1929-31 and 2000-02

<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>   |   <B>1929-31 and 2000-02</B>   |   <A HREF="id77.htm" TARGET="_top" TITLE="Barack Obama, Jimmy Carter and JFK">Barack Obama, Jimmy Carter and JFK</A>   |   <A HREF="id29.htm" TARGET="_top" TITLE="Parallels: 1920s and 1990s">Parallels: 1920s and 1990s</A>   |   <A HREF="id79.htm" TARGET="_top" TITLE="197476 20091?">1974-76 = 2009-1?</A>   |   <A HREF="id87.htm" TARGET="_top" TITLE="1930s,1970s and Today">1930s,1970s and Today</A></div> <div> </div> </td> </tr><tr> <td valign="top" height=445 BGCOLOR="#FFFFFF" TEXT="#080000"> <bR> <div> 1929 and 2000</div> <bR> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="691" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="COLS" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=BOTTOM HEIGHT= 23 WIDTH="338"><div> Dow Jones 1927-1930</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Nasdaq 1998-2001</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 35 WIDTH="338"><bR> <div> 1927</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> 1998</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 32 WIDTH="338"><div> Global crisis - interest rate cut</div> <bR> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Global crisis - interest rate cuts</div> <bR> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 19 WIDTH="338"><div> 1928</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> 1999</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> Three interest rate increases</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Three interest rate increases</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 32 WIDTH="338"><div> DJIA increased 48%</div> <bR> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Nasdaq increased 86%</div> <bR> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 19 WIDTH="338"><div> 1929</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> 2000</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> Interest rate increase in August</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Interest rate increase in February</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> DJIA increases 27% to peak</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Nasdaq increases 25% to peak</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="338" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=BOTTOM WIDTH="338"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="338" HSPACE="0" VSPACE="0"></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> Peak September 3</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Peak March 10</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="338" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=BOTTOM WIDTH="338"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="338" HSPACE="0" VSPACE="0"></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> Black Tuesday October 29 Crash</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Black Friday April 14 Crash</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 ><NOBR><div> DJIA falls 11.7% - down 39% from peak</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> Nasdaq falls 9.7% - down 34% from peak</div> </NOBR></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="338" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=BOTTOM WIDTH="338"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="338" HSPACE="0" VSPACE="0"></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> November 13 yearly low from peak</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> December 20 yearly low from peak</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 32 WIDTH="338"><div> DJIA down 47% from peak to low</div> <bR> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Nasdaq down 53% from peak to low</div> <bR> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 19 WIDTH="338"><div> Suckers' rally</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Suckers' rally</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 32 ><NOBR><div> DJIA increased 48% from November 13, 1929 to</div> <div> April 17, 1930</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> Nasdaq increased 41% from April 4 to</div> <div> May 15, 2001</div> </NOBR></tD> </tR> </TABLE></div> <bR> <div> In looking at 1998 through 2000, the Nasdaq in its relation to the American economy is a very close match to the Dow Jones and the American economy from 1927 through 1929.The major difference is that the Nasdaq peaked in March 2000 and declined over nine months to its yearly low on December 20, 2000, whereas the Dow Jones peaked in September 1929 and declined over two and a half months to its yearly low on November 13, 1929.