Is A 1929-Style Stock Crash Likely October 2003 ? - Part 1

August 5, 2003

A first definition and first warning

The warning is that (1) the writer has an economics degree from a university (London UK) and (2) this tare or handicap (an economics degree) is something he has lived with a long time, and takes little account of (economics, that is).

The first real definition is what 'likely' means. Likely, here, means possible-to-probable.

What does 1929 "style" mean ?

This is important.
Since around 1870-90 stock market or bourse crashes (such as those of 1873, 1882-84, 1890-93, and 1900-03) have tended to get more uncontrolled, longer and deeper - measured by the loss of total notional or fictional 'value', using yardsticks like the time taken to claw back the lost 'value', or the size of the notional loss relative to GNP. But this brings in PPP or 'purchasing power parity' corrections for measuring one crash, in one decade or era, and another. How do you value an 1870 dollar against a 2003 dollar? Or compare a Reichen mark against a Renten mark, and a Deutschemark of 2002 ? (Before they disappeared and were replaced by Euros).

None of this is easy. Bill Gates likes to say that if technology progress in automobiles had kept pace (he meant to say/ was comparable) with technology progress in PCs then a family auto of today which cost $5000 in 1979 would now cost $15 and do 150 miles-per-gallon. Thanks to the Cheap Oil interval of 1986-99 and the Sunset Commodity lie (oil and gas are throwaway, old time resources for hamburger flipping, derivatives trading modern consumer citizens) new car fuel economy averages in the US and several other OECD countries are at 1970 levels, today. Also, we could ask if those PC-style autos work like 'Windows'? First you turn the motor on, push the 'Start' button, and only then you can turn it off - what could be more logical? Hey, wait a minute, the motor was already running!

The bottom line is how to compare value with changing money yardsticks. It is difficult to compare a 1979 dollar with a 2003 dollar, and even this latter is changing before your eyes. January 2003 dollars, and June 2003 dollars, against Euros, are already 12%-15% different......

We can however say that in 2003 dollars the 1929 crash wiped off, destroyed, or made to disappear notional or paper 'value' estimated (by J K Galbraith and other experts) at about $ 1 500 Billion.

And we can say the 1987 bourse crash destroyed at least $ 2 400 Billion of notional 'value'.

And the 2000-02 crash annihilated about $ 6 000 Billion of notional 'value', some of which has magically reappeared thanks to the 'Baghdad Bounce', which is more of a swansong than a victory chant, we may soon discover.

However, the essential factor is that the 1929 crash was very different to and from the 1987 and 2000-02 crashes.

Why and how was the 1929 crash different ?

After the 1929 crash, but more precisely after the 1929-31 sequence of economic meltdown triggered by the bourse crash, there was no bounce back or rebound in the Real Economy, on which the bourse machine feeds, reflects, steers, plays with, and pumps funds from rather than the opposite direction.

That is, the 1929 crash transmitted through the various outer sheaths or layers of the Real Economy, and impacted it. Through 1929-35 or 1929-36 in some countries of the "civilized world" there were unremitting falls of activity in 'key sectors'.

The uncivilized world was however less than concerned by the event - it gained.(A. Gunder Frank, S. Amin and suchlike will give you a Marxist Economics spin on the related and unrelated sequences of economic change governing metropole-colony relations). Simple facts and figures show considerable economic growth in the 'colonial South' of the 1929-39 period.

The Real Economy impacted

We can take 'leading indicators' in any the rich world countries of the time. In the period of 1929-36 there were sheer and stark falls, for example a fall in industrial production by 40%-50%. A reduction in new house starts by 60%-70%. A reduction in cars manufactured and sold by 60%-75%. A reduction in new steel produced and cables laid and drawn by 60%-75%. A reduction in ships built and operated by 50%-70%.

Depending on country and on reference dates, eg. 1927 or 1928 against 1933, or eg. 1925-28 average against 1931-34 average. Overall, through 1929-36, falls in activity/output were around 60%-90% by country and by sector. Unemployment rates were up to 25%-40%, not in Albania 2003 but throughout Western Europe in 1933. The young reporter and writer George Orwell wrote flowing tales of this massive misery decreed for and by Liberal good management of the economy and defence of Strong Money.

Needless to say food production didn't fall by 60%-90%. Human beings need to feed themselves even when destroying notional or paper 'value' and deciding not to work - but there were 10%-15% falls in food produced, all the same. An increasingly popular, tub thumping set of politicians naturally emerged and very like the GW Bush regime, but called Mussolini and Hitler. These two leaders applied Keynesian economic recovery; the Military Keynesian solution was found to yield big popular voting support and very fast falls in unemployment through building weapons and preparing for war. Both of these fully-voted, fully-democratic leaders of the West had No Alternative but to crank up wars, the bigger the better. Democracy has the word 'demos' as a stem. it gives us Demonic and Demagogic as well as Democracy.

OIL PRICES FELL, but we will get onto that subject later on.

What matters is the following:

1929 impacted the Real Economy. The bourse crashed, and so did the Real Economy. The crash, which was fiercest through about Nov. 1929-Nov. 1930, with a rapid loss of at least 50% of initial paper 'value', trimmed paper values on all civilized world bourses by up to 65%-75%, and started with a huge cut (at least 30%) in just the first week or two, rapidly achieving a 50%+ fall in notional or paper 'value' (that is notional capitalization).

Unlike 1987, which also had huge and fast cuts in the notional 'value' pile in just a week, the 1929 crash kept on keeping on. It steamrolled into the Real Economy, creating an unstoppable reduction - contraction - of economic activity. Neither the paper economy bourse, or the real economy bounced back. They went down, and stayed down.

None of that happened in 1987 and 2000-02, which of course brings up the simple question: Why ?

Let us terminate this first part by a few considerations of what would constitute the initial part of a 1929-style crash in October 2003. The lead bourse would of course be the NYSE, as in 1929, 1987 or 2000-02.

As noted by Mark Jones in 'Battle of the Titans' ('The Final Energy Crisis', Pluto Press, forthcoming)/

In purely cyclic terms, bourse dynamics might set a period of over 15 years before the DJ index claws back to 10,000 again; through 2002 some US stock exchange analysts have waved the spectre of the Dow plunging to under 400 points and staying there 'for some years'. In fact, any protracted bourse crisis on Wall street with the index hitting even 4000 points will trigger panic equivalent to the 1929 crash, the post 1929 collapse of the fantasy paper economy entraining a 6-year, world-wide depression of the real economy. Optimists argue that even in the event of a paper economy meltdown this will not harm the real economy because mistakes made in the 1930s will not be repeated. That is: protectionism, futile and counter-productive attempts to balance budgets, monetarist rivalries, the deflationary gold standard, etc.

If the DJIA index fell to 4000 from its present 9100-odd, this would represent a 50%+ loss. If at least 30%-40% was slashed in a single week, this would constitute a '1929-style' (and 1987-style) bourse crash. Whether this would go on to trigger a Real Economy crash, that is 1929-36 style contraction, is another question that is discussed below.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.

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