Tuesday, December 6, 2011

GD 2

I just finished reading The great crash of 1929. The book is rather alright, just that it gives one an insight into the 1950s when this book was written. John Galbraith basically says that contrary to suppositions, there wasn't much leverage in the system; the primary issues with the lofty heights of 1928-29 were related to holding companies, investment trusts and the madness of people (with some leverage of course). The last factor was primarily responsible; people stopped focusing on their real work and started speculating in the market. 
What followed was a massive capitulation - so (and this is my understanding) it wasn't the extremely high values of stocks, rather, it was the ferocity with which people just wanted to get out of the market once the joy ride was over. The "Times" industrials (the benchmark in those days) fell from 452 on Sept. 3, 1929 to 224 on Nov. 13, 1929 - crazy, right?
But wait. On July 8, 1932 this benchmark reached a value of 52.
In times of carnage a large monetary force is required to bring sanity to the market in addition to corrective steps. 

In 2008-09, only the first thing happened. The corrective steps have been largely missing.
And now George Soros comes out and says that the global financial system is in a self-reinforcing process of disintegration. Tough words but I fear he might be right. We are currently in the midst of a global slowdown and the fear of what's happening in the Eurozone is growing. 
The reason I started this post with the GD is that the crash of 1929 should not have continued through to 1932, but it did. Gloom gave rise to gloom and production slowed down because demand slowed down and thus the cycle continued. I am afraid of China. There is a big difference between inflation and the GDP deflator - please read the post by Michael Pettis. Link to link here. The reduction of demand from China is going to throw corporations worldwide into a tizzy because they have plausibly build their respective infrastructure and plans on global demand, much of which is now coming from China. My last post kinda says why I am so scared. 
The question is Will this be a 2008 kinda downturn or a 1929 kinda grind-down?

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