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> 1929 and 2001</div> <bR> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="691" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="COLS" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=BOTTOM HEIGHT= 23 WIDTH="338"><div> Dow Jones 1928-1929</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Dow Jones 2000-2001</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 35 WIDTH="338"><bR> <div> 1928</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> 2000</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> Three interest rate increases</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Three interest rate increases</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 35 WIDTH="338"><bR> <div> 1929</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> 2001</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> Year entered during a mild slump</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Year entered in slowing economy</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 ><NOBR><div> Sharp break in stocks in early February</div> </NOBR></tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Slight dip in stocks in late February</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 ><NOBR><div> Serious break in stocks in late March</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> Serious break in stocks mid March to early April</div> </NOBR></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> <B>Summer rally</B></div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> <B>Spring rally</B></div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 ><NOBR><div> Rally ends in September - 28% increase</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> Rally March 22 to May 21 - 20% increase</div> </NOBR></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="338"><div> October 29 - 11.7% correction</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> September 17 - 7.1% correction</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 35 WIDTH="338"><bR> <div> Interest rate cuts</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> Interest rate cuts</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 33 WIDTH="338"><div> November 1 & 15, 1929</div> <div> February & March 1930</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><div> January, March, April, May, June, August, September, October, November & December</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 35 WIDTH="338"><div> First suckers' rally</div> </tD> <tD VALIGN=BOTTOM WIDTH="338"><bR> <div> First suckers' rally</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 32 ><NOBR><div> DJIA increased 48% from November 13, 1929 to</div> <div> April 17, 1930</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> DJIA increased 29% from September 21, 2001 to</div> <div> March 19, 2002</div> </NOBR></tD> </tR> </TABLE></div> <bR> <div> While a major correction did not occur in 2001, the September 11 attacks on America and the Dow correction that followed may be considered a crisis situation on par with October 1929:</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, <B>the Dow recorded its biggest single-day point drop, 684.81 points, </B>or 7.1 percent. The index hit a three-year low on September 21" (Ben White, <I>It Could've Been Worse</I>, washingtonpost.com, January 1, 2002).</div> <bR> <div> "...the terrorist attacks wiped almost $1.38 trillion in value off the Dow Jones Industrial Average in five days, leading to its biggest weekly drop since 1933" (Farah Nayeri, <I>Terrorism, War Fears Roil Economies and Markets, Leaders Say</I>, bloomberg.com, September 11, 2002).</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 Tuesday September 11, 2001 has many similarities to the response after Black Tuesday October 29, 1929.</div> <bR> <div> A number of parallels with 1929 follow which suggested, at the time, that another suckers' rally, in keeping with the 'double pattern', would be sparked by the September crisis:</div> <bR> <div> <U>1929</U>: "President Hoover said that 'the fundamental business of the country, that its production and distribution of commodities, is on a sound and prosperous basis'" (John Kenneth Galbraith, <I>The Great Crash 1929</I>, (London: Penguin Books, 1992), p.128).</div> <bR> <div> <U>2001</U>: ""The American economy is fundamentally strong," Bush said in his weekly radio address. The "skills and hard work and entrepreneurship" of Americans are "as strong today as they were two weeks ago," the American workforce is the "most productive in the world," and U.S. factories produce more, and a wider variety, of goods than any other country, he said" (Holly Rosenkrantz, <I>Bush Sees Business Climate Improving After Attacks</I>, bloomberg.com, September 22, 2001).</div> <bR> <div> <U>1929</U>: "Professor Irving Fisher ... added, 'I expect to see the stock market a good deal higher than it is today within a few months'" (Galbraith, p.116).</div> <bR> <div> <U>2001</U>: "Treasury Secretary Paul O/Neill predicted on CNN that stock indexes would rebound to record levels "in the not-so-distant future"" (Vince Golle & Monee Fields, <I>Fed cuts benchmark rate to 3%, ECB reduction follows</I>, bloomberg.com, September 17, 2001).</div> <bR> <div> <U>1929</U>: "In New York [on Thursday October 24] the panic was over by noon. The organised support appeared... Word had reached the floor of the Exchange that the bankers were meeting, and the news ticker had spread the magic word afield. Prices firmed at once and started to rise. Then at one-thirty Richard Whitney [acting president of the Exchange].... perhaps the best know figure on the floor ... made his way through the teeming crowd... At the Steel post he bid 205 for 10,000 shares... he continued on his way, placing similar orders for fifteen or twenty other stocks. That was it. The bankers, obviously had moved in. The effect was electric. Fear vanished and gave way to concern lest the new advance be missed. Prices boomed upward" (Galbraith, pp. 122-124).