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I listen to analysts and pundits on TV all the time, and they make typical statements like this: "Let's compare today's stock market to 1991," or, "The last time something like this happened was waaaaaaaaaaaaay back in 1962," or, "Ever since 1945, such and such has always happened." These analysts never go back any earlier, because almost no one is around any longer who remembers earlier times.
The skeptics echo those statements, completely ignoring the conclusion of this book: That we're now in a period resembling the 1930s, and nothing that's happened since then is particularly relevant.
The skeptics claim that we can't be repeating the 1930s, because "It's impossible." Why is it impossible? "Because the government set up agencies to prevent it from happening again." They say this even though those agencies have already failed: The SEC was specifically created to prevent a repeat of the 1920s stock market bubble that caused the 1930s depression, but the SEC did not prevent the 1990s stock market bubble. (The one difference that people point to is the Fed reflation policy; this is discussed on page [trend#222]).
The whole point of this book is that the mistakes of the 1920s and 1930s are being repeated in the decades of the 1990s and 2000s because the people who remember those earlier decades are no longer around. They've retired or died.
So if you want to argue against the conclusions of this book, you have to depend on more than your memory. You have to do the actual research comparing today to the 1920s and 30s.
And when you do that research, as I have, you discover that there really isn't much difference at all.
hI'm presenting two different kinds of evidence. This chapter contains generational evidence, and Chapter 11 contains analytical evidence.
Irrational Exuberance in the 1990s
Let's begin by using the Generational Dynamics methodology to explain why a new financial crisis is occurring about 80 years after the last one.
Ask any financial counselor who worked during the 60s, 70s, 80s or 90s, and he'll agree with the following: Anyone who grew up or lived through the Great Depression is "risk aversive." People who lived through the Depression were extremely cautious about spending money or making risky investments.
They had good reason to feel that way. Kids who grew up in the 1930s saw homelessness and starvation all around them. My own mother often told me how her father's business had gone bankrupt, and how she talked her way into a job to keep her family from starving -- the job paid $8.00 per week!
Money had been flowing freely in the "roaring 20s." Everyone was rich, and everyone spent money freely. In the 30s, surrounded by starvation and homelessness, people were bitter not only at the government and businessmen, but also at themselves: they would be living comfortably if they had only saved the smallest amount of the money they had throwing around so freely a few years earlier.
So they learned to save money, never knowing when the next depression would come. My mother lived in fear of another depression in the years I was growing, and when I started going to college, any bad financial news she heard on television would prompt her to ask me if this was a new depression.
People like my mother were so cautious that they were often mocked by younger people (perhaps including myself) and caricatured.
And yet, people in my mother's generation also worked in financial institutions, and carried the same caution and risk aversion in making institutional investments.
Those people, more than anyone, understood the significance of this graph. The heavy black line shows the ups and downs of the Dow Jones Industrial Average from 1896 to 1940. Something crazy happened, starting around 1922. People started borrowing money from one another and using it to leverage stock purchases, and then used those stock purchases as collateral to get more loans, and purchase more stocks.
The graph above shows how the value of stocks skyrocketed throughout the 1920s. The stock market bubble burst in 1929 when the interlocking credit structure collapsed. Over the next 4 years, stocks lost about 80% of their peak value
