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Joe's question led me back to the history of crashes generally, and to
1929 specifically. I am surprised at the similarity in the international
situation in the two time periods. Reading Manias, Panics, and Crashes
(Kindleberger), I see: in 1928 money flowing out of foreign into the US
stock market, deflation hitting raw-material exporting nations, a major
power inflating to pay off its international obligations (Germany). This
house of cards came crashing down BECAUSE of the US stock market crash!
But what caused the crash? Kindleberger's most direct cause is
"preoccupation with speculation and a decline in business as the stock
market reached its apex". Banks, particularly those outside of NY, were
loaning vast sums of money for stock speculation during 1929. When the
market stumbled, many of the loans, made by less sophisticated banks,
were pulled willy-nilly, creating a flurry of selling in the stock
market.
That brings me to two scenarios of my own:
One looks for a similar trigger, some event that will cause the US
market to fall drag down the economies of the rest of the world with it.
Do I know what it might be? No...
The second scenario considers the increase in importance in bond trading
over equity trading in the recent decades. Perhaps the LTCM debacle, the
losses in Asia and Russia, and the recent standstill in the credit
markets are the beginnings of our crash. Russia starves, Asia can't
recover, business can no longer borrow -- sounds pretty bad to me.
Remember, it took until 1932 for the bottom to hit -- for the world
economy, that was 4 years after the ball started rolling...
Regards
Dan G
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