Learning from history - 1930s

Two of the worst recessions in the recent memory are 1973-1974 and early 1980s. However, in both recessions, there were no credit market implosions. Since this time of recession is triggered by asset bubble(housing bubble), frozen credit market and banking crisis, a lot of people are going back to study 1929.

Looking into the Great Depression makes sense to learn what they did right and wrong to get themselves out of the dark hole. Make no mistake that the Great Depression was triggered by a series of policy response mistakes. That is why W. Buffett or George Soros were paying a very close attention to how the authorities were going to handle the crisis. We should not be too obsessive with drawing the % of stock market index up or down.

When FDR finally took over the office, he made a commitment to reflate the asset prices back to 1926 level.



Along the recovery from 1933 to 1937, they made a mistake by getting too concerns with inflations even though the prices have not gone back to pre-crisis level.



They gave a lot of verbal warnings that sending wrong signals to the market that that essentially triggered interest rate to move up a little bit and led to huge decline of output(triggered another great recession, see the first chart). It is also worth to note that the short term and long dated interest rates are extremely low.








Realizing their mistake, they resumed with reflation path in 1938 until they get out from the Great Depression around 1942.

The recent policies response taken by the central bankers around the world should put the economy back on track. The next test is to see how the authorities going to handle inflation when it started to show up. Will they make a mistake of 1937 later? No matter what happens, I still feel hard assets will be a good bet because history teaches us reflation is inevitable.

Back to some short term stock market comments, it's going to be volatile. Though the general direction should be up but looking at entry point is a tricky business. That's why on and off, I will flash some cautious remarks.


Reference: http://cges.georgetown.edu/docs/IRF%20-%20papers/Conference/1Friday%20MorningPresentations/Eggertsson%20Presentation.ppt