Martin Hutchinson lays it all out here, in much greater detail.
An investment bubble is created, with too much money chasing too many bad investments (and too few good ones). It pops and the market radically dips. First, the air comes out of unhealthily inflated stocks, companies with share prices far away from an actual measure of their earnings. But people/brokerages are so leveraged, they sell off the healthy stocks and liquidate their portfolios. And another crash occurs, this time hurting the good businesses.
Pain spreads, and President X convenes leading industrialists and employers at the White House and gets them to agree not to lay off workers. Wages must be kept high and employment cannot dip, advises the president. We need those workers to spend their paychecks. Businesses consent for a while, until earnings dip so far they break their word and massive layoffs occur.
Government debt increases as spending remains high (and goes higher as the feds try to "prime the pump") and tax receipts decline precipitously. Congress gets spooked by red ink on the books and passes massive tax increases, which the president signs. With less money in private pockets -- less private money for spending, saving, investing, which is always more efficiently allocated than public money -- the economy slows further.
Populists in Congress call for tariff increases to protect suffering American industry from witheringly cheap foreign competition, and a massive protectionist bill is passed, rolling back the expansion of international trade and global markets that has been progressing for decades. Tough times are exported.
People can't pay their mortgages and banks foreclose. Congress steps in to prevent foreclosures. Banks are unable to recoup their losses and fail by the droves, taking deposits with them. Those who can take their money out of banks and put it into hard assets like gold. Gold is safe as compared to the uncertainty of equities, but in the wider context of investment, gold buying is akin to burying your money in a Mason jar in the backyard.
The Dow loses 80%+ of its value in four years.
That was 1929-1932. Or was it?
1 comment:
Starts to make a $700 billion bailout look like a reasonable gamble to break the cycle, doesn't it?
In the current context, does it make sense for anyone to want to be the next president? He will either oversee an exploding federal deficit that will pretty much pre-empt anything he had in mind in terms of new initiatives or he'll raise taxes -- and then get an even bigger deficit as we tie a very large weight around the necks of struggling American consumers and workers.
If I were either candidate, I'd pretty much choose this moment to decide I need to spend more time with the family.
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