above $50,000 a year account for nearly half of all consumer spending..." (The Economist, <I>How slow a slowdown</I>, October 17, 1998, p.34).</div> <bR> <div> "... the average U.S. household now sports 13 credit or charge cards, and carries $7,500 in credit-card balances, up from $3,000 in 1990... Nowadays, even a poor credit history doesn't preclude someone from being deluged with offers of credit..." (Gregory Zuckerman, <I>Borrowing levels reach a record, sparking debate</I>, dowjones.com, July 5, 2000).</div> <bR> <div> "The most striking evidence of why this cannot last is that total household saving turned negative in September for the first time in 60 years... As a result, the combined private saving rate (the gap between total private income and spending) has fallen to levels well below anything ever seen before in America.</div> <bR> <div> "Total [American] household debt has jumped from 85% of personal income in 1992 to 103% last year... The debt of Japanese households rose from 89% of their disposable income in 1985 to 112% in 1989” (The Economist: <I>Special: Debt in Japan and America</I>, January 22, 2000, p.22).</div> <bR> <div> "Clearly, spending cannot exceed income for ever. The share-price gains which have been driving growth must, eventually, come to an end" (The Economist, <I>The world's forgotten danger</I>, November 14, 1998, p.13).</div> <bR> <div> "The American economy is being propped up by consumer borrowing. If that borrowing collapses, a more prolonged downturn will follow" (The Economist, <I>Dicing with debt</I>, January 26, 2002, p.25).</div> <bR> <div> <B>SHAREMARKET MORE THAN TRIPLES</B></div> <bR> <div> <U>1920s</U>: "The Dow  Jones between 1923 and 1929 rose 344%" (Grep Ip, <I>Market pace slows after 10-year run, may not pick up</I>, dowjones.work.com, September 6, 2000).</div> <bR> <div> <U>Today</U>: "One of the stump slogans of Al Gore, the vice-president, is that the Democrats have overseen a tripling of the stock market..." (Andrew Hill, <I>Wall Street crush</I>, ft.com, August 29, 2000).</div> <bR> <div> "Between its 1994 low and its January 2000 high, the Dow rose 226%" (Ip, ibid.).</div> <bR> <div> "... and the tech-heavy Nasdaq Composite Index had leapt 571% when it reached its high in March [2000]" (E.S. Browning & Greg Ip, <I>Six myths that drove the boom in technology stocks</I>, dowjones.work.com, Oct. 2000).</div> <bR> <div> "In the five years to 1999, rising share prices boosted the wealth of American households by $10 trillion" (The Economist, <I>Special: America's economy</I>, December 9 , 2000, p.86).</div> <bR> <div> <B>SHAREMARKET PENETRATION</B></div> <bR> <div> <U>1920s</U>: "In a population of 120 million, there was a total of 1.5 million investors, and only around 600,000 speculators - those who borrowed money to gamble" (Evans, p.231).</div> <bR> <div> Only 1.25% of the American people "had an active association of any sort with the stock market... the striking thing about the stockmarket speculation of 1929 was not the massiveness of the participation. Rather it was the way it became central to the culture" (Galbraith, pp.102-103).</div> <bR> <div> "Twenty years earlier, when big business had become a target for reformers of many stripes, only about half a million Americans owned stocks or bonds. In those days a bull market might run two or three years at best before succumbing to panic and/or depression. This one survived for six years and showed no signs of slowing. "Most surprising of all," Moody stressed, "the incurable stock-market optimism ... as well as the army of innocent 'lambs', have for several years been led, not to proverbial slaughter, but to a continuous feast of speculative profits. For the first time within the memory of man, 'tips' galore have made good"" (Maury, p.126). (NB. Maury estimated that 15 million owned securities).</div> <bR> <div> <U>Today</U>: "The America public's fortunes are now more closely linked to the stockmarket: equities account for 50% of individuals' net worth, compared with 10% in 1929" (The Economist, <I>The Jay Gatsbys of today</I>, December 2, 2000, p.95).</div> <bR> <div> This is "up from 41% in 1995 and just 12% in 1975...  According to the Federal Reserve data crunched by Ned Davis Research, Americans put an average of 40% of their financial assets into stockholdings last year, up from 18% in 1989. The previous high of about 38% was recorded in 1968, a few years before the 1973-74 bear market wiped out countless portfolios and brought the percentage back below 14%" (Aaron Lucchetti, <I>Investors embrace risks and rewards of new economy</I>, dow jones.com, March 27, 2000).</div> <bR> <div> <B>MOM AND POP INVESTORS</B></div> <bR> <div> <U>1920s</U>: Investment trusts in the 1920s "were supposed to enable the 'little man' to 'get a piece of the action'. In fact they merely provided an additional superstructure of almost pure speculation..." (Johnson, p.239). </div> <bR> <div> <U>Today</U>: "The key to Wall Street's continuing miracle, bulls have started arguing, is...the new courage of small investors. The suggestion is that the rules that they have followed in the past may no longer apply. Having overcome a previously irrational fear of the risks of equities, they are pouring into them" (The Economist, <I>Stockmarkets: the equity premium</I>, July 18, 1998, p.17).</div> <bR> <div> <B>STELLAR PERFORMERS</B></div> <bR> <div> <U>1920s</U>: "The rise in stock prices was not uniform across all industries. The stock that went up the most were in industries where the economic fundamentals indicated there was cause for large amounts of optimism. They include airplane, agricultural implements, chemicals, department stores, steel, utilities, telephone and telegraph, electrical equipment, oil, paper, and radio. These were reasonable choices for expectations of growth" (Harold Bierman, <I>The Great Myths of 1929 and the Lessons to be Learnt</I>, (New York: Greenwood Press, 1991), p.32).</div> <bR> <div> <U>Today</U>: "The growing gap between a few leading shares and the rest makes sense. Last year, most of the 50 biggest S&P 500 shares delivered higher profits, whereas the earnings of nearly two-thirds of the remaining 450 fell. The average p/e of the 100 biggest S&P 500 companies - around 32 times forecast 1999 profits - is well above the 19 times for the smallest 100. In other words, investors expect continued faster earnings-growth from giant firms like Microsoft and General Electric" (The Economist, <I>Record American share prices</I>, March 20, 1999, p.77).</div> <bR> <div> <B>LATEST TECHNOLOGY</B></div> <bR> <div> "The similarities between the Radio phenomenon of the 1920s and the Internet of the 1990s are painfully obvious. From the inception, to the skeptical acceptance, to the public's infatuation and phenomenal growth, who could ever guess that we would be reading the same media "insights" 70 years later" (James B. Stack, <I>What's Left of the New Era? (Radio vs Internet)</I>, prudentbear.com, May 19, 2000).</div> <bR> <div> <B>P/E RATIOS AND SPECULATIVE SYMBOLS</B></div> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="00a8a970.png" border=0 width="650" height="407" ALT="WordPerfect 9 Document" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> (Graph from Ross Gittins, <I>Shares best long term? Think again</I>, SMH, July 8, 2000, p.46).</div> <bR> <div> <U>1920s</U>: "The traditional basis of judging the value of stocks was "ten times earnings." Some stocks in 1929 were selling at fifty times this, or more" (Harold Underwood Faulkner, <I>American Economic History</I>, 8th edition, New York: Harper & Brothers, 1960, p.644).</div> <bR> <div> Radio Corporation of America was "in many respects the speculative symbol of the time" (Galbraith, p.40); and "had never paid a dividend at all" (Johnson, p.239).</div> <bR> <div> "The company's earnings increased from $2.5 million in to nearly $20 million in 1928, and its stock climbed from a low of 1½ in 1921 to 85½ in early 1928. From there is was propelled by Meehan's pool operation to a high of 114 in 1929, <B>seventy-three times its earnings</B> and nearly seventeen times book value. RCA was highly leveraged, paid no dividends and expanded rapidly through acquisitions. In 1929 it was the most heavily traded stock on the New York Stock Exchange, where it was known as the "General Motors of the Air"" (Edward Chancellor, <I>Devil Take The Hindmost</I>, (New York: Plume, 2000), p.206).</div> <bR> <div> "... the stock of RCA, the only company that successfully built a profitable business from radio, lost 97 percent of its value between 1929 and 1933" (Burton G. Malkiel, <I>A Random Walk Down Wall Street</I>, Eight Edition, (New York: W.W. Norton, 2003, p.102).</div> <bR> <div> "For two decades after the crash, RCA stock hovered at around $US10. Even in 1960, when the company was stable its stock was $US78. The technology was revolutionary, the business was genuine and the company eventually delivered on its business plan. But early investors lost all the same" (David Crowe, <I>Investors could learn from radio's lessons</I>, AFR, March 3, 1999, p.11).</div> <bR> <div> <U>Today</U>: "[The] Nasdaq trades on a price/earnings ratio of 62 times trailing earnings. Between 1973 and 1995, its p/e never exceeded 21" (The Economist, <I>Technology shares stumble...</I>, April 8, 2000, p.85).</div> <bR> <div> "According to tried-and-tested measures, Wall Street today is more overvalued than at any other time in the past 150 years. In September 1929, just before the crash, the price-earnings ratio for the S&P composite index, calculated on a backward-looking ten-year moving average of earnings, reached 33. That was far higher than at the other two great market peaks of the past century, in 1901 and 1966 ... in all three cases, the markets went on to suffer prolonged (and, in 1929, catastrophic) slumps. In January [2000], the price-earnings ratio, calculated on the same basis, soared to 44. And this week after three months of extraordinary turbulence, it was once again at about that level" (The Economist, <I>Irrational share prices</I>, March 25, 2000, p.100).</div> <bR> <div> "For the first time in U.S. history firms in the top 20 ranking sold at triple-digit P-E ratios..." (Jeremy J. Siegel, <I>Stocks for the Long Run</I>, Third edition, (New York: McGraw-Hill, 2002), p.150).</div> <bR> <div> "By the spring of 1996, new Internet stocks were flooding the U.S. stock market. In April, three providers of Internet browser services were floated on the Nasdaq Stock Exchange. The most successful of these, Yahoo!, a company founded a year earlier, which boasted meagre quarterly sales of $1 million, soared to a 153 percent premium on its first day (the third-greatest rise in history), giving it a market capitalisation of $850 million" (Chancellor, p.150).</div> <bR> <div> "In March 2000 ... Yahoo! was selling <B>over</B> <B>600 times earnings</B>... Yahoo! declined more than 97 percent from its peak of $250 a share in January 2000 ... to a trough of $8 in September 2001" (Siegel, p.158).</div> <bR> <div> <B>INVESTMENT TRUSTS AND MUTUAL FUNDS</B></div> <bR> <div> <U>1920s</U>: "The most notable piece of speculative architecture of the late twenties, and the one which, more than any other device, the public demand for common stocks was satisfied, was the investment trust or company" (Galbraith, p.72).</div> <bR> <div> "We have had a tremendous growth in investment trusts lately by which the small investor can put in a thousand dollars and have his investment scattered among such stocks as American Telephone and Telegraph, United States Steel, etc. His thousands dollars are spread among the whole lot of them so there is not very much risk of loss in the long run" (Edmund Platt, vice-governor of the Federal Reserve Board, before the Senate Committee hearings on Banking and Currency in 1928, quoted by Bierman, p.22).</div> <bR> <div> "During 1928 an estimated 186 investment trusts were organized; by the early months of 1929 they were being promoted at the rate of approximately one each business day, and a total of 265 made their appearance during the course of the year" (Galbraith, p.75).</div> <bR> <div> <U>Today</U>: "The rise of the mutual fund is perhaps the greatest phenomenon of the US financial industry in the past 20 years... More than 65 million Americans (and 37 per cent of households) invest in managed funds" (Jeremy Duffield, <I>Don't ignore this threat to savings</I>, WEA, Jan 2-3, 1999, p.23).</div> <bR> <div> "Supposedly, mutual funds are the investment vehicles for the small saver: user-friendly ways to acquire a diversified stake in the stockmarket" (The Economist, <I>Requiring ratings for mutual funds</I>, August 22, 1998, p.58).</div> <bR> <div> Around 1,690 new mutual funds were launched in 1997, averaging around 4.5 for each day of that year, compared with around 1050 in 1998 though they have slowed so far in 1999 (Bloomberg, <I>Mutual finds growth slows</I>, Australian Financial Review, March 31, 1999, p.37).