</div> <bR> <div> <U>2001</U>: "Leading the Washington/Wall Street coalition that tried to prevent the market from crashing, Treasury Secretary Paul O'Neill joined NYSE Chairman Richard Grasso in working the floor of the exchange during the day" (Jerry Knight, <I>Dow, Nasdaq Tumble After Four-Day Halt</I>, washingtonpost.com, September 17, 2001).</div> <bR> <div> <U>1929</U>: "Yet by 1929 popular faith in <I>laissez-faire</I> had been greatly weakened. No responsible political leader could safely proclaim a policy of keeping hands off" (Galbraith, p.160).</div> <bR> <div> "The conventional explanation is that Herbert Hoover, President when Wall Street collapsed and during the period when the crisis turned into the Great Depression, was a laissez-faire ideologue who refused to use public money and government power to refloat the economy... There is no truth in this mythology... From the very start ... Hoover agreed to take on the business cycle and stamp it flat with all the resources of government" (Paul Johnson, <I>A History of the American People</I>, (London: Weidenfeld & Nicolson, 1997), pp.614, 617).</div> <bR> <div> "The new element of the New Deal was the acceleration of the decline in <I>laissez faire"</I> (Harold Underwood Faulkner, <I>American Economic History</I>, 8th edition, New York: Harper & Brothers, 1960, p.683).</div> <bR> <div> <U>2001</U>: "Even before the September 11 attacks, the administration had shown flexibility in its policies, breaking with the purist free-market supporters when it believed such action was necessary" (Paul Blustein, <I>White House Willing to Nudge Markets</I>, washingtonpost.com, September 19, 2001).</div> <bR> <div> "White House economic advisor Lawrence B. Linsey ... a fervent believer in free markets and market-driven solutions ... and other members of President Bush's economic team chose government intervention instead of a laissez-faire approach" (Glenn Kessler, <I>Riding to the economy's rescue</I>, washingtonpost.com, September 25, 2001).</div> <bR> <div> <U>1929</U>: "Mr Hoover's first step was out of the later works of John Maynard Keynes. Precisely as Keynes and Keynesians would have advised, he announced a cut in taxes. The rate on both individuals and corporations was cut by one full percentage point..." (Galbraith, p.156).</div> <bR> <div> "...on Thursday, 31 October [effective November 1]...the Federal Reserve Banks lowered the rediscount rate from six to five per cent. The Reserve Banks also launched vigorous open-market purchases of bonds to ease money rates and liberalize the supply of credit... On all these happy portents the market closed down [i.e., "suspended"] for Friday, Saturday, and Sunday..." (Galbraith, p.141).</div> <bR> <div> "Mr Hoover also called a series of meetings on the state of the economy... the meeting of the industrial leaders on 21 November ... was attended by, among others, Henry Ford, Walter Teagle, Owen D. Young, Alfred P. Sloan, Jr, Perre du Pont, Walter Gilfford, and Andre Mellon [the Treasury Secretary]..." (Galbraith, p.157).</div> <bR> <div> "Mr Hoover proposed that construction be pushed, both public and private... Cities, states, and the Federal government took Mr Hoover's advice..." (Irving Fisher, <I>Booms and Depressions</I>, (London, George Allen and Unwin, 1933), pp.98-100).</div> <bR> <div> "Henry Ford had followed this credo in cutting the prices of his cars to spur sales, as savvy businessmen had long done in the belief that rising prices discouraged buyers while falling prices attracted them" (Maury Klein, <I>Rainbow's End:  The Crash of 1929</I>, (New York, OUP, 2001), p.259).</div> <bR> <div> <U>2001</U>: ""This is an economy that's going to get a dose of both supply-side and Keynesian economics" White House spokesman Ari Fleischer said, referring to competing theories that tax cuts and government intervention stimulate the economy" (Ryan J. Donmoyer, <I>Greenspan, Congressional Leaders to Discuss Economy</I>, bloomberg.com, September 18, 2001).</div> <bR> <div> "Masterful orchestration by the U.S. Federal Reserve, the Treasury Department, and Wall Street very effectively minimized the economic impact of the attacks. The Fed issued a statement on September 11 assuring that it remained open and would "meet liquidity needs" of the global financial system, echoing the President's Working Group on Financial Markets (comprised of the chief financial regulators from the Fed, Treasury, Securities and Exchange Commission, and Commodity Futures Trading Commission). In the four days that the U.S. stock markets remained closed, the Fed introduced more than $100 billion of liquidity into financial markets and coordinated an additional $80 billion from other G-7 countries, effectively acted as a lender of last resort to finance uncleared transactions, arranged innovative temporary currency swaps, reduced the overnight rate to the lowest level since 1994, and initiated unusual repurchase operations (short-term loans) to 25 primary banks to ensure the federal funds rate remained near its target of 3.5 percent" (Kori Schake & Klaus Becher, <I>How America Should Lead</I>, policyreview.org, August 2, 2002).</div> <bR> <div> On October 3 at a round-table discussion President Bush met with top U.S. executives. "Most of the business leaders he met with at Federal Hall this morning were chief executives of large publicly traded companies. They included Kenneth Chernault, chief executive of American Express, Sanford I. Weil, chairman of Citigroup, and Betsy D, Holden, head of Kraft Foods" (Michael Brick, <I>Bush calls for billions more to give the economy a boost</I>, nytimes.com, October 3, 2001).