Plummeting in the Great Depression (1929) - Black Monday, Thursday, and Tuesday
When: October 21, 24, and 29, 1929
The amount the market declined from its peak: The Markets dropped by more then 90% between its high of 1929 and the low of July 1932.
- The influx of easy money had made a great case for rising consumer debt. Americans were buying stocks of listed companies against borrowed money. The avenues of consumption encouraged people to spend more then the loan relying on the investment to generate a return sufficient enough to repay back the whole loan as well as the interest. The development of new products led to an unprecedented consumption of luxuries.
- The learned economist Fisher observed that the main cause for the depression was the rising debt of an average American. He further stated that "If "A" owes a million to "B" and "B" a million to "C" and so on till we find "Z" who owes a million back to "A" the failure of "A" would bankrupt "B" which may cause the bankruptcy of "C" and so on and so forth. Thus a net debt of zero may bankrupt 26 millionaires!
- Fisher commented further that while companies issued shares the applicants recklessly borrowed to apply for these shares. Thus there was a shift of debt from the collective (corporate) level to the personal level.
- Marc Faber in his book Tomorrow's Gold argues that had the rate of interest been raised the public's appetite to take on further loans would have been dented and the panic might not have occurred.
- This hike in the rate of interest might have hurt the business to some extent but would have prevented the crash from occurring .
- Behavioral finance indicates that the less an investor knows, the easier it is for him or her to be swallowed in popular opinion (herd mentality). This behavior is a double-edged sword because the ignorant investors are also easily spooked into panic. Both actions, joining and fleeing, have very little basis in the quality of the news or the quality of the market.
- The Harvard Economic society, which had made negative forecasts in 1929, changed its outlook to positive right before the 1929 crash adds Faber. This was accompanied by a more precipitous fall as stocks and investment trusts suffered substantial bleeding in the next couple of years.
- Dr Marc Faber points out to striking similarities between the great depression of 1929 and the present state of the US economy. He lists these similarities as
- Merger fever
- High leverage
- Easy Monetary Policy
- Presence of Foreign Funds
- Favorable labor conditions
- PC's vs. the Radios
- Software instead of Movie Companies
- Internet instead of Electric utilities
- The twelve-year worldwide depression ended only with the declaration of the world war. This stands as the worst financial blow to the USA ever. Economists predict that the US economy is currently on road to yet another 1929 like crash.