</div> <bR> <div> "The number of mutual funds has more than doubled since the end of 1993 to 11,758, as the assets of the industry ballooned to $US5.5 trillion ($8.6 trillion) today from almost $US2.1 trillion over the past five years, according to Wisenberger...an industry research group in Rockville, Maryland" (ibid.).</div> <bR> <div> "...the assets of mutual funds overtook those of banks last year" (The Economist, <I>Fed up, not Fed down</I>, March 27, 1999, p.19).</div> <bR> <div> <B>MARGIN TRADING AND LEVERAGE</B></div> <bR> <div> <U>1920s</U>: "Two new and sinister elements emerged: a vast increase in margin-trading and a rash of hastily cobbled-together investment trusts. Traditionally, stocks were valued at about ten times earnings... by 1929 some stocks were selling at 50 times earnings. As one expert put it, the markets were 'discounting not merely the future but the hereafter'. A market-boom based on capital gains is merely a form of pyramid selling. The new investment trusts, which by the end of 1928 were emerging at the rate of one a day, were archetypal inverted pyramids. They had what was called 'high leverage' through their own shrewd investments, and secured phenomenal growth on the basis of a very small plinth of real growth... and the 'high leverage' worked in reverse once the market broke.</div> <bR> <div> "It is astonishing that, once margin-trading and investment-trusting took over, the Federal bankers failed to raise interest rates and persisted in cheap money..."  (Johnson, pp.237-241).</div> <bR> <div> <U>Today</U>:  "The booming US stock market is...highly leveraged. Margin debt, which is the credit extended to buy shares, is at its highest level as a percentage of GDP since the 1920s" (Max Walsh, <I>Bad vibrations on the fault line</I>, SMH, February 16, 1998, p.37).</div> <bR> <div> "Borrowing by clients of New York Stock Exchange member firms rose 5 per cent to a record $278.5 billion in March, the Big Board said today. It's also never been higher as a percentage of the market, according to investment research firm TrimTabs.com. "When this happens, it signals a speculative excess and historically a market top," said Charles Biderman, president of TrimTabs.com.. Margin debt now equals 1.54 percent of the market value of U.S. companies, the biggest ever under the current rules, which date to 1974... It stood at 1.37 percent in September 1987, a month before the crash that sent the Dow Jones Industrial Average down 23 percent in one day" (Nick Olivari, <I>Record Margin Borrowing Signalled Rapid Market Selloff</I>, Bloomberg.com, April 14, 2000).</div> <bR> <div> <B>MONETARY POLICY</B></div> <bR> <div> <U>1920s</U>: "Although the amount of money in circulation remained stable ... credit was expanded from $45.3 billion on June 30, 1921 to $73 billion in July 1929, a 61.8 percent expansion in eight years. The White House, the Treasury ... the Congress, the federal banks, and the private banks too combined to inflate credit. This would not have mattered if interest rates had been allowed to find their own level, that is if the manufacturers and farmers who borrowed money had paid interest at the rates savers were prepared to lend it. But, again, the same combination joined to keep interest rates artificially low. It was the stated policy of the Federal Reserve not only to 'enlarge credit resources' but to do so 'at rates of interest low enough to stimulate, protect and prosper all kinds of legitimate business'" (Paul Johnson, <I>A History of the American People</I>, London: Weidenfeld & Nicholson, 1997, pp.607-608).</div> <bR> <div> <U>Today</U>:   "James Grant, editor of <I>Grant's Interest Rate Observer</I>, a financial newsletter ... accuses the Fed of having inadvertently pursued an over-expansionary monetary policy that helped to fuel the bull market. Its mistake, he argues, was to aim for price stability, rather than to allow prices to fall in line with productivity gains. This is similar to the 1920s - also a decade of rapid technological progress - when the Fed propped up product prices with easy credit, which then inflated share prices" (The Economist, <I>Central banking</I>, November 14, 1998, p.23).</div> <bR> <div> "In America...monetary policy has been too loose over the past couple of years. If interest rates had been raised earlier to check the stockmarket and to curb the growth in consumer spending, America's economy might now be in better balance. True, the fragile state of the world economy argues against a rise in American rates right now; but in retrospect the Fed was probably wrong to cut rates so eagerly last year. The bubble will eventually burst anyway, but it would have been better to prick it sooner at the cost of a mild recession than to risk a deeper recession later" (The Economist, <I>Dollar danger</I>, January 9, 1999, p.14).</div> <bR> <div> <B>BASEBALL</B></div> <bR> <div> <U>1927</U>: Babe Ruth: "Between 1920 and 1934, Babe's performance as a batter for the New York Yankees set records that stood for decades. In 1927, he hit 60 home runs during a 154-game stretch. This record stood until 1961, when it was broken by Roger Maris (baberuth.com).</div> <bR> <div> <U>1998</U>: Mark McGwire:"McGwire captivated the nation in 1998 by hitting 70 homers to break Roger Maris' 37-year-old record of 61" (mlb.com).</div> <bR> <div> (Roger Maris broke Babe Ruth's record for the most home runs in a season in 1961. The next year a bull market lasting nearly three and a half years began; America was soon to be dragged into Vietnam. In 2001 Barry Bonds broke McGwire record and a bull market began in 2002; America was soon to be dragged into Iraq).</div> <bR> <div> <B>GLOBAL CRISIS THEN BOOM</B></div> <bR> <div> <A HREF="id72.htm" TARGET="_top" TITLE="192931 and 200002">1929-31 and 2000-02</A></div> <bR> <div> <B>NOTES ON FOLLOWING PARALLELS</B></div> <bR> <div> While history does not repeat exactly certain recurring patterns may be identified because human nature does not change. The scenario of "Global Crisis-Boom-Bust" has been a characteristic of the "mania" stage at the end of bull markets, e.g. the post Crimean-, American Civil-, WW1-war booms. In the "bubble" period of the post Cold War boom there seems to be a reasonably strong double pattern contained in this scenario. Therefore the years 2000 and 2001 share a number of significant characteristics with 1929. Some of today's parallels may occur prior to or after a corresponding event of the 1920s. This is in keeping with the methodology of typology employed by Future Watch in identifying repeat patterns in history.</div> <bR> <div> Following the 'double' pattern there are some signals that a 'second' boom and or bubble is being inflated.</div> <bR> <div> Therefore the next section of parallels with the 1920s-1930s refer to the 'boom and bust' of the first bubble of Today. This period covers, generally, 2000 to late 2002-early 2003. The Dow Jones reached its low, from its all-time high, on October 9, 2002. Then followed a rally followed by a downturn, with a bottom of 7524 on March 11, 2003. This broke the pattern of lower lows.</div> <bR> <div> Two dates, therefore, are significant markers for the first stage of the second bubble: October 9, 2002 and March 11, 2003.</div> <bR> <div> The first date: James Stack, from InvestTech Research, dates the upturn from 2002:</div> <bR> <div> "After just passing its one-year anniversary on October 9, this bull is not very old in historical terms... [but] based on purely historical odds, we should be watching out for a bull market peak after next year's election. [No bull market since 1947 has lasted less than 24 months]" (<I>Market Analyst</I>, Vol.3, Is.14, October 17, 2003, p.3).</div> <bR> <div> The second date: If we roughly compare 2002 and 1930, (that is, the years following 2001 and 1929 respectively), the rally from October 9, 2002 would parallel the rally from the December 16, 1930 (Dow 157); and the rally top of November 27, 2002 (Dow 8931) would be paired with February 24, 1931 (Dow 194). In the downswing from November, 2002 'a' trend was broken with the 1930s - the low of this downswing (Dow 7524) was higher than the preceding low (Dow 7286). In 1931 the downswing passed the low of the preceding downswing on April 22, 1931 (Dow 156) and established a low on May 31 (Dow 128).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>THE YEAR OF THE CRASH</B></div> <bR> <div> <B>CREDIT CONTRACTION</B></div> <bR> <div> <U>1928</U>: "The credit inflation petered out at the end of 1928..." (Johnson, p.613).</div> <bR> <div> <U>2000</U>: "Not since 1989 have speculative-grade credit rating revisions incurred become so worrisome of deterioration... The marked worsening of the U.S. high-yield corporate credit rating revisions in 1989 coincided with the approach of the credit crunch and recession of 1989-1992" (Staff, Moody's: <I>U.S. Corporate Credit Quality Continued to Weaken In 3Q</I>, dowjones.work.com, October 19, 2000).</div> <bR> <div> "Some credit experts now fear that the "new economy" will be bad for corporate debt of all sorts, because it will neither deliver profits to new Internet companies nor allow "old economy" firms to continue to be as profitable as in the past. However fast the economy grows, under this scenario, profits will be destroyed (and thus bond defaults will rise). There is also a danger that the markets may turn its fears into a self-fulfilling prophecy by starving needy companies of cash and forcing them over the edge... Moreover, bank regulators are becoming tougher with banks about loose lending practices, which could mean that less credit is available at just the same time as the bond market is shut..." (The Economist, <I>Junk bonds holed</I>, November 11, 2000, p.106).</div> <bR> <div> "A recent Fed survey found that a net 44% of banks reported a tightening of lending standards to firms in November, the highest since November 1990, in the middle of America's last recession. That tightening reflects a deterioration in credit quality... a drying up of credit is dangerous for an expansion built on investment and easy access to capital. A combination of a higher cost of capital and lower profits may force firms to slash their capital spending" (The Economist, <I>Special: America's economy</I>, December 9, 2000, p.85).</div> <bR> <div> The credit contraction in 2000 came after the crash of the Nasdaq as opposed to 1928 when it proceeding the crash in 1929. The 'petering' out of credit inflation, beginning at the end of 1928, was followed in mid-1929 by a downturn in economic activity. </div> <bR> <div> The credit contraction after the Nasdaq in 2000 was followed by America's descent into recession in March 2001 according to the criteria of the National Bureau of Economic Research.</div> <bR> <div> <B>FED MONETARY POLICY DISSENT</B></div> <bR> <div> <U>1929</U>: "On 14 February 1929, the New York Federal Reserve Bank proposed that the rediscount rate be raised from five to six per cent to check speculation. The Federal Reserve Board in Washington thought this a meaningless gesture which would only increase rates to business borrowers. A long controversy ensued in which President Hoover sided with the Board against the Bank. The rate was not increased until late in the summer" (Galbraith, pp.57-58).</div> <bR> <div> <U>2000</U>: "Only the dominance of Mr Greenspan has prevented a revolt by Fed associates who have been uncomfortable with the recent looseness of monetary policy. Two notable hawks are Larry Meyer, a Fed governor, and Jerry Jordan, president of the Cleveland district Fed. In speeches and articles, both have given the impression that they think interest rates should have been increased more rapidly" (The Economist, <I>Falling euro, bad central bank?</I> May 6, 2000, p.91).</div> <bR> <div> <B>BRITISH RATE INCREASE</B></div> <bR> <div> <U>1929</U>: "On February 7 ... in Britain, the bank rate was raised to 5.5 per cent..." (Rees, p.36).</div> <bR> <div> <U>2000</U>: "After raising rates [to 6 percent] in February, the Bank of England kept interest rates on hold for the rest of the year" (Philip Coggan, <I>Building castles in the air</I>, ft.com, December 22, 2000).</div> <bR> <div> <B>MODEST SLOWDOWN BEFORE THE CRASH</B></div> <bR> <div> <U>1920s</U>: "... the summer of 1929 marked the beginning of the familiar inventory recession. The proof is not conclusive from the (by present standards) limited figures available... But a mild slump in department store sales in April could have been a signal for curtailment... the economy had weakened in the early summer well before the crash. This weakening can be variously explained. Production of industrial products, for the moment, had outrun consumer and investment demand for them. The most likely reason is that business concerns, in the characteristic enthusiasm of good times, misjudged the prospective increase in demand and acquired larger inventories than they later found they needed. As a result they curtailed their buying, and this led to a cutback in production" (Galbraith, p.192).