</div> <bR> <div> "There, he said he was proposing $60 billion to $75 billion in additional personal and corporate tax cuts to provide a boost, saying the economy needed a "kick-start," and he was working with Congress to get it" (Ashad Mohammed, <I>Bush Talks Up Economy on 2nd Visit to New York</I>, reuters.com, October 3, 2001).</div> <bR> <div> "General Motors, scared that consumers would stop spending after September's terrorist attacks, launched deep discounts to "Keep America Rolling". Ford and DaimlerChrysler were forced to follow suit..." (The Economist, <I>America's car makers</I>, January 12, 2002, p.62).</div> <bR> <div> History suggests that the bear market following the bursting of the American dot.com bubble will, <B>after a number of suckers' rallies</B>, turn into a "great" recession or depression when events from overseas wash-back on the American economy pushing it over the brink. But before looking at what happened after the crash of 1929 we will look at the background to the booms in America in the 1920s, Japan in the 1980s and America in the 1990s setting the precedent for the future.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>International Crisis-Boom-Bust</B></div> <bR> <div> "The classic text on financial manias and crashes by Charles Kindleberger suggest ... that manias typically develop in two stages. The first still bears some relation to an anticipation of eventual profit from the underlying asset ... In the second stage, the seemingly inevitable prospect of capital gain overwhelms any analyst of the underlying business" (David Uren, <I>Internet frenzy a mania in the making</I>, WEA, April 24-25, 1999, p.36).</div> <bR> <div> For example:</div> <bR> <div> "...Until 1928 stock-exchange prices had merely kept pace with actual industrial performance. From the beginning of 1928 the element of unreality, of fantasy indeed, began to grow. As Bagehot put it, 'People are most credulous when they are most happy.' People brought and sold in blissful ignorance. In 1927 the number of shares changing hands, at 567,990,875, broke all records. The figure then rose to 920,550,032" (Johnson, pp.612-613).</div> <bR> <div> Catalyst for stage 2 of a mania? In America in the 1920s, Japan in the 1990s, and America in the 1990s it was an international crisis.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> Global Crisis - Boom - Bust</div> <bR> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="695" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="COLS" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 19 WIDTH="225"><div> <B>USA</B></div> </tD> <tD VALIGN=TOP WIDTH="225"><div> <B>JAPAN</B></div> </tD> <tD VALIGN=TOP WIDTH="225"><div> <B>USA</B></div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 35 WIDTH="225"><bR> <div> 1927</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> 1987</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> 1998</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 82 WIDTH="225"><div> Interest rates lowered 0.5 of a percentage point due to a potential international financial crisis</div> <bR> </tD> <tD VALIGN=TOP WIDTH="225"><div> Low interest rate policy continued due to potential global crisis as a result of USA October stockmarket crash</div> </tD> <tD VALIGN=TOP WIDTH="225"><div> Interest rates lowered three times as a result of a potential global meltdown</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 57 WIDTH="225"><div> <B>Cue for mania stage of stockmarket boom</B></div> <bR> </tD> <tD VALIGN=TOP WIDTH="225"><div> <B>Cue for mania stage of stockmarket boom</B></div> <bR> </tD> <tD VALIGN=TOP WIDTH="225"><div> <B>Cue for mania stage of stockmarket boom</B></div> <bR> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 19 WIDTH="225"><div> 1928</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> 1989</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> 1999</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 32 ><NOBR><div> Three interest rate increases</div> <div> DJIA up 48%</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> Three interest rate increases</div> <div> Nikkei up 29%</div> </NOBR></tD> <tD VALIGN=BOTTOM><NOBR><div> Three interest rate increases</div> <div> Nasdaq up 86%</div> </NOBR></tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 38 WIDTH="225"><bR> <div> 1929</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> 1990</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> 2000</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 82 WIDTH="225"><div> New York Federal Reserve Bank proposed an interest rate increase in February; rejected by the Federal Reserve Board in Washington</div> </tD> <tD VALIGN=TOP WIDTH="225"><div> Interest rates increased one percentage point in March</div> </tD> <tD VALIGN=TOP WIDTH="225"><div> Interest rates increased 0.25 of a percentage points in February</div> <bR> <div> Interest rates increased 0.25 of a percentage points in March</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 49 WIDTH="225"><bR> <div> Interest rates increased 0.5 of a percentage point in August</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> Interest rates increased 0.75 of a percentage point in August</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> Interest rates