I just picked back up a book I got in 2000 called "Devil Take The Hindmost" by Edward Chancellor. It is a history of financial speculation. I went right to the section called "The crash of 1929". The author discusses the various arguments about what caused the Great Depression and whether or not the crash was the chief cause. He did not take a position himself; he just laid out the various arguments.
However, he quoted from "Only Yesterday" by Frederick Lewis Allen which was published in 1931. Allen saw the Depression "as a profound psychological reaction from the exuberance of 1929". He quotes further from the book..
" Prosperity is more than an economic condition; it is a state of mind.....With the Big Bull Market gone and prosperity going, Americans were soon to find themselves living in an altered world which called for new adjustments, new ideas, new habits of thought, and a new order of values. "
It seems quite clear to me that our great bull market ended in the euphoria of 1999/2000. We managed to stave off the economic effects by the real estate bubble. This enabled us to live a few more years beyond our means. Incomes could no longer support our lifestyle; asset inflation kept us going. That ended in a financial meltdown.
Clearly, if the gov't throws the kitchen sink at the problem it can slow it down. So, we are now in the inevitable contra trend move up in economic statistics . But, the economy is still on life support. Reinhart and Rogoff in their definitive history of financial booms and busts and sovereign debt concerns speak to how bank crises become sovereign debt crises. So, when will the economy stand on its own when the gov't is so involved?
Investing seems to have virtually disappeared; we are left with a speculative environment supported by the Fed's zero interest rate policy. The vicious snapback in profits is best explained by the trading profits of banks and the cutting to the bone of other businesses.
The Great Depression saw much more dramatic increases in gdp than we have had. It is all part of the process.
The main problem is we are depressed. We can't continue to deny that an economy that is losing wealth can advance. We must contract. Consumption is 70% of gdp and it hit a wall when households reached the limits of their borrowing.
As for the chart that shows the widening between the rich and poor it could easily be that the rich are keeping their wealth and the middle class squandered theirs on the pipedream of ever rising leveraged assets. All I believe is that it is not good for the markets , the economy, or the political environment when this condition exists. I recently ran into an investment guy I worked with who comes from one of the most recognizable rich families in Philly. It got me to thinking about how the rich invest. I believe they hold on forever and live off of the dividends. It's the little guy who gets suckered into the idea that stocks can make them rich from ever increasing prices. Even now I believe the great majority of investors believe that stocks always go up if you just wait!
Another similarity between the roaring 20's and our finance bubble is the heightened percent of income earned by the financial industry. Much of the money made in this industry in boom times comes from those with little skin in the game . It can hardly be called "capitalism". I think we should do everything we can to encourage entrepreneurship but little to encourage croupiership. If mortgages could only be securitized in a covered bond fashion where the underwriter held a decent percentage I doubt the subprime mess would have happened.
Then, as now, the great unwashed bought into a dream that you could have something for nothing.
I expect this depression to last a long time because institutions like the Fed and our federal government will do anything to avoid short term pain.
Niall Ferguson, another financial historian, said that the limits to federal borrowing aren't known until it is too late and that he didn't recommend the U.S. find out its limits.
The accumulation of household and government debt to a level which exceeds our income in an economy that is getting older at the very least will stunt growth for years to come. The effort at inflating our way out worked for about 1/2 of the debt after WWII . There is a heated argument now as to whether this inflating is possible meaning deflation will take over or even hyperinflation . Wow !what a choice.
I know people always say "we will find a way". But, if you examine history there seems to be only difficult solutions for these credit depressions and the way we have decided to get out so far is rooted in how we got into the mess in the first place! We think those who got us here can get us out if we just give them time.
So I imagine the golf clubs will experience times at least as tough as the Great Depression.