</div> <bR> <div> "In June the indexes of industrial and of factory production both reached a peak and turned down. By October, the Federal Reserve index of industrial production stood at 117 as compared with 126 four months earlier. Steel production declined from June on; in October freight-car loading fell. Home-building, a most mercurial industry, had been falling for years, and it slumped still further in 1929" (Galbraith, p.111).</div> <bR> <div> "Until September or October of 1929 the decline in economic activity was very modest... until the market crash one could reasonably assume that this downturn movement might soon reverse itself, as a similar movement had reversed itself in 1927... There was no reason for suspecting disaster. No one could foresee that production, prices, income, and all other indicators would continue to shrink through three long and dismal years. Only after the market crash were there plausible grounds to suppose that things might now for a long while get a lot worse" (Galbraith, pp.112-113).</div> <bR> <div> "Nor was the economy of the United States in 1929 subject to such physical pressures or strain as the result of its past level of performance that a depression was bound to come. The notion that the economy requires occasional rest and resuscitation has a measure of plausibility and also a marked viability... In 1929 the labour force was not tired; it could have continued to produce indefinitely at the best 1929 rate. The capital plant of the country was not depleted. In the preceding years of prosperity, plant had been renewed and improved. In fact, depletion of the capital plant occurred during the ensuing years of idleness when new investment was sharply curtailed. Raw materials in 1929 were ample for the current rate of production. Entrepreneurs were never more eupeptic. Obviously if men, materials, plant, and management were all capable of continued and even enlarged exertions a refreshing pause was not necessary.</div> <bR> <div> "Finally, the high production of the twenties did not, as some have suggested, outrun the wants of the people. During these years people were indeed being supplied with an increasing volume of goods. But there is no evidence that their desires for automobiles, clothing, travel, recreation, or even food was sated. On the contrary, all subsequent evidence showed (given the income to spend) a capacity for a large further increase in consumption..." (Galbraith, pp.190-191).</div> <bR> <div> <U>2000</U>: "Consumer spending in April crept up at its slowest rate since July, according to a Commerce Department report..." (Dow Jones, <I>Spending checks hints at cooler US economy</I>, SMH, May 30, 2000, p.34).</div> <bR> <div> "... the Commerce Department reported today that orders for U.S. factory goods fell 4.7 percent in April, the biggest decline in a decade" (Vince Golle, <I>U.S. economy: 4.1% Jobless rate  eases rate pressure</I>, bloomberg.com, June 3, 2000).</div> <bR> <div> It appears "that the [US] domestic economy, which has grown rapidly for more than nine years, is poised to cool..." (Dow Jones, <I>Manufacturing</I>,<I> construction spending data point to slowing economy</I>, dowjones.com, June 1, 2000).</div> <bR> <div> "Retail inventories ...[in May]... posted their strongest gain since 1995, rising 1.4%, suggesting that retailers may have been overly optimistic about the pace of sales when ordering for early summer" (dowjones.com, <I>Business inventories rose 8%</I>, July 17, 2000).</div> <bR> <div> In the second quarter "A large chunk of the increased output went into inventories, rather than flying off the shelves, as consumer spending lost some of its recent zip. Unless consumers regain their appetite soon, growth is likely to slow again as production is curbed to reduce inventories to normal levels" (The Economist, <I>The Greenspan effect on the markets</I>, August 5, 2000, p.71).</div> <bR> <div> "... the National Association of Purchasing Management said U.S. manufacturing contracted in August dropped for the first time since January 1999" (Robert Dieterich, <I>U.S. stocks rise a 5</I><I>th</I><I> week as jobs report boost rate optimism</I>, bloomberg.com, September 1, 2000).</div> <bR> <div> "U.S. unemployment rose in August... Construction spending fell in July for the fourth straight month... Today's reports come on the top of previous indicators that consumer spending grew in the second quarter at the slowest pace in three years, that home resales slumped in July and that factories reported the largest-ever drop in new orders in July" (Siobhan, <I>U.S. Economy: Jobs, factory reports points to slowdown</I>, bloomberg.com, September 1, 2000).</div> <bR> <div> <B>25%  RALLY TO MARKET TOP</B></div> <bR> <div> <U>1929</U>: From 297.41 on May 31 to 381.17 on September 3, the market top, the Dow Jones Industrial Average rose 28 percent.</div> <bR> <div> Galbraith pointed out that "in June the indexes of industrial and of factory production both reached a peak and turned down". The economic peak was in the second quarter of 1929 with the Dow reaching its peak in the following quarter. The crash coming in the fourth quarter.</div> <bR> <div> <U>2000</U>: The Nasdaq rose "25 per cent in the first quarter of this year", (John Durie, <I>Wall Street rediscover the meaning of risk</I>, October 14-15, 2000, p.41). Market top for the Nasdaq was 5048.62 on March 10, 2000.</div> <bR> <div> "The peak in economic activity was the fourth quarter of 1999: real G.D.P. growth of 8.3 percent. The peak in terms of profit growth was also the fourth quarter of 1999" (Abbey Joseph Cohen, <I>Wall Street’s Prescription in a Convalescing Economy</I>, nbr.com, January 2, 2002). The crash came in the second quarter.</div> <bR> <div> <B>6% DISCOUNT RATE</B></div> <bR> <div> <U>1929</U>: The discount rate, a key policy instrument of the Federal Reserve, was raised to 6 percent on August 8, 1929; effective from August 9. This occurred twenty-six days before the Dow Jones peaked and eighty-two days before the October 29, 1929 crash.</div> <bR> <div> <U>2000</U>: The discount rate was raised to 6 percent and the federal funds rate was raised to 6.5 percent on May 16, 2000.</div> <bR> <div> Today the federal funds rate has replaced the discount rate as a key policy instrument. The federal funds rate was raised to 6 percent on March 21, 2000. This was eleven days after the peak of the Nasdaq and twenty-four days before the April 14, 2000 crash. </div> <bR> <div> <B>MARKET WARNING</B></div> <bR> <div> <U>1929</U>: "Speaking before his Annual National Business Conference on 5 September [1929], Roger Babson observed, 'Sooner or later a crash is coming, and it may be terrific...factories will shut down...men will be thrown out of work...the vicious circle will get in full swing and the result will be a serious business depression'" (Galbraith, p.108).</div> <bR> <div> <U>2000</U>: ""Just as forecasters seriously underestimated the growth potential of the US economy in the 1990s, they are underestimating the possibility of a steep decline in the near future," says Michael Mandel, economics editor of <I>Business Week</I> in his new book, <I>The Coming Internet Depression: Why the High-Tech Boom will Go Bust, Why the Crash Will be Worse Than You Think, and How to Prosper Afterwards</I>. Mandel argues that sapped investor confidence will be self fulfilling, will actually cause the technology sector to fail, because the venture capital investment that has been driving innovation will follow the stock market’s lead and become risk averse. Innovation will dry up, and stock markets will crumble further in a vicious circle. </div> <bR> <div> ""Instead of a rising stockmarket generating more funds for financing innovation, a falling market will reduce the risk capital for new start-ups. That will lead to slower technical innovation and productivity growth, depressing the stockmarket further. Investment will fall ... and so will unemployment," he warns" (John Davidson, <I>Serious trouble with tech stocks</I>, AFR, October 7-8, 2000, p.26).</div> <bR> <div> (NB: "The failure of the capital markets after 1929 virtually halted the transition in economic structure that had been in progress for over two decades" (Bernstein, p.46)).</div> <bR> <div> <U>2001</U>: "I'm going to tell you two things you don't want to hear. We're going to have a recession and not even Alan Greenspan can prevent it. Why a recession? Because demand is collapsing. Investment spending has plunged and consumption is slowing rapidly. The investment swoon follows from the stock market bubble that provided free capital for any company that wanted it. Last summer, the classic signs of over investment, an inability to realize profits on the new capacity, emerged. Now investment is falling at a 14 percent annual rate, the fastest drop since the 1982 recession. Consumption growth has been halved since last year and has only been sustained by borrowing that has pushed household debt to a record high while household net worth has fallen by 10 percent, over $4 trillion. Companies desperately trying to slow the fall in profits are cutting workers. That will hurt consumer confidence. The Fed can't prevent this recession. Lower interest rates won't boost investment and the global economy is slowing. The drop in investment didn't occur because interest rates were too high. It occurred because there was too much unprofitable capital equipment in place. Congress needs to pass broad investment tax credits and accelerated depreciation measures to encourage investment while the Fed needs to keep cutting interest rates. Our friends in Japan and Europe need to get busy stimulating their economies. If these things happen, maybe next summer we'll be breathing a sigh of relief at the end of a pretty tough recession" (John Makin, <I>Brace Yourselves For A Recession</I>, nbr.com, August 13, 2001).</div> <bR> <div> <B>SUMMER RALLY AND COLLAPSE</B></div> <bR> <div> <U>1929</U>:  "There was no summer lull in Wall Street. [<I>The New York Times</I> industrial index gained ] ... 110 points in three months - from 339 on the last day of May to 449 on the last day of August - [this] meant that during the summer values had increased, over-all, by nearly a quarter" (Galbraith, p.91).</div> <bR> <div> The Dow Jones from the September 3 peak to October 28, 1929 was down 31.6 percent.</div> <bR> <div> "Labour Day brought the summer of 1929 to its conventional end on 2 September. There was a severe heat wave, and on the evening of the holiday returning motorists tied up the roads around New York for miles. In the end many were forced to abandon their vehicles and make their way home by train or subway. On 3 September the city continued to swelter in what the Weather Bureau reported was the hottest day of the year" (Galbraith, p.106).</div> <bR> <div> "On Tuesday, 29 October ... the most devastating day in the history of the New York stock market ... Volume was immensely greater than on Black Thursday... The <I>Times</I> industrial averages were down 43 points, cancelling all of the gains of the twelve wonderful months preceding" (Galbraith, p.133).</div> <bR> <div> <U>2000</U>: The Nasdaq from 3,400.9 points on May 31 to 4,234.3 on September had increased 24.5 percent.</div> <bR> <div> "The Nasdaq has now fallen more than half from its high set in March and, after a summer rally, almost 45 percent from September 1" (Alex Berenson, <I>Market Paying Price for Valuing New-Economy Hope Over Profits</I>, nytimes.com, December 21, 2000).</div> <bR> <div> "It was the biggest volume ever on the New York Stock Market" (<I>Tech shares battered on Wall Street</I>, news.bbc.co.uk, November 30, 2000). [The trading volume of November 30 has since been exceeded].</div> <bR> <div> "... the technology-heavy Nasdaq composite index ... plunged 22.9 percent in November, finished its worst month since the crash of October 1987... and it is at its lowest level since August 12, 1999, wiping out all of the 97 percent rally to its March high" (Jonathan Fuerbringer, <I>Stock Sell-Off Accelerates and Broadens</I>, nytimes.com, December 21, 2000).</div> <bR> <div> The combined value of the Nasdaq firms on March 10 was $6.711 trillion. On December 20 the combined values was $3.399 trillion - a loss of $3.312 trillion (<I>Tech shares battered on Wall Street</I>, news.bbc.co.uk, November 30, 2000).</div> <bR> <div> <U>2001</U>: With a suckers' rally likely on the Nasdaq in 2001, following the 1929-30 example, see below, FW thought it was also possible for a summer rally of around 28 percent on the Dow. But the Dow instead of a summer rally experienced a spring rally rising 20 percent from March 22 to May 21 - 9,389.48 to 11,337.92. (Whereas the Dow was down less than one percent from the opening of the year at the start of the summer rally in 1929 the Dow in 2001 was down 14.8 percent from the opening of the year at the start of the spring rally).</div> <bR> <div> The Dow from the May 21 peak to September 10, 2001 was down 15.3 percent.</div> <bR> <div> "A five-day heat wave reached a withering peak across a wide swath of the Northeast yesterday as temperatures soared to 103 in New York City, 105 in Newark and 100 or more in many cities, shattering records and straining power supplies across the region on the hottest day of the year...