increased 0.5 of a percentage point in May</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 48 WIDTH="225"><bR> <div> <B>Dow Jones loses</B></div> <div> <B>35 percent</B>*</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> <B>Nikkei loses</B></div> <div> <B>38.7 percent</B></div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><div> <B>NASDAQ loses</B></div> <div> <B>51 percent</B>*</div> </tD> </tR> <tR> <tD VALIGN=BOTTOM HEIGHT= 16 WIDTH="225"><div> * from peak</div> </tD> <tD VALIGN=BOTTOM WIDTH="225"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="225" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=BOTTOM WIDTH="225"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="225" HSPACE="0" VSPACE="0"></tD> </tR> </TABLE></div> <bR> <div> <B>USA  1927-1929</B></div> <bR> <div> "Winston Churchill was Chancellor of the Exchequer in 1925. Eager for Britain to once again assume world leadership, and viewing the pound sterling as a symbol of Britain's greatness, he insisted on returning the pound to its prewar relationship to the dollar and gold. In that year, the pound was pegged at $4.86.</div> <bR> <div> "The rate was unreasonable, and had the effect of pricing many British goods out of the world market. A flight from the pound to the dollar began at once, as Britain had its first of several financial crises in 1925. Indeed, gold from all parts of Europe came to America in great quantities in the next two years.</div> <bR> <div> "Had the situation continued, most European nations would have had to leave the gold standard. <B>Given the complexities of the reparations situation, the United States would be dragged down with them in a major financial crisis</B>. Accordingly, Secretary of the Treasury Andrew Mellon and Benjamin Strong eagerly accepted invitations from European central bankers to a conference on the question. In 1927 Montague Norman of the Bank of England, Hjalmar Schacht of the Reichsbank, and Charles Rist of the Bank of France met with their American counterparts. The situation might yet be saved, they argued, if the Federal Reserve cut its rediscount rate. Such an action would lower American interest rates in relation to those in Europe, and therefore attract funds to European banks. <B>At the same time, low interest rates would encourage borrowing in America and stoke the speculative furnaces</B>. <B>Strong was unhappy about the latter probability, but in the end proved willing to further stimulate an already active American economy in order to save international stability</B>. In 1927, the Federal Reserve lowered its discount rate from 4 to 3.5 percent.</div> <bR> <div> "Wall Street greeted the lowered rate. It meant businesses could borrow funds more easily, and so expand operations and profits. More important, it assured a continual flow of cheap credit for the call-money market. Member banks were able to borrow money from the Federal Reserve at 3.5 percent and then lend it as call money at 5 percent, making an easy profit of 1.5 percent. <B>Thus, the international situation was resolved in such a way as to encourage speculation on Wall Street</B>" (Robert Sobel, <I>Panic on Wall Street</I>, (New York: Macmillan, 1968), pp.360-361).</div> <bR> <div> "Adolph C. Millar, a dissenting member of the Federal Reserve Board, subsequently described this as 'the greatest and boldest operation ever undertaken by the Federal Reserve System, and...[it] resulted in one of the most costly errors committed by it or any other banking system in the last 75 years'. The funds that the Federal Reserve made available were either invested in common stocks or (and more important) they came available to help finance the purchase of common stocks by others. So provided with funds, people rushed into the market. Perhaps the most widely read of all the interpretations of the period, that of Professor Lionel Robbins of the London School of Economics, concludes: 'From that date, according to all the evidence, the situation got completely out of control'" (Galbraith, pp.38-39).</div> <bR> <div> <B>JAPAN  1987-1990</B></div> <bR> <div> "...Dr Yoshio Suzuki, explains... 'In 1987 the Japanese economy had already started to recover so we thought our low monetary policy should be raised. We led call rates [short-term money market rates] up and we thought about raising the official discount rate towards the end of 1987. But then Black Monday [the stockmarket crash of October 1987] occurred. Then the Ministry of Finance people said, again and again, "A Bank of Japan decision to raise the official discount rate in late 1987 would be accused of ignoring the international circumstances." That was the pressure on us - it originated with US authorities but the Ministry of Finance was the messenger.'</div> <bR> <div> "The Black Monday stockmarket crash, which began on Wall Street but provoked a staccato echo of crashes on markets around the world, persuaded the United States, Japan and others that easy money was the best policy. This created a cushion of liquidity to absorb financial shock and prevented the trauma from being transmitted to other parts of the economy. The policy was largely successful. But in the United States and Germany this was only a short-term response. Within five months the United States raised official interest rates and Germany followed four months after that. Japan's central bank waited much longer under the combined pressure of the Okurasho [the Ministry of Finance] and the Americans - until May 1989, allowing the bubble to bloat further.