Re: 1929 deja vu

Date: Mon Apr 24 2000 - 14:07:17 MDT

Robin writes:

> Experimental economists have been able to reliably induce asset bubbles
> in lab experiments. In such experiments, almost all traders are saying
> something like "why are those fools still buying", as they then buy more
> themselves. Traders tend to think they can pull out before it falls, and
> it takes a fair bit of experience for them to learn otherwise, at which
> point assets bubbles no longer happen. Appropriately constructed futures
> markets can also make assets bubbles go away even with less experienced
> traders.

How about the existing financial futures markets? Are they adequate to
prevent irrational bubbles? There are LEAPS options which are relatively
long term (by market standards), two years or more. If there are new
kinds of financial instruments which could stabilize the markets, that
would be very interesting to hear about.

> >Second, as far as hard landings: through most of history there has not
> >been the understanding that we have today of macroeconomics. Yes, there
> >is still much to be learned, and people do not always behave predictably.
> >But at the same time we can't deny the effectiveness of the US Federal
> >Reserve over the last two decades in moderating the business cycle and
> >keeping the economy on a generally even keel.
> I think many people do deny this. I'm not sure I share your confidence.

Take a look at We see that the most
recently completed business cycle, 07/81 - 07/90, had 16 months of
contraction followed by 92 months of expansion. The next, uncompleted
cycle, had 8 months of contraction followed by, so far, 108 months of
expansion (that last figure is not shown; it is 03/91 - 03/00).

So we will have two cycles in a row averaging over 100 months each
of expansion. This is unprecedented. No earlier entries in the chart
have anywhere this period of sustained economic growth.

If you look at their figures over the last 150 years we find that the
down/up month ratio has gone from 18/35 pre WWI to 11/50 post WWII.
The economy spent 1/3 of its time in recession back then, and only 1/6 of
the time now. This is a big improvement and I think we can give credit
to our improved understanding of economic theory.

> >Stock prices may fall and even crash eventually, but we should not expect
> >a 1930s style depression as a result. ... There is still every
> >reason to expect significant, possibly unprecedented, economic growth
> >over the next few decades, based on technology. Ultimately that can
> >support very high valuations.
> But there was also significant unprecedented technology growth
> in the 1930s.

It is true, technological advances in themselves do not guarantee a
healthy economy. But if we avoid the monetary mistakes of the 1930s then
technology growth should be able to continue to produce economic growth.


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