</div> <bR> <div> "Hundreds of passengers were caught on a stalled train in Connecticut, countless drivers were trapped in over-heated cars..." (Robert D. McFadden, <I>Scramble to Avoid Blackouts as Record heat Wilts Region</I>, nytimes.com, August 10, 2001).</div> <bR> <div> "Prospects for the markets had seemed bleak when the terrorist attacks shut down Wall Street for four days. The World Trade Center collapse left a swath of New York's financial district in rubble and the rest dusted with ash. When the New York Stock Exchange reopened Sept. 17, the Dow recorded its biggest single-day point drop, 684.81 points, or 7.1 percent. The index hit a three-year low on Sept. 21" (Ben White, <I>It Could've Been Worse</I>, washingtonpost.com, January 1, 2002).</div> <bR> <div> After the October 29, 1929 crash the Dow continued to decline and reached a low on November 13 - a drop of 24 percent over two weeks. After the Monday September 17, 2001 drop the Dow fell for the rest of the week - a decline of 14.3 percent.</div> <bR> <div> From the May 21, 2001 high of 11,337.92 to the yearly low of 8235.81 on September 21 the Dow Jones declined by 27 percent. While the severity of that decline does not compare with the 48 percent decline from September 3 to November 13, 1929 the response to Black September 2001 has many similarities to the response after Black Tuesday October 29, 1929.</div> <bR> <div> <B>STOCKMARKET CLOSURE</B></div> <bR> <div> <U>1929</U>: "The Governing Committee [of the New York Stock Exchange] decided on a plan of "special holidays" and shortened trading sessions. On Thursday the thirty-first [of October] the Exchange would open at noon instead of ten o'clock as usual; Friday and Saturday would be "special holidays" devoted to paperwork, and regular hours would be resumed the following Monday... The plan ... worked so well that the partial closing was extended; trading was shortened most days throughout November and was suspended entirely on several more "special holiday" without noticeably increasing public alarm" (John Brooks, <I>Once in Golconda</I>: A True Drama of Wall Stret 1920-1938, (John Wiley & Sons, 1999), pp.126-127).</div> <bR> <div> <U>1933</U>: "On the morning of inauguration day [Saturday, March 4], the New York Stock Exchange abruptly suspended trading..." (Kennedy, p.132).</div> <bR> <div> "After staying closed through eight days business days while the worst of the banking crisis passed, the stock exchange was back in business on the morning of March 15" (Brooks, p.149).</div> <bR> <div> <U>2001</U>: "It was six days after 9/11 before the nation's equity markets resumed trading, <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the longest suspension since the Great Depression</B></FONT>" (Scott Gurvey, <I>America Rebuilds-Is Wall Street Reinforced & Ready?</I> nbr.com, September 12, 2002).</div> <bR> <div> <B>RESPONSE TO CRISIS: 1929 & 2001</B></div> <bR> <div> <A HREF="id72.htm" TARGET="_top" TITLE="192931 and 200002">1929-31 and 2000-2002</A></div> <bR> <div> <B>PRESIDENTIAL ECONOMIC ADVICE</B></div> <bR> <div> <U>1920</U>: "Orthodox economic theory held that business downturns were inevitable parts of the business cycle... Orthodox political theory accordingly prescribed that government should refrain from interfering with the natural course of recovery in the economic organism. Conspicuous among what Hoover called the "leave it alone liquidationists" was Treasury Secretary Andrew Mellon. "Mr. Mellon had only one formula," Hoover later wrote. "Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate," Mellon preached to the president. "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more life"" (David Kennedy, <I>Freedom from fear</I>: The American People in Depression and War 1929-1945, (New York, OUP, 2001, p.51).</div> <bR> <div> <U>2002</U>: "Bush's top economic adviser, Lawrence B. Lindsey, has been bearish about the economy for years and is said to oppose any meddling before the market fallout has run its course" (Dana Milbank and Jonathan Weisman,<I> Bush Resists Taking New Economic Steps</I>,<B> </B>washingtonpost.com, July 18, 2002).</div> <bR> <div> <B>FIRST SUCKERS' RALLIES</B></div> <bR> <div> <U>1929-30</U>: From mid-November 1929 to mid-April 1930 the Dow Jones rallied by 48 percent. Tax and interest rate cuts contributed to the bear market rally.</div> <bR> <div> "At the outset of 1930, the stockmarket began to do better, and hopeful prognostications abounded. The commodity price level turned up a little (from the last quarter of November to past the middle of January) but almost at once resumed its descent, and never stopped again, except for a slight retardation (not an upturn) in the third quarter of 1930. Other business factors at the beginning of 1930 also registered upturns; stocks, velocity of deposits, production, and payroll, but not employment" (Fisher, pp.98-100).</div> <bR> <div> "While the economic signs remained mixed early in March, the president [Herbert Hoover] declared on the 7th that "all evidences indicate that the worst effects of the crash upon employment will have passed during the next sixty days..."" (Klein,<I> </I>p.262).</div> <bR> <div> "... the [<I>Wall Street</I>] <I>Journal</I>, conceded that recovery had been disappointingly slow in coming. "That the market until recently had been advancing faster than business improvement, every one seems to know," it said as month's end. "Earlier in the year, it was believed business conditions would be much better before the end of spring. Now the opinion prevails that business improvement will be slower than expected. Some say it will be several months before business begins to approach normal. Others take a less optimistic view".</div> <bR> <div> "... At the end of April [1930] he [Hoover]welcomed the U.S. Chamber of Commerce to Washington for its annual meeting. Its chairman, Julius Barnes, joined Secretary of Commerce Robert P. Lamont in praising Hoover's "quick action towards stemming the business slump last Fall." On May Day evening Hoover himself addressed the delegates. "We have been passing through one of these great economic storms which periodically bring hardship and suffering to our people," he began. "While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. The remainder of his speech was a hymn to the courage and perseverance of the American people coupled with a recitation of the steps taken to banish the business recession..."" (Klein, pp.266-67).</div> <bR> <div> <U>2001</U>: The Nasdaq rallied 41.2 percent from April 4 to May 15. Interest rate cuts and the Republican administration's push for tax cuts were the back-drop to this rally.</div> <bR> <div> <U>2001- 02</U>: From September 21, 2001 to March 19, 2002 the Dow Jones rallied 29 percent. The Nasdaq increased 35.5 percent from September 21, 2001 to March 8, 2002 (but from September 21, 2001 to January 4, 2002 it rallied  44.7 percent).</div> <bR> <div> "After shrinking last summer, the American economy reversed course and grew from October through December at an annual rate of 1.4 percent. The results of aggressive government spending - not only at the federal level, but among states and cities as well [see also next event] - accounts for much of the swing from contraction to expansion, even without adding in the tax breaks, the Bureau of Economic Analysis reports. The rise in government outlays, along with the remarkable bounceback in consumer spending after Sept. 11, more than offset declines in other sectors, particularly business spending on new equipment, offices and factories...</div> <bR> <div> "To nearly everyone's surprise the states and cities found ways to sustain their spending anyway, despite balanced-budget laws that require them to keep spending in line with revenue. This rear-guard resistance, however, seems likely to give way by early summer when many new budgets, mandating cuts, go into effect for the fiscal year 2003" (Louis Uchitelle, <I>Sharp Rise in Federal Spending May Have Helped Ease Recession</I>, nytimes.com, March 23, 2002).</div> <bR> <div> "Shrugging off the effects of last year's brief recession, the U.S. economy roared ahead in the first three months of the year, propelled in part by low interest rates and tax cuts.</div> <bR> <div> "Increases in consumer and government spending and a big swing in business inventories boosted economic growth to an inflation-adjusted 5.8 percent in the first quarter" (John M. Berry, <I>U.S. Economy surged in the first quarter</I>, washingtonpost.com, April 27, 2002).</div> <bR> <div> "The U.S. economy is "sprinting out of recession," with strong productivity gains likely to keep inflation low in the coming quarters, said Richard Clarida, assistant Treasury secretary for economic policy.</div> <bR> <div> "After the economy unexpectedly expanded at a 1.7 percent annual rate in the fourth quarter of last year, many forecasters expected growth to slump. Instead, the economy expanded at a 5.8 percent annual rate in the first quarter of 2002, demonstrating "the recession is behind us," Clarida told members of the Treasury Department's Borrowing Advisory Committee, a panel of securities industry executives.</div> <bR> <div> ""Few forecasters are now looking for the economy to sag again in the immediate future," he said. The economy appears to be sprinting out of the 10th post-World War II recession.</div> <bR> <div> "In his briefing on the Treasury department's quarterly economic outlook, Clarida said "it seems unlikely" that the economy would repeat the first quarter surge in gross domestic product. "Instead, like most private forecasters, we expect a more moderate but sustainable rate of GDP growth. As the expansion gains steam, we expect the unemployment rate to fall," he said" (Brendan Murray, <I>Treasury Says the U.S. Economy Is `Sprinting Out of Recession'</I>, bloomberg.com, April 30, 2002).</div> <bR> <div> <U>1930</U>: "In January, February, and March of 1930 the stock market showed a substantial recovery. Then in April the recovery lost momentum, and in June there was another large drop" (Galbraith, p.160).</div> <bR> <div> "On June 2 an investment company published a full-page ad in <I>Time</I> with a bold headline asking, "Will Stocks Break Their November Lows?" That same day stocks began a slide...</div> <bR> <div> ""Sentiment rules the market, and its is about as low as it has been in a number of months," admitted the <I>Wall Street Journal</I>. "Ask any broker, and he will tell you that the main reason for the market's weakness is the failure of business to improve as predicted." With steel and automotive production, construction, and railway traffic all down, "Wall Street resigned itself to a series of poor earnings statements for the second quarter." Few signs of cheer penetrated the gloom. "What the country needs at present," said the <I>Journal</I>, "is one good 'break' of luck, according to some Wall Street diagnosticians." The best break, the sources added, would be "defeat of the pending tariff bill in the Senate."</div> <bR> <div> "By the end of June no glimmer of change was in sight. The market [had] continued its downward course... The New York Reserve Bank had tried to stem the tide on June 19 with still another rate cut to an unprecedented 2½ percent, but the move proved wholly ineffective. Hundreds of stocks stood at new lows for the year, many of them at levels comparable to their November 1929 bottoms...</div> <bR> <div> "When the Market collapsed, Alexander Noyes [financial columnist of the <I>New York Times</I>] happened to be aboard a ship heading for England with a number of financial men going on vacation... [When informed by dispatches of the selloff] "Everyone realized at once," Noyes recalled, "that the market's previous recovery had been fallacious, that reaction and depression, instead of being ended, had in reality only begun..."" (Klein, pp.270-72).</div> <bR> <div> "... presently Mr [Henry] Ford had to discharge many thousands of his men and later to lower his wage rates; and, despite all the efforts of cities, states, and the Federal government, the upturns [in certain economic indicators] were promptly ended. Quite possibly the subsequent downswing was accelerated by way of reaction to falsified hopes" (Fisher, p.100).</div> <bR> <div> <U>2002</U>: "US stocks tumbled on Friday, moving the main market indices closer to their September lows as stocks fell for the fifth straight week. Trading was volatile because of "triple witching", the expiration of stock options, index options and futures contracts.</div> <bR> <div> "Negative sentiment continued to weigh on the market. "The gloom and doom out there is so thick you can cut it with a knife," said Peter Cardillo, president and chief strategist at Global Partner Securities. "The scenario here is one of testing and re-testing the low end of the trading range, and it'll be key whether or not the Nasdaq holds these lows" (Mary Chung & Andrew Postelnicu, <I>Wall St concludes fifth straight losing week</I>, ft.com, June 21, 2002).