Tuesday, October 07, 2008

Echoes from the past

Histories should be part of our general thinking and pertinent historical facts can com from all sorts of places. As a voracious and eclectic reader it rarely surprises me to come across relevant gems; the latest being comments on the ’29 crash and the great depression.

It was a John O’Hara novel, first published in the 1950s – 10 North Frederick. The part which caught my attention, the rapid wealth acquisition during the second half of the ‘20s, then the rapid wealth loss in the great crash. Quick money quickly lost.

Then I find other parallels with that far off period; even the same corporate players in some cases. Citi, Morgan and Chase were in the forefront of hopeless efforts to buy the markets out of trouble in 1929. They had placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. The expensive ploy obviously failed.

Another parallel can be found with the wild wealth generation preceding the market/credit crisis. The top 0.1 per cent now earn more money than the bottom 50 per cent of Americans, and the top 1 per cent owns more wealth than the bottom 90 per cent. The wealthiest 400 people in our country saw their wealth increase by $670 billion while Bush has been president.

According to IRS and other records, the last time a similar situation existed in the US was in the late 1920’s. For those able to invest wealth was created rapidly over a few years, and has history shows lost over a few days. The market collapse was dramatic, but affected a relative few. It was the underlying economic rot that did the long term damage.

Spreading the contagion

The fear now must be, does this current mess go beyond the market players; will it sweep us all up in its path as the 1920’s situation did? Australia has a fundamentally different economy from the US, and has always been resource based, as is Canada. In many ways that commodity base was the safety net, but how will it hold?

Both countries a depending on China’s continuing growth, but Baoshan Iron & Steel Co., China's biggest steelmaker, and Aluminum Corp. of China Ltd. led declines in commodity stocks on concern the deepening global credit crisis will slash demand for metals. In Canada commodities markets are heading for the biggest annual decline since 2001, while Australia is caught in the same trap.

If we are to avoid a replay of the 1930’s we certainly can’t depend on the ‘experts’ leading the way. They led us into the mess with their mantra of free, unregulated markets. Only now are we seeking comments like: “The freer a country’s financial system, the more severe an economic downturn will be during times of financial stress.”

Like the late ’20, there was an era of get rich quick, now to be followed by general suffering. Perhaps it is simply part of the broader set of economic cycles, but certainly seems to be based on innate greed and stupidity. Either way, it is a major correction and I will never see its like again.


lindsaylobe said...

Hi Cart
There are eerie parallels to the great depression as you have aptly illustrated. The world is vastly different but I don’t think human nature has changed much, accept to eclipse historic greedy excesses.

I was pleased to see our Reserve bank was on the mark with a 1% cut in official interest rates, with more to come.

Those scary headlines about slowing demand and tumbling commodity prices, with iron ore prices tumbling from $ US $ 200 a tonne into China to $100 are not as dire as the headline suggests.

Spot prices of $100 exceed the 2008 /2009 contract price, and, due to recent devaluation of the Aussie those contract prices translate favorably into an unexpected huge windfalls.

Other exports are similarly enhanced and collectively continue to swell the Current Account to record surpluses.

The Steel Mills will be able to negotiate price reductions, in 2009, maybe around a 15% but that’s still high from a historic point of view, as prices were only $20 in 2001.

Economic growth has slowed in china but it’s still likely to be around 9% into 2009 as they continue to implement their government’s massive urbanization policy, infrastructure projects and developments.

Best wishes

lindsaylobe said...

Another point worth mentioned about that 1% rate cut to official interest rates by our RBA was the behaviour of the Aussie.

When you cut interest rates by that amount expect to see your currency nosedive, which is did from 72 cents on the way down to say 68 or below but then it inexplicably ratcheted up above its pre rate cut level!!

Why was that?

Because it was realised countries are all agreeing on a series of rate cuts right across the globe, combined with injections of funds to restore liquidity.

We just happened to get in first!! So countries have gone from being lightly regulated to ones that are highly regulated in the space of just a few months which much more to come, with co-ordinated packages and rate cuts across various markets.

Best wishes

Cart said...

Lindsay, it seems like the world has be driving automatics then suddenly need to drive manuals. Listening to many of the commentators, no one knows a clutch from a hole in the head. But what fascinates me is the tendency to settle on one control from a multiplicity of controls. Then I have to go and learn new terms – to me – to try and keep up eg: mark-to-market rules.

abi said...

America suffers from a severe case of "It can't happen here/It can't happen again." Yes there are now safeguards against a 30s-style depression. But there's no safeguard against greed, and I'm afraid human ingenuity has founds some workarounds against those safeguards.

I think we're in for a very wild ride for the next few years.

Praguetwin said...

Well you know Cart, I expected this to happen quite some time ago. We talked about it quite a lot with RBE and we all just threw our hands up in the air when the dow went from 13 to 14K.

My theory all along has been that the boom benefited relatively few, but when the inevitable bust comes, which it has, we will all suffer.

It will take some time: not 3 years like in 29; the world moves so much faster now. But it is a cycle. Less investment, less jobs, fear, less buying, less profit, less investment, less jobs and so on. Commodities are a good thing to focus on. Less growth, less commodities being bought, which then translates to less consumption which in turn means less growth.... and so on.

The suffering hasn't even begun for us little people yet.

Cart said...

Abi, the can't happen here is the argument PT is referring to. Seems like over two years now we've been poking the idea around.
PT, I wonder what response from Lysanda and the rest of the right now... I doubt if there will be any - sorry, you were right.

Praguetwin said...

Nope, none of that Lysander is not even responding to my questions. Both he and NS trace the entire problem back to the Democrats and Frannie and Freddie of course.

It is pointless with them.

Although it was great to get to tell NS about his theory that the credit crisis was just a media invention. That was fun.