</div> <bR> <div> "Dr Yoshio Suzuki continues: 'So we kept our low interest-rate policy through the essential period of October 1987 to May 1989. During that time of about one and a half years the economy was rising vigorously, so there was no reason we had to keep the low-interest rate policy and we should have raised the official discount rate...But the judgment we made at the time was incorrect. Because, though prices were stable, asset prices rose too quickly and it would create much trouble later..." (Peter Hartcher, <I>The Ministry</I>, (Sydney: HarperCollins<I>Publishers</I>, 1997), p.74).</div> <bR> <div> "...Geoffrey Miller, the director of the Center for the Study of Central Banks at New York University, who has studied Japan's bubble, reckons that with hindsight it is clear that monetary policy was too lax. The Bank of Japan started to fret about rising property and share prices and rampant bank lending in 1987. If it had tightened policy then, the economic damage would have been considerably less. So why did the bank wait two more years?</div> <bR> <div> "Uncertainty about whether it really was a bubble and how asset prices would respond to higher interest rates both played a part. And as in America today, CPI inflation was low (in part because of a strong yen), so politically the bank would have found it hard to take action..." (The Economist, <I>Survey: The World Economy</I>, September 25, 1999, pp.17-18).</div> <bR> <div> <B>USA  1997-2000</B></div> <bR> <div> "Faced with a serious liquidity crisis ... on July 2, 1997. Thailand's central bank stopped defending the baht's peg to the dollar. The baht lost 16 percent of its value, and this plunged Thailand into a serious recession. The substantial devaluation of the baht and Thailand's economic troubles triggered a panic in neighbouring economies with similar problems. Like Thailand, the economies of Malaysia, Indonesia, and others were afflicted by heavy foreign borrowing and banking systems weakened by large numbers of unpaid or nonperforming loans" (Robert Gilpin, <I>The Challenge of Global Capitalism</I>, (Princeton: Princeton University Press, 2000), pp.145-146).</div> <bR> <div> "In October 1997 "the drop of stock prices on the Hong Kong stock market (<I>Hang Seng</I>) by 24 percent in four days sent shock waves round the world. Spreading recognition of the very serious nature of East Asia's troubles threw panic into investors everywhere. On October 27, 1997, the tenth anniversary of the 1987 crash of the American stock market, the Dow Jones plunged 554 points (somewhat more than 7 percent), the largest [now third largest] one-day loss ever. Similar declines took place in Western Europe, Brazil, and elsewhere. Investors were panicking and abandoning the emerging markets" (Gilpin, p.147).</div> <bR> <div> In November 1997 "attention shifted to Korea... the possibility or even probability that the Korean economy would collapse finally jolted the United States into action. ...the most important consideration was the fear that Korea's default on its huge international debts would trigger a much larger international crisis. Collapse of the Korean economy could also have brought down the weakened Japanese economy, and that in turn could have produced disastrous consequences for the United States and the rest of the world.</div> <bR> <div> "In response to these dangers in Korea, the United States in mid-December 1997 engineered the largest-ever IMF rescue package..." (Gilpin, pp.148-149).</div> <bR> <div> Three IMF rescue loans - to Thailand in August, Indonesia in October and South Korea in December - were the defining responses to the international crisis of 1997, in the following year it was to be three interest rate cuts in America in September, October and November.</div> <bR> <div> "In August [1998] the Russian devaluation of the ruble and other financial troubles triggered a sharp decline in the American and other stock markets. Capital flight and the threat of currency collapse engulfed Brazil and other countries. The world was plunged into the worst economic crisis since the Great Depression" (Gilpin, p.162).</div> <bR> <div> On August 31, 1998, the Dow Jones plunged 512.61 points, its fourth largest one-day loss. Then came the near-collapse of the Long Term Capital Management hedge fund in September.</div> <bR> <div> "...the Federal Reserve began a series of rate cuts ... by a quarter point in September, October, and November [1998] to avert a global economic meltdown and in the process sparked a 191% jump in the Nasdaq over the next 18 months, and a 46% rise in the Standard & Poor's 500 Index" (<I>Nasdaq falls to year low</I>, news.bbc.co.uk, December 19, 2000).</div> <bR> <div> The Dow Jones from the first trading day in 1999 to its peak on January 14, 2000 increased 27.5%.</div> <bR> <div> "Before those [interest rate] cuts [in 1998], many analysts had expected the Fed to raise rates to slow growth" (Al Yoon, <I>U.S. Treasuries Plunge on Concerns Over Federal Reserve Interest-Rate Rise</I>, bloomberg.com, March 24, 2000).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>First Stage of Collapse</B></div> <bR> <div> "Nothing could have been more ingeniously designed to maximise the suffering, and also to ensure as few as possible escaped the common misfortune... the man who waited out all of October and all of November [1929], who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then brought stock would see their value drop to a third or fourth of the purchase price in the next twenty-four months" (Galbraith, p.130-31).