</div> <bR> <div> "...said Brian Pears, head of equity trading at Victory Capital Management. "We need one big catalyst that says, 'Hey, the economy is really doing better' ... We need better earnings news also. We already have a good economy"" (Chelsea Emery, <I>Stocks Tumble to New Lows for the Year</I>, reuters.com, June 20, 2002).</div> <bR> <div> (FW compares the low on November 13, 1929 with the low on September 21, 2001).</div> <bR> <div> "Ford Motor Co. Chief Executive Officer William clay Ford Jr. [the great-grandson of Henry Ford] said the second-largest automaker will cut 35,000 jobs, close five factories and eliminate four models after its first annual loss in nine years" (Bill Koenig & Alison Fitzergerald, <I>Ford to close Plants, Cut 35,000 Jobs to Stem Losses</I>, bloomberg.com, January 11, 2002).</div> <bR> <div> <B>HEAT WAVE</B></div> <bR> <div> <U>1930</U>: "Tempers had begun to climb with the thermometer as a record-breaking heat wave hit the East Coast late in February. On the 25th the temperature reached 73 in New York and 83 in Washington, the highest reading for any winter day in major eastern cities..." (Klein, p.260).</div> <bR> <div> <U>2002</U>: "... the National Oceanic and Atmospheric Administration (NOAA) ... said January 2002 was the balmiest in the 123 years temperatures for the month have been recorded globally" (Ellis Mnyandu, <I>Drought Lifts Sales of Washers, Toilets</I>, reuters.com, March 24, 2002).</div> <bR> <div> "The abrupt, record setting heat wave that last week had the Middle West and the East feeling like August in April made matters worse...</div> <bR> <div> "Meterologists defined a heat wave as three consecutive days with temperatures reaching 90 degrees or higher, and that is exactly what struck New York City and the surrounding region Tuesday until Thursday, only the second time is a century that a heat wave occurred in April. The last one was in 1976... Last Wednesday ... the temperature in Central Park reached 96 degrees..." (Andrew C. Revkin, <I>Extended Drought Strains Resources Along East Coast</I>, April 21, 2002).</div> <bR> <div> <B>FARM SUPPORT</B></div> <bR> <div> <U>1929-30</U>: "... in June [1929] President Herbert Hoover had signed into law the Agricultural Marketing Act, which created a Federal Farm Board designed to help farmers stabilize prices and production. "The farm," he proclaimed, "is more than a business; it is a state of living"" (Klein, pp.4-5).</div> <bR> <div> "[After the October crash] The Federal Farm Board moved to support prices of commodities that had declined sharply, notably wheat and cotton..." (Klein, p.246).</div> <bR> <div> "Hoover's vaunted Federal Farm Board drew severe criticism for pouring millions into a vain effort to halt the slide of wheat prices..." (Klein, p.260).</div> <bR> <div> "The public works program and the Federal Farm Board ... cost a great deal of money and impinged on Hoover's ardent desire to keep the federal budget in surplus. Increasingly that spring [1930] Hoover talked less of spending and more of curtailing expenditures..." (Klein, p.269).</div> <bR> <div> <U>2001-02</U>: "President George W. Bush signed into law a $5.5 billion farm rescue package, making the fourth straight year of emergency aid to U.S. farmers. "Its necessary for our ranchers and our farmers," Bush said at a signing ceremony at his ranch... "A lot of people make their living on the farm and ranch"" (Heidi Przybyla & Roger Runningen, <I>Bush Signs $5.5 Billion farm Package, a Victory Over Democrats</I>, bloomberg.com, August 13, 2001).</div> <bR> <div> "President Bush ... signed a farm bill [The Farm Security and Rural Investment Act of 2002] today [May 13] that will shower billions of dollars in new subsidies on bread-basket states... "it will promote farmer independence, and preserve the farm way of life for generations," Bush said. "It helps America's farmers, and therefore it helps America"...</div> <bR> <div> "Several Republicans complained that the bill will further strain the federal budget art a time when deficits are predicted... Sen. Richard G. Lugar ... called [it] "a recipe for a great deal of hurt and sadness, and at the expense of huge transfer payment from a majority of Americans to a very few"" (Mike Allen, <I>Bush Signs Bill Providing Big Farm Subsidy Increases</I>, washingtonpost.com, May 14, 2002).</div> <bR> <div> "Bush said the mixed reports [on the economy] suggest a need to "make sure Congress doesn't overspend" on programs..." (David Morris, <I>Bush Says He's `Not Confident' After Report of 6% Unemployment</I>, bloomberg.com, May 3, 2002).</div> <bR> <div> <B>MORAL SUASION AND MARGINS</B></div> <bR> <div> <U>1929</U>: "...the Federal Reserve was helpless only because it wanted to be. Had it been determined to do something, it could for example have asked Congress for authority to halt trading on margin by granting the Board power to set margin requirements... An<B> </B>increase in margins to, say, seventy-five per cent in January 1929, or even a proposal to do so, would have caused many speculators and quite a few big ones to sell. The boom would have come to a sudden and perhaps spectacular end...</div> <bR> <div> "Actually, not even new legislation, or the threat of it, was needed. In 1929, a robust denunciation of speculators and speculation by someone in high authority and a warning that the market was too high would  almost certainly have broken the spell...</div> <bR> <div> "To the more cautious of the Federal Reserve officials in the early part of 1929 silence seemed literally golden. Yet the boom was continuing... Finally the Board decided to write a letter and issue a press release... Economists have long had a phrase for this action - it was the Federal Reserve's effort at 'moral suasion'. Since the market was temporarily checked, there has been ever since virtually complete agreement that moral suasion was a failure.</div> <bR> <div> "Precisely the opposite conclusion could and probably should have been drawn. It is impossible to imaging a milder, more tentative, more palpably panic-stricken communique than that issued by the Board... Clearly the Federal Reserve was less interested in checking speculation than in<B> </B>detaching itself from responsibility for the speculation that was going on..." (Galbraith, pp.58-61).</div> <bR> <div> <U>2002</U>: "Alan Greenspan, the chairman of the Federal Reserve, defended the central bank today against criticism that it had mishandled the rise and fall of the stock market and said that the Fed could not have prevented the bubble on Wall Street without damaging the economy...</div> <bR> <div> ""As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact - that is, when its bursting confirmed its existence," he said. "Moreover, it was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity, the very outcome we would be seeking to avoid"...</div> <bR> <div> ""This was his defense, and it was a credible defense," said David D. Hale, chief economist for Zurich Financial Services. "But you can still ask questions about other channels he could have used. He could have used moral suasion more than he did to dampen investor sentiment"...</div> <bR> <div> "[A] weapon open to the Fed, which besides controlling official interest rates helps regulate the financial system, would be to tighten requirements for margin lending. Some economists say the Fed could have sent a powerful signal to the markets that prices were becoming excessive by making it harder for investors to borrow to purchase shares" (Richard W. Stevenson, <I>To Greenspan, 90's Bubble Was Beyond Reach of Fed</I>, nytimes.com, August 31, 2002).</div> <bR> <div> "Some investors said Greenspan was trying to distance himself from a situation his central bank helped create. </div> <bR> <div> ""The Fed is the culprit - they caused the bubble" by keeping interest rates low and increasing the country's money supply, said Bill Fleckenstein, president of Fleckenstein Capital Inc. a Seattle investment firm, which has $90 million under management" (Michael McKee, Brendan Murray & Craig Torres, <I>Greenspan Says Fed Policy Can't Prevent Stock Bubbles</I>, bloomberg.com, August 30, 2002).</div> <bR> <div> <B>POLITICS AND BUDGET DEFICITS</B></div> <bR> <div> <U>1930s</U>: "Increasingly that spring [1930] Hoover talked less of spending and more of curtailing expenditures" (Klein, p.269).</div> <bR> <div> "It was in the second half of President Hoovers' term that the rot set in. It set in because, as the depression stayed and deepened, the problem of what to do about it became the main theme of politics and the one that brought sectional, party and class differences. After a decade of budget surpluses there was a series of deficits... The insolvency of many railways, the threatened insolvency of many banks and the many disastrous bank failures, the drying up of local credit, left the federal government no choice but the underwriting of the credit structure. One instrument of that underwriting was the creation of the Reconstruction Finance Corporation. But, for the insurgent members of Congress, the theory behind the new corporation was exactly what the country had been wrecked on. It was the theory of wealth and well-being percolating down from above. They wanted aid for the unemployed to be provided by the federal government, aid provided for bankrupt municipalities and for states whose tax resources were drying up..." (D.W. Brogan, "The United States of America", <I>The New Cambridge Modern History</I>, Vol.12, p.166).</div> <bR> <div> <U>2002</U>: "President George W. Bush criticized the Democrat-led U.S. Senate for "ignoring fiscal discipline" in his weekly radio address. He demanded Congress restrain federal spending, something he said the Senate has been unable to do. "If Congress will not show spending restraint, I will enforce spending restraint," Bush said in his address, delivered from his ranch in Texas, where he's spending the month. "We cannot go down the path of soaring budget deficits" (Ryan J. Donmoyer, <I>Bush Says Senate Democrats 'Ignore' Fiscal Discipline</I>, bloomberg.com, August 17, 2002).</div> <bR> <div> "The U.S. will record an annual budget deficit for the first time in five years as the recession, tax cuts and the war on terrorism cause the government to take in less money and spend more, administration and congressional estimates showed.</div> <bR> <div> "In fiscal year 1998, President Bill Clinton produced the first budget surplus since 1969, when Richard Nixon was settling into the White House. Those surpluses lasted for four years - the longest such stretch since before the Great Depression" (Laura Litvan, John Cranford & Holly Rosenkrantz, <I>U.S. Economy: First Deficit in Five Years Projected</I>, bloomberg.com, January 23, 2002).</div> <bR> <div> "With unemployment offices filling up and tax coffers emptying, state governments around the country are watching their bottom lines turn from black to red. Thirty-five states are currently facing budget shortfalls, shortfalls that could reach as high as $30 billion this year alone. And since 49 of the 50 states have some sort of balanced budget requirement, legislators and governors have no choice but to make up the difference by cutting spending or raising taxes" (Quinn O'Toole, <I>The Terrorist Attacks Have Much of America Facing Economic Crisis</I>, nbr.com, November 23, 2001).</div> <bR> <div> "Now the states must deal with the effects of past chicanery even as they face recession, soaring health care costs and the fiscal impact of terrorism. The result will be layoff of teachers and policemen, medical care denied to the poor, delayed repairs to roads and bridges - eventually when it can no longer be avoided - tax increases... It's not a pretty picture, but you should get accustomed to it. As the states go, so goes America" (Paul Krugman, <I>Our Wretched States</I>, nytimes.com, January 11, 2002).</div> <bR> <div> <B>PRESIDENTIAL SPEECHES AND REACTION</B></div> <bR> <div> <U>1930</U>: "On May Day evening Hoover himself addressed the delegates [of the U.S. Chamber of Commerce at its annual meeting in Washington]. "We have been passing through one of these great economic storms, which periodically bring hardship and suffering to our people," he began. "While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover." The remainder of his speech was a hymn to the courage and perseverance of the American people coupled with a recitation of the steps taken to banish the business recession" (Klein, pp.266-267).</div> <bR> <div> "... said Simon D. Fess, the Chairman of the Republican National Committee: "Persons high in Republican circles are beginning to believe that there is some concentrated effort on foot to utilize the stock market as a method of discrediting the Administration. Every time an Administration official gives an optimistic statement about business conditions, the market immediately drops" [Quoted by Edward Angly, <I>Oh Yeah!</I>, p.27, from the <I>New York World</I>, 15 October 1930] (Galbraith, p.162).</div> <bR> <div> <U>2002</U>: "At one point yesterday afternoon, George W. Bush was beginning to look like the president with perhaps the worst market touch since Herbert Hoover. Every time he tried to sound reassuring, a few hundred points vanished from the Dow Jones industrial average.</div> <bR> <div> "This economy is coming back," Mr. Bush said in Alabama, assigning the blame for Wall Street's current problems in no small part to the "economic binge" of the late 1990's, when someone else was president. "That is the fact"" (Floyd Norris, <I>Wild Wall Street Ride Slowed by Main Street</I>, nytimes.com, July 16, 2002).</div> <bR> <div> "I know our farmers - Alabama farmers, Texas farmers, farmers all across the country - are the best in the world... We're good at a lot of things in America, and we ought to be selling our products all around the world... I'm the president of the greatest country on the face of the earth...</div> <bR> <div> "...I want to talk to you today about how - ways in which I intend to continue to work in Washington to build confidence, to build on the foundations - a strong foundation for economic vitality that exists, to build on the good statistics we're beginning to see... I fought so hard for a tax cut for the American people. I believe when you cut taxes, it spurs economic growth, particularly in the small business sector... In the tax relief plan, we reduced the marriage penalty... we reduced the alternative minimum tax.. we eliminated the death tax" (From text of a speech given by President George Bush at the University of Alabama in Birmingham, Ala., on Monday [July 15] was recorded by The Federal News Service; @ nytimes.com, July 16, 2002).</div> <bR> <div> "When America's president starts advising investors that there is value to be had from buying equities, it may really be time to panic. George Bush, acting in the best Hoover traditions of 1929-30, has tried to reassure  jittery stockmarkets by praising the economy's healthy foundations. Each time he has spoken, Wall Street has responded by falling" (The Economist, <I>Bear Days of July</I>, July 27, 2002, p.13).</div> <bR> <div> <B>MID FIRST PRESIDENTIAL TERM</B></div> <bR> <div> "PRESIDENT BUSH, who marked his 18th month in office this weekend, is off to the worst start of any president in the last 75 years. At least, that is, as measured by the performance of the Standard & Poor's index of 500 stocks.</div> <bR> <div> "With the plunge in stock prices over the last nine weeks, the S.& P. 500 has now fallen 36.9 percent since Mr. Bush was sworn in on Jan. 20, 2001. That is the worst record for any president, as measured by the S& P., which dates back to 1927, and is nearly twice as bad as the record compiled over the first 18 months of Herbert Hoover's administration...</div> <bR> <div> Hoover, of course, was not only defeated when he ran for re-election but also remained so unpopular that Democrats used his memory as a campaign issue for decades. It was not his first 18 months that hurt him, but the fact that he was unable to get the country out of the Depression.</div> <bR> <div> "If Mr. Bush is bothered by the record of having the worst start of any president, perhaps he can gain reassurance from the fact that he looks better if the Dow Jones industrial average is used as the benchmark.</div> <bR> <div> "That average is down only 24.3 percent since he took office, leaving his record slightly better than Hoover's, which showed a decline of 24.8 percent over the same period. But the Bush performance in the first 18 months lags every other president's since the index was begun in 1896" (Floyd Norris, <I>A Difficult Start for Bush</I>, nytimes.com, July 22, 2002).</div> <bR> <div> <B>INERTIA: MID-1930 & MID-2002</B></div> <bR> <div> <U>1930</U>: "When a delegation of bishops and bankers in June 1930 urged him [Hoover] to expand public works, he said, "Gentlemen, you have come sixty days too late. The depression is over." Four months later, when it was manifestly worse, he was unrepentant. He denounced economic fatalism. The Depression was being solved by "the genius of modern business."... Hoover's unshakable public optimism was sired in part by his belief that "restoring business confidence" was the key to ending the depression..." (Evans, p.236).</div> <bR> <div> "What neither [US President] Hoover nor anyone else understood until sometime in 1931 was that they were looking at a historic event that we now know as the Great Depression. Hoover and others thought they were facing another quite familiar downturn in the cycle, of the kind that people had seen before, most recently in 1921" (David M. Kennedy, <I>Our Finest Hours? Atlantic Monthly</I>, June 10, 1999).</div> <bR> <div> <U>2002</U>: "The Bush administration is resisting pleas for further actions to give the economy and markets an immediate boost, arguing it has already offered sufficient remedies...</div> <bR> <div> "In terms of the state of the economy, I see nothing that would suggest the need for any change in policy," said R. Glenn Hubbard, chairman of Bush's Council of Economic Advisers. "What the president has already done, plus the monetary policy stance, is an awful lot already at a time when the economy is doing reasonably well"..." (Dana Milbank and Jonathan Weisman,<I> Bush Resists Taking New Economic Steps</I><B> </B>washingtonpost.com, July 18, 2002).</div> <bR> <div> "President Bush tried to calm investors' fears today by predicting that new restrictions on corporate accounting will buoy stock prices, but he said short-term fluctuations on Wall Street are out of his hands. Bush said the accounting bill headed for passage on Capitol Hill this week will give investors more confidence in balance sheets and "take some of the risk out of the market"...</div> <bR> <div> "White House officials had adopted a policy, similar to one followed by President Bill Clinton and his aides, of talking up the fundamentals of the economy - including the growth, unemployment and inflation rates - while avoiding comments about daily market turns...</div> <bR> <div> "Officials in past administrations have discovered that a risk in discussing the stock market is that if the president appears too gloomy, he could help drive investors to the exits. If he sounds too upbeat, he may appear out of touch with the public's concerns. And if he seems to be encouraging citizens to venture back into stocks, and prices head farther down, he might be blamed for the losses..." (Mike Allen, <I>Accounting Bill Would Aid Market, Bush Says</I>, washingtonpost.com, July 23, 2002).</div> <bR> <div> <B>DEMOCRATS</B></div> <bR> <div> <U>1932</U>: "...Franklin Roosevelt ran and was elected in 1932 on a platform of slashing government spending by 25 percent<I> </I>and balancing the budget. Roosevelt denounced Hoover for "the greatest spending administration in peace times in all our history." He asked voters "very simply to assign to me the task of reducing the annual operating expenses of your national government" (Davidson & Rees-Mogg, p.423). NB. Taxes were cut in 1929 and then raised in 1932 because of the budget deficit.</div> <bR> <div> <U>2002</U>: On January 4th, Tom Daschle, Senate majority leader and Democrat-in-chief, lamented "the most dramatic fiscal deterioration in our nation's history" and argued that George Bush's tax cuts had "probably made the recession worse". With breath-taking inconsistency, he then offered his own roster of tax cuts and spending plans" (The Economist, <I>Tom v George</I>, January 12, 2002, p.33).</div> <bR> <div> <B>BUSINESSMEN AS VILLAINS</B></div> <bR> <div> "There us even a striking historical parallel between Mr Lay and an earlier business villain who helped to provoke the regulatory surge of the 1930s. Samuel Insull turned a modest energy company called Middle West utilities into the hub of a vast financial empire made up of interconnected companies with interlocking boards. His empire collapsed amid accusations of stock fraud and crooked accounting; congressional hearings followed, together with ringing promises that such a thing would never be allowed to happen again...</div> <bR> <div> "But is America really preparing for a backlash against business (whatever that may mean)? And are Americans really so simple-minded that they shift swiftly from unbridled enthusiasm to unbridled scepticism? A glance at the past two decades suggests that the picture is rather more nuanced.</div> <bR> <div> "At first blush, the 1980s and 1990s, with the stockmarket roaring away, appear to have been a time of uncritical admiration for business. Inane business books leapt up to the top of bestseller lists. Jack Welch graced almost as many magazines covers (including <I>The Economist's</I>) as Madonna. Bill Gates attracted far more attention at economic gabfest than a mere head of state...</div> <bR> <div> "Between 1929 and 1932 the American economy shrank by 26.8%, while unemployment leapt from 3% to 24%. FDR was a master of stirring up hatred of the "economic royalists" who were ruining the country..." (The Economist, <I>The businessman as villain</I>, February 16, 2002, p.36).</div> <bR> <div> "America was and is a millennarian society where overweening expectations can easily oscillate into catastrophic loss of faith.... The heroes of the 1920s had been businessmen ... titans, led by Thomas Edison.... The 1929 crash and its aftermath weakened faith in this pantheon... " (Johnson, <I>Modern Times</I>, pp.259-261).</div> <bR> <div> "It was discovered between 1929 and 1933, that the business leaders did not understand or could not control the great economic machine that they had claimed to have made and to know how to operate with more and more skill. The inevitable result of the depression was to weaken, then to destroy faith in the business class as a ruling class..." (Brogan, p.164-165).</div> <bR> <div> "And, as scandal after scandal was revealed; as it was learned how the tax laws made it easy and legal for the rich-and-well-advised to avoid payment of income tax, as it was learned how the markets had been rigged; as fraudulent pyramids of cards like the Insull utilities "empire", or the less scandalous but equally insolvent Van Sweringen railroad "empire" collapsed, discontent and distrust swelled into fear and anger. The American people, or many millions of them, had been betrayed by their natural leaders..." (Brogan, p.166).</div> <bR> <div> "Americans had abdicated much of their political power in the twenties to the business establishment and party hacks. They took it back and in free debate found a way through the darkness... The public turned on the former titans of Wall Street with a wrath that would last throughout the next decade... The Depression began a revival of community values against the selfishness of the twenties..." (Evans, pp.227-228,234).</div> <bR> <div> "The cult of the heroic chief executive has been ended by recession, plunging share prices and Enron...  April 2002 may go down as the month when the last vestiges of the cult of the heroic chief executive were erased. In the space of a few weeks, a panoply of once-mighty corporate titans has been laid low" (Andrew Hill, <I>The business mighty are now fallen</I>, ft.com, May 3, 2002).</div> <bR> <div> "The vehemence of today's reaction against business leaders is partly a reflection of how far their companies' shares have fallen, and also of the extent of their personal greed. But it is also a reaction against the worship heaped on them in the 1990s. Revolutions devour their children, and the impact of new technology and the bull market on business was little short of a revolution. Now for the devouring" (The Economist, <I>Fallen idols</I>, May 4, 2002, p.11).</div> <bR> <div> <B>SUICIDE</B></div> <bR> <div> <U>1929</U>: "Reports of suicides and embezzlements attributed to the crash began to pop up in the papers. The most shocking suicide was that of banker James J. Riordan, a confident of Al Smith, who shot himself on November 8" (Klein, p.239).</div> <bR> <div> <U>2002</U>: "J. Clifford Baxter, the [former] Enron vice president ... committed suicide in January... Whistleblowers, says the social worker [who has worked with them], often "take on the guilt of the organization." The weight of Enron's guilt may have been too much to bear" (Jack Beatty, <I>The Enron Ponzi Scheme</I>, TheAtlanticOnline, March 13, 2002).</div> <bR> <div> <B>CORPORATE REFORM</B></div> <bR> <div> "Going back two centuries, economists have worried about what Adam Smith described as the tendency of chieftains in a market system "to deceive and even to oppress the public." When the grasping got out of hand a century ago, government regulation made a great leap forward in the Progressive Era. There was another leap in response to the excesses of the 1920's. And now regulation is again on the agenda" (Louis Uchitelle, <I>Broken System? Tweak It, They Say</I>, nytimes.com, July 28, 2002).</div> <bR> <div> "President Bush, signing what he called the most far-reaching overhaul of the nation's business practices since the Great Depression...