</div> <bR> <div> The world economy will eventually begin the second stage of collapse. This first stage is mild compared to the second - the more significant event. We now look at what has happened so far in the mild stage and at what may happen in the future.</div> <bR> <div> <B>SUCKERS' RALLIES</B></div> <bR> <div> "The crash [of the stockmarket] is then followed by a wind-down period, interrupted by <B>numerous suckers' rallies</B>,<FONT SIZE="2" COLOR="#000000" FACE="Arial" > </FONT>which absorb cash from optimists expecting an early recovery. Ultimately,  assets are deflated by about 90 percent" (James Dale Davidson and William Rees-Mogg, <I>The Great Reckoning</I>, Revised Edition, (London: Sidgwick & Jackson, 1993), p.146).</div> <bR> <div> Interest rates cuts and the Republican administration's push for tax cuts were the backdrop to a spring 2001 suckers'rally. From April 4 to May 15 the Nasdaq rose 41 percent; while the Dow rallied 20 percent from March 22 to May 21. This maybe considered a Nasdaq inspired suckers' rally following its collapse in 2000. The response following September 11 and the Dow correction also sparked a suckers' rally. (The suckers' rallies to follow are those following the September 11, 2001 crisis. A suckers' rally and decline, in this article, is defined by a 15 percent or more rise followed by a 15 percent or more decline).</div> <bR> <div> <B>SUCKERS' RALLY - 1</B></div> <bR> <div> <U>1929-30</U></div> <bR> <div> "From late November 1929 to mid-April 1930, a period of four and a half months, the market rallied, and it seemed as though it would again move into new high ground. In this period, the economy appeared to gain strength, and by early spring of 1930, the "correction" was considered over. It was thought of as simply  one more pause on the road to prosperity" (Sobel, p.387).</div> <bR> <div> After the crash on October 29, 1929 interest rates were lowered three days later on November 1 by 1 percentage point. This was followed by a 0.5 percentage point cuts on November 15, 1929, February 7 and March 14 of 1930. Over a period of seven and a half months interest rates went from 6 to 2.5 percent. Also</div> <bR> <div> "In the belief that tax reduction would counter the depression Hoover asked Congress in December, 1929 for lower income-tax rates. Congress responded at once" (Faulkner, p.649).</div> <bR> <div> These measures contributed to the suckers' rally of mid-November 1929 to mid-April 1930.</div> <bR> <div> From the low of 198.69 on November 13, 1929 to December 31, 1929 the Dow Jones rose by 25 per cent. From December 31, 1929 to April 17, 1931 the Dow Jones rose 18 per cent. Therefore from the post-crash low in November 1929 to the peak in April 1930 the Dow Jones <B>increased by 48 per cent</B>. The close on April 17, 1930 was only 5.93 point lower than the close on December 31, 1928. (From the high of 294.07 on April 17, 1930 to the close of 164.58 on December 31, 1930 the Dow Jones lost 44 percent).</div> <bR> <div> "... in April [1930] the recovery lost momentum, and in June there was another large drop..." (ibid., p.161).</div> <bR> <div> " ... despite all the efforts of<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> </B></FONT><B>cities, states, and the Federal government</B>, the upturns [in business factors] were promptly ended. Quite possibly the subsequent downswing was accelerated by way of reaction to falsified hopes" (Fisher, p.100).</div> <bR> <div> <U>2001-02</U></div> <bR> <div> "After shrinking last summer [2001], 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 <B>the federal level, but among states and cities</B> as well - 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> "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" (John M. Berry, <I>U.S. Economy surged in the first quarter</I>, washingtonpost.com, April 27, 2002).</div> <bR> <div> 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 <B>rallied  44.7 percent</B>).</div> <bR> <div> <B>SUCKERS' RALLY - 2</B></div> <bR> <div> <U>1930</U></div> <bR> <div> From the April 17, 1930 high the Dow <B>declined 30%</B> to June 24, 1930. Then began a summers' rally which peaked on September 10, 1930 for a <B>15.7% increase</B>. The low for the year was reached on December 16, 1930, down 35% from the September high.</div> <bR> <div> <U>2002</U></div> <bR> <div> Following the pattern of 1930 the Dow from the northern hemisphere's spring 2002 high <B>declined 27.5%</B> to July 23, 2002, Then began a suckers' rally which peaked on August 22, 2002, for an <B>increased 17.5%</B>.</div> <bR> <div> After the 2002 summer rally the stock indices declined; then followed a "fall" rally.</div> <bR> <div> In 1930 there were two major sucker's rallies while there were three in 1931. 2002 has followed 1931 and has experienced three suckers' rallies.</div> <bR> <div> <B>SUCKERS' RALLY - 3</B></div> <bR> <div> <U>1931</U></div> <bR> <div> The Dow Jones on October 5, 1931 was<B> down 77.3%</B> from the September 3, 1929 high.</div> <bR> <div> The Dow Jones <B>increased 35%</B> in the four week period of October 5 to November 9, 1931.