</div> <bR> <div> "White House officials staged a grand East Room ceremony for the signing of a Democratic-originated corporate responsibility law that creates a federal accounting oversight board, makes it easier to prosecute executives who shred documents, creates criminal liability for executives who knowingly file false financial reports and adds a felony for securities fraud that is punishable by 25 years in prison.</div> <bR> <div> "Bush called the package "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt," who appointed Joseph P. Kennedy, president John F. Kennedy's father, as the first SEC chairman. The commission was established by Congress in 1934 to promote stability in the markets and protect investors.</div> <bR> <div> "The Sarbanes-Oxley Act of 2002 has similar goals. It creates a five-member Public Company Accounting Oversight Board, two members of which will be certified public accountants, to regulate the accountants who audit public companies. Among other provisions, the law expands the definition of obstruction of justice, creates a new felony for the destruction of audit work papers, doubles the maximum sentence for violations of securities laws to 20 years and increases the maximum criminal penalty for an individual to $5 million and for a company to $25 million.</div> <bR> <div> "When Bush was encouraging Congress to complete work on the bill last week, he predicted that passage would help make "the market go back up." Yesterday, White House press secretary Ari Fleischer said more cautiously that the law "will bring certainty to the markets." The Dow Jones industrial average finished down 31.85 points yesterday after a consumer confidence report that was the lowest in five months" (Mike Allen, <I>Bush Signs Corporate Reforms Into Law</I>,<B> </B>washingtonpost.com, July 31, 2002).</div> <bR> <div> <B>TARIFFS</B></div> <bR> <div> <U>1930s</U>: [The Hawley-Smoot tariff bill] "had begun as a promise by Herbert Hoover in the presidential campaign of 1929 to improve the situation of the American farmer..." (Harold James, <I>The End of Globalization - Lessons from the Great Depression</I>, p.29).</div> <bR> <div> "The League of Nations sponsored numerous conferences aiming to end restrictions and to reverse the developing high-tariff policies, but with few tangible results. The United States was persuaded to participate in at least two of these conferences, including the International Economic Conference of 1927. Here she joined in signing the conference report that "time had come to put an end to the increase in tariffs and move in the opposite direction." Instead of following this policy, the Hoover administration sponsored the Hawley-Smoot tariff... </div> <bR> <div> "The uprising of the world against the American tariff system came after the Hawley-Smoot Act of 1930, which raised the already high duties of the Fordney-McCumber tariff of 1922..." (Faulkner, pp.693, 647).</div> <bR> <div> "The bank and currency crises of mid-1931 precipitated a new round of responses on commercial policy. After July 1931 most European and many non-European countries revised or reconstitued their tariff systems. The most spectacular turnaround occurred in the United Kingdom, which had for a century and a half been the leading international proponent of laissez-faire principles in commerce...</div> <bR> <div> "Instead of a harmonious liberal vision of an integrated and prosperous world, beliefs about the inevitability of conflict and importance of national priorities gripped populations and politicians. They now talked about enrichment at the expense of others - what critics then termed "beggar thy neighbor" or now call a zero-sum approach. The domestic and international tensions that followed destroyed the mechanisms and institutions that kept the world together, and precluded any effective institutional reform. The reaction against the international economy put an end to globalisation..." (James,  pp.123, 29-30).</div> <bR> <div> <U>2000s</U>: "Bush pledged to West Virginia steelworkers during the 2000 presidential race to do something about imports..." (Blair Pethel, <I>Bush Taxes Steel Imports up to 30%, Risking Backlash</I>, bloomberg.com, March 5, 2002).</div> <bR> <div> "The world's top steel producers blasted the United States on Wednesday for slapping hefty tariffs on steel imports [on Tuesday, March 5, 2002], threatening to fight back through law suits and trade reprisals...</div> <bR> <div> "As well as supporting freer trade in the America's, the Bush administration was a driving force behind the Doha agenda for global trade talks. There it was agreed that rich countries would cut their remaining tariffs, "in particular on products of exports interest to developing countries". Rich countries are supposed to cut their duties (relatively) more than poor countries" (The Economist, <I>Free trade</I>, March 30, 2002, p.29).</div> <bR> <div> "The EU's Lamy said he feared the U.S. move would end any hope of finding an internationally agreed solution at the Organization for Economic Cooperation and Development (OECD) to overcapacity in the world steel industry.</div> <bR> <div> "The European Commission said in a statement the EU might be forced to take trade measures of its own to protect itself from a wave of steel imports from other producers it fears may now be diverted from the United States..." (Tim Large and Paul Taylor, <I>World Blasts Steel Tariffs, Threatens Reprisals</I>, reuters.com, March 6, 2002).</div> <bR> <div> <B>BILATERAL TRADE</B></div> <bR> <div> <U>1930s</U>: "After the crisis of 1931 in South America and Europe, the abnormal behaviour of trade in the 1930s was less the result of the spread of tariffs than of the extension of bilateral and barter trading practice...</div> <bR> <div> "Bilateral trade practices were promoted by the increase of quotas and clearing agreements, both of which often explicitly aimed at securing bilateral balances in trade (rather than triangular or more complicated relationships), as well as by MFN agreements giving concessions limited to narrow rages of goods that in practice were the subject of bilateral trade between the partners in the agreement.</div> <bR> <div> "... the best available index of bilateralism indicates that British trade shifted more in this direction than did that of Germany...</div> <bR> <div> "International conferences to reverse the movement to restrict international trade - notably in 1927 and 1933 - and the efforts of the Leaque of Nations Economic and Financial Committe failed. There was no rejection of the second-best alternatives, no return to an optimal solution, and no victory of common sense. Nor, after 1934, did the trade liberalization policies of the United States - the country that above all was blamed for setting a bad example with tariffs in the 1920s - produce a reverse slide into free trade. Secretary of State Cordell Hull's successes were limited to painfully slow negotiaitons in bilateral liberalization" (James, pp.164,140, 109).</div> <bR> <div> <U>2000s</U>: "... President Bush has just signed free-trade agreements with Chile and Singapore. In the past year, the Bush team has initiated bilateral trade deals with all the Central American countries and five countries in southern Africa, as well as Morocco and Australia. It has also promised to start talks with Bahrain and the Dominican Republic. More are likely to follow. After the failure of Cancun talks [September 14, 2003], Mr Zoellick said that America would now push on the bilateral and regional route. Bilateral trade deals, particularly with small countries, are much easier to get through Congress than multilateral ones.</div> <bR> <div> "... bilateral trade deals are no substitute for progress towards multilateral free trade. On current trends, depressingly, it seems that the global trade system is heading for second best" (The Economist, <I>Survey: World Economy</I>, September 20, 2003, p.28).</div> <bR> <div> <B>REGIONAL BLOCS</B></div> <bR> <div> <U>1930s</U>: "[There was] political resentment against the dramatic German expansion of commerce in Latin America and southeastern Europe...</div> <bR> <div> "The world was divided into several blocs: the imperial systems of Britain and France, the free-trading environment of idealistic Hullian principle and barter world of German trading practice..." (James, p.157).</div> <bR> <div> <U>2000s</U>: "Merging Mercosur, already the world's third-largest trade group, with the Andean Community would mean a union with a combined gross product of $1.2 trillion and a population of 370 million people...</div> <bR> <div> "United States officials, who for more than a decade have been yearning for an Alaska-to-Argentina pact that would bring together 823 million people and $3.4 trillion in trade, said in Mexico that they would more aggressively move ahead on bilateral deals with individual nations, a tactic that implicitly pressures stalling countries into accepting Washington's dictates...</div> <bR> <div> "The problem for the United States is that while it wants to negotiate from a position of strength, trade analysts say, it has also wanted to conclude a hemispherewide deal because the Europeans and Mercosur have been negotiating.</div> <bR> <div> "I think it would be a very bad thing to have the Latin trading bloc moving to have a relationship with European trading bloc, with the U.S. left on the sidelines," said a senior Democratic aide in the United States Senate who works on trade issues" (Juan Forero, <I>Brazil Pushes for South American Trade Pact</I>, nytimes.com, September 17, 2003).</div> <bR> <div> <B>DUST BOWL</B></div> <bR> <div> ""The soil is on the move again in the High Plains, drifting over a swath of the American midsection calcified by drought. For some, it is reviving memories of a time when the world seemed to blow away. There have been serious droughts here before, some as fierce as the dry spells of the 1930's. But this drought is among the worst, and in some counties, particularly in the northern plains, it is the most devastating in more than a century...</div> <bR> <div> "But what makes the drought stand out in the western Plains is the blowing dust, a haunt of the Dirty Thirties when brown blizzards carried sand all the way to the Atlantic Ocean and prompted more than three million people to leave their homes.</div> <bR> <div> "While the storms this year have not been nearly as epic or debilitating as the brown clouds that rolled over the flatlands during the Depression, they have been fierce - and they have come as something of a surprise for people who believed the land had been stabilized...</div> <bR> <div> ""My father was born in 1918 and all my life he's been talking about how we should be careful, we could have another 1930's," said Lochiel Edwards, a wheat farmer from near Havre, Mont. "Well, now it's as dire as I've seen in my life, and my father just the other day said it's as bad as 1936."</div> <bR> <div> "The aridity may be worse than it was in the 1930's, but the dust storms do not compare. Up to 10 million acres lost at least the upper five inches of topsoil in those years, according to federal surveys. During one storm in 1934, more than 350 tons of airborne dust was galloping across the prairie. Wheat was never replanted on much of the land, which was reseeded with native prairie grass. Now the government pays thousands of farmers to keep the ground untilled, as part of the conservation reserve program.</div> <bR> <div> ""It's a cumulative thing," Mr. Aber of Montana's task force said. "Four years without much rain at all. Even during the 30's, there were some fairly normal rainfall years, so this is almost unprecedented"...</div> <bR> <div> "Looking to the white sky, farmers shrug and wonder if a new Dust Bowl will soon be upon them.." (Timothy Egan, <I>Dry High Plains Are Blowing Away, Again</I> nytimes.com, May 3, 2002).</div> <bR> <div> <B>LATIN AMERICA AND THE END OF FREE-MARKET COMPETITION</B></div> <bR> <div> <U>1930s</U>: "The great depression of world trade which set in towards the end of 1929 struck Latin America almost immediately and with disastrous results. The Latin-America countries were more vulnerable, perhaps, than ever before. They depended upon foreign sources for many essential goods and services; they relied upon the export of a few basic commodities to pay for their varied purchases. They were in many cases under contractual obligations to supply their customers, and the burden of their contracts was greatly increased by the fall in prices. Most of them were saddled with a heavy load of public and private debt. Their public revenues, out of which interest had to be paid and administration maintained, were drawn largely from export and import duties, which shrank alarmingly as trade declined" (Brogan, pp.194-195).</div> <bR> <div> "In view of the combination of price collapse and consequent difficulty in debt servicing on the other hand, and the almost complete failure of world capital markets on the other, default became a highly attractive option. The first came in Bolivia in January 1931, followed by Peru in April and Chile in August. By 1934 only Argentina, Haiti, and the Dominican Republic kept up debt service" (James, p.146).</div> <bR> <div> "...all [Latin American governments] perforce, reduced expenditure at home. Spending on works of capital development, on public health, on education, was drastically reduced. Governments and private concerns reduced their staffs. There was widespread unemployment - a new phenomenon in Latin America - followed by labour unrest, rioting and political revolts.</div> <bR> <div> "During 1930 and 1931 eleven of the twenty Latin American republics experienced revolution; or more accurately, experienced irregular changes of government; for these outbreaks were alike not only in their success, but, in most instances, in their relatively bloodless character... It would be an over-simplification to attribute the outbreaks entirely to the depression. Bad business helped to make bad government intolerable. In every case there already existed social and political grievances to which the depression gave an opening. The commonest complaints were ...administrative waste and corruption; and the perennial grudge of the 'Outs' against the 'Ins'" (Brogan, p.195).</div> <bR> <div> "The contrast between the experience of the two largest South American trading economies, Argentina and Brazil, is remarkable. Argentina largely kept up debt service and attracted refunding loans from Britain... Brazil on the other hand defaulted on debt and changed the direction of trade dramatically, from a historical connection to the United States to an increased engagement with Nazi Germany" (James, p.146).</div> <bR> <div> "It is therefore not surprising that the effects of the great slump on both public thinking were dramatic and immediate. Unlucky the government which happened to be in office during the cataclysm, whether it was on the right, like Herbert Hoover's presidency in the USA (1928-32), or on the left, like Britain's and Australia's  labour governments... by the middle 1930s there were few states whose politics had not changed substantially" (Eric Hobsbawn, <I>The Age of Extremes</I>, (London: Abacus Books, 1995),<I> </I>p.104).</div> <bR> <div> "And by the end of the 1930s the liberal orthodoxies of free-market competition was so far away that the world economy could be seen as a triple system composed of a market sector, an inter-governmental sector... and a sector of international public or quasi-public authorities which regulated certain parts of the economy" (Hobsbawn, pp.103-4).</div> <bR> <div> "... the Great Slump destroyed economic liberalism for half a century... Those of us who lived through the years of the great slump still find it almost impossible to understand how the orthodoxies of the pure free market, then so obviously discredited, once again came to preside over a global period of depression in the late 1980s and 1990s..." (Hobsbawn, p.94-95, 103). Note: Hobsbawn was writing before the boom years of 1995-2000). Neo-liberalism gained a second wind and bloomed in its "purist" form during the Clinton administration. The years 1925-1929 are to be compared with the period of 1995-2000 as opposed to the "Reagan economic miracle" of 1982-1987.</div> <bR> <div> <U>2000s</U>: "Across Latin America, millions ... are ... letting their voices be heard. A popular and political ground swell is building from the Andes to Argentina against the decade-old experiment with free-market capitalism. The reforms that have shrunk the state and opened markets to foreign competition, many believe, have enriched corrupt officials and faceless multinationals, and failed to better their lives...</div> <bR> <div> "The backlash has given rise to leftist politicians who have combined pocketbook issues and economic nationalism to explosive effect. Today the market reforms ushered in by American-trained economists after the global collapse of Communism are facing their greatest challenge in the upheavals sweeping the region.</div> <bR> <div> ""The most worrying reading is that perhaps we have come to the end of an era," said Rafael de la Fuente, chief Latin American economist for BNP Paribas in New York. "That we are closing the door on what was an unsuccessful attempt at orthodox economic reforms at the end of the 90's"" (Juan Forero, <I>Still Poor, Latin Americans Protest Push for Open Markets</I>, nytimes.com, July 19, 2002).</div> <bR> <div> "In urging countries around the world to embrace free markets and free trade alongside free elections, the United States has held out the hope that rapid economic progress, benefiting all segments of society, will follow.</div> <bR> <div> "Four South American countries will be having presidential elections over the next 10 months: Bolivia, Colombia, Ecuador and Brazil. In each, the disintegration of the Argentine economy after a decade-long experiment with free-market policies provides ammunition for candidates who reject the notion, propagated by the United States, that there is an unbreakable link between democracy and the North American model of an open economy, a combination Latin Americans call neoliberal" (Larry Rohter, <I>Argentina's Crisis: It's Not Just Money</I>, nytimes.com, January 13, 2002).</div> <bR> <div> "... the broad prosperity that was promised remains a dream for many Latin Americans. Today those same reforms are equated with unemployment and layoffs from both public and private companies, as well as recessions that have hamstrung economies...</div> <bR> <div> "Popular perceptions - revealed in street protests, opinion polls and ballot boxes - are clearly shifting against the economic prescriptions for open markets, less government and tighter budgets that American officials and international financial institutions have preferred...</div> <bR> <div> "In Brazil, South America's largest country and its economic engine, revulsion with American-led market orthodoxy has fueled strong support for the labor leader Luiz Inácio da Silva, known as Lula, who is now the front-runner in the October presidential election, to the chagrin of worried financial markets...</div> <bR> <div> "The backlash in many of these countries gathered momentum with the economic meltdown in Argentina, which forced a change of presidents after widespread rioting in December.</div> <bR> <div> "While the causes are multifold, many Argentines blame the debacle on a combination of corrupt politicians and the government's adherence to economic prescriptions from abroad that have left the country with $141 billion in public debt, the banking system in ruins and one in five people unemployed" (Juan Forero, <I>Still Poor, Latin Americans Protest Push for Open Markets</I>, nytimes.com, July 19, 2002).</div> <bR> <div> <B>MIDDLE EAST</B></div> <bR> <div> <U>1920s</U>: "Kissinger believed that idealism had clearly failed throughout America's diplomatic history - that it led to an inefficient cycle of intense hope and activity abroad followed by morose withdrawal once it became apparent that hope and activity were unlikely to remake the world. The clearest example is President Woodrow Wilson's failed attempt to advance democracy and self-determination in the Muslim Middle East after the First World War, and the isolationism that followed" (Robert Kaplan, <I>The Coming Anarchy</I>, (New York: Random House, 2000), pp.182, 154, 138).</div> <bR> <div> <U>2000s</U>: "Reality: America is the place seized with an intelligently moralistic, Wilsonian vision of peace with its necessary component of freedom..." (William Safire, <I>Myth America 2002</I>, nytimes.com, July 8, 2002).</div> <bR> <div> "The president's speech on the Middle East this week unveiled a radically new idea that goes far beyond the "Arafat has to go" headlines... President Bush went far beyond the obvious. He dared to apply the fundamental principle of American foreign policy - the promotion of democracy - to the one area where it has always been considered verboten: the Middle East... The Bush proposal is grounded in the larger American idea that the spread of democracy is fundamental not only to the spread of American values but also to the achievement of peace..." (Charles Krauthammer, <I>Peace Through Democracy</I>, washingtonpost.com, June 28, 2002).</div> <bR> <div> "Like President Wilson, today's ideologues see a model society already at work in the US: a combination of law, liberal freedoms, competitive private enterprise and regular, contested elections with universal suffrage. All that remains is to remake the world in the image of this "free society"... "Spreading democracy" aggravated ethnic conflict and produced the disintegration of states in multinational and multicommunal regions after both 1918 and 1989" (Eric Hobsbawn, <I>The dangers of exporting democracy</I>, guardian.co.uk, January 22, 2005).</div> <bR> <div> <B>DEMOCRATS IN THE SENATE</B></div> <bR> <div> "When the 109th Congress takes office today [January 5], there will be 44 Democrats in the Senate. When was the last time there were fewer than 44 Democrats in the Senate?</div> <bR> <div> "There were 39 Democrats in the Senate of the 71st Congress between 1929 and 1931. There have been more than 44 Democrats in the Senate in every Congress after that until this one" (Source: Washington Post Trivia Question and Answer, January 5, 2005).</div> <bR> <div> <B>PROTECTIONISM</B></div> <bR> <div> "... the [recent] burst of economic nationalism can be seen as the political dark side of otherwise positive developments. In addition, political posturing may hide a different reality, as we will show in the French case. Nevertheless, we fear that politicians may be playing with fire. Italian Finance minister Giulio Tremonti made a reference to the political tensions of 1914 that led to the First World War. Although there is some electoral hyperbole in this statement, we think it is not totally irrelevant: there are several possible non-cooperative equilibriums in this game, and some of them are nasty. Instead of 1914, we would rather evoke the ominous Smoot-Hawley Tariff Act of 1930: raising barriers to capital movement may initiate a vicious cycle of retaliations" (Eric Chaney and Vincenzo Guzzo, <I>It's Not 1914, but It Smells Like 1930</I>, morganstanley.com, March 6, 2006).</div> <bR> <div> <B>STATE BUDGETS</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>For their part, state and local governments have restored budget balance after the record deficits seen in 2002-03</B></FONT>. Now, spending on unmet infrastructure needs and tax relief seems much more likely than any further move into surplus. Thus, while governments had added significantly to national savings over the past year, they look set to swing in the opposite direction in the year ahead...</div> <bR> <div> "As we see it, the positive thrust to national savings at the state and state and local government level has ... run its course...</div> <bR> <div> "So while it is quite unlikely that states and municipalities will swing back into deficit any time soon, the positive impact on national savings from <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" >the budget consolidation of the past few years is probably over for the foreseeable future</FONT>" (Richard Berner and Ted Wieseman,<I> America's Twin Deficits - Implications for the Dollar and Interest Rates</I>, morganstanley.com, Year-End Issue, 2005).</div> <bR> <div> <B>DUST BOWL</B></div> <bR> <div> "With parts of South Dakota at its epicenter, a severe drought has slowly sizzled a large swath of the Plains States, leaving farmers and ranchers with conditions that they compare to those of the Dust Bowl of the 1930's" (Monica Davy, <I>Blistering Drought Ravages Farmland on Plains</I>, nytimes.com, August 29, 2006).</div> <bR> <div> <B>LATIN AMERICA LEFT AGAIN</B></div> <bR> <div> "Tacamara and dozens of similar communities across the scrub grass of the Bolivian highlands are at the forefront of a new leftward tide now rising in Latin American politics. Tired of poverty and indifferent governments, villagers here are being urged by some of their more radical leaders to forget the promises of capitalism and install instead a community-based socialism in which products would be bartered. Some leaders even talk of forming an independent Indian state.</div> <bR> <div> ""What we really need is to transform this country," said Rufo Yanarico, 45, a community leader. "We have to do away with the capitalist system."</div> <bR> <div> "In the burgeoning cities of China, India and Southeast Asia, that might sound like a hopelessly outdated dream because global capitalism seems to be delivering on its promise to transform those poor societies into richer ones. But here, the appeal of rural socialism is a powerful reminder that much of South America has become disenchanted with the poor track record of similar promises made to Latin America.</div> <bR> <div> "So the region has begun turning leftward again" (Juan Forero, <I>Latin America Looks Leftward Again</I>, nytimes.com, December 18, 2005).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <A HREF="index.htm" TARGET="_top" TITLE="Future Watch">Home Page</A></div> <bR> <bR> </td> </tr></table></body>