</div> <bR> <div> <U>2002</U></div> <bR> <div> The Nasdaq on October 7, 2002 was <B>down 77.8%</B> from its March 10, 2000 high; or if we take it from its September 1, 2000 close, after the 24.5% summer rally, it was down 70.5%.</div> <bR> <div> "The bear market that began in March 2000 vaporized about $8 trillion <B>in the 30-month slide</B> that ended - if indeed it did end - in early October. <B>That loss amounts to about 85 percent of the U.S. economy's total output this year, which is equivalent to the loss during the stock market crash that began in 1929</B>, [Bill] Miller [who runs the Legg Mason Value Trust, a $9.3 billion fund that has outperformed Standard & Poor's 500-stock index 11 years running, a record unmatched in the mutual fund industry] noted" (Jerry Knight, <I>Top Performer Declares End To Bear Market</I>,<B> </B>washingtonpost.com, December 2, 2002).</div> <bR> <div> The Nasdaq <B>gained 32.9%</B> in the roughly seven week period of October 7 to November 27, 2002.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Break - departing from the script</B></div> <bR> <div> The rhyme of post-2000 with post-1929 departed from the script when the next low in the Dow Jones in 2003 was higher than the low in 2002. The Dow then followed the bear-market rally rhyme of 1970-1973 where the 'nominal' high of the Dow in 1973 passed the ‘valuation’ high of 1966.</div> <bR> <div> The peak in the 'nominal' high in the bear-market rally of 2002-???? will signal the onset of recession leading eventually to depression, reverting to the script of the post-1929 rhyme.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>1933</B></div> <bR> <div> "In the agonizing interval between Roosevelt's election in November 1932 and his inauguration in March 1933, the American banking system shut down completely. The global economy slid even deeper into the trough of the Depression. The world also became a markedly more dangerous place. Adolf Hitler was installed as chancellor of Germany, after massive unemployment had seeded despair into millions of German households.</div> <bR> <div> "... yet another banking panic. This one started in Michigan, where the governor declared an eight-day banking "holiday" on February 14, to protect the reeling banks in his state from collapsing. The drastic action in a key industrial state set off tremors throughout the country. Public apprehension about the banking system and disillusionment with bankers were amplified at this moment by ... scandalous admission of malfeasance, favouritism, tax avoidance, and corruption from the princes of Wall Street...</div> <bR> <div> "After suffering through three years of depression and witnessing more than five thousand bank failures in the last three years, Americans reacted this time with hair-trigger haste and last-ditch desperation. By the thousands, in every village and metropolis, they scurried to their banks, queued up with bags and satchels, and carted away their deposits in currency and gold. They hoarded these precious remnants of their life savings under the mattress of in coffee tins buried in the back yard. Wealthier deposits shipped gold out of the country. Stock prices plummeted again, though not from their 1929 heights.</div> <bR> <div> "... in bank lobbies throughout the country, there was no silence. Shouting depositors jostled and shoved up to the tellers' wickets, demanding their cash. In state after state, the banking system quivered, buckled, and was saved from final failure only be gubernatorially decreed holiday. Maryland's banks were closed for three days by executive order on February 24. Similar closings followed in Kentucky, Tennessee, California, and elsewhere. On the morning of inauguration day, the New York Stock Exchange abruptly suspended trading; so did the Chicago Board of Trade. By then government proclamation had shut every bank in thirty-two states. Virtually all banks in six others were closed. In remaining states, depositors were limited to withdrawing a maximum of 5 percent of their money, in Texas no more than ten dollars a day. Investors had ceased to invest and workers had ceased to work. Some thirteen million willing pairs of hands could find no useful employment. Many had fidgeted idly for three years. Now they wrung in anxious frustration or steepled hopefully together in prayer. History's wealthiest nation, the haughty citadel of capitalist efficiency, only four years earlier a model of apparently everlasting prosperity, land of the pilgrim's pride, of immigrant dreams and beckoning frontiers, America lay tense and still, a wasteland of economic devastation" (Kennedy, pp.131-33).</div> <bR> <div> "Banks, already hurt by the speculative real-estate boom which, with the usual help of self-deluding optimists and mushrooming financial crookery, had reached its peak some years before the Big Crash, loaded with bad debts, refused new housing loans or to refinance existing ones. This did not stop them from failing by the thousands, while (in 1933) nearly half of all US home mortgages were in default and a thousand properties a day were being foreclosed (Miles et al., 1991, p.108)" (Eric Hobsbawm, <I>Age of Extremes</I>, (London: Abacus, 1995), pp.100-101).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <A HREF="id66.htm" TARGET="_top" TITLE="Crash Index">Crash Index</A>            <A HREF="index.htm" TARGET="_top" TITLE="Future Watch">Home Page</A>            <A HREF="id72_m.htm" TITLE="192931 and 200002">Top of Page</A></div> <bR> </td> </tr></table></body>