--- Begin Message --- "The amount of gimmickry and outright fraud [on Wall Street since the late '90s] dwarfs any period since the 1920s, when rampant fraud helped cause the crash of 1929 ..." --Alex Berenson, writing in 2001
Timesizing® Associates
©1998-2001 Phil Hyde, The Timesizing Wire, Box 622, Cambridge MA 02140 USA (617) 623-8080 -
Parallels with the 1920s
Seldom do analysts today look back further than World War II (1941-45), even though there was nothing like the "deflationary boom" of the 1990s since the "Roaring '20s." In the '90s it happened in slow motion, taking three or four times as long because of the much greater size of the economy and the corresponding difference in economic momentum, and because there was a socialistic multiplicity of inefficient spending centrifuges in our economic "basement" that kept some semblance of production-consumption balance, however fragile.In the Roaring '20s with a smaller economy and no centrifuges, it all happened in a mere eight (1921-29) to twelve (1918-30) years. By 1929, "the United States was faced with the accumulations of eight revolutionary years [by Y2000, it was more like twenty-eight years] in which the social and economic structure of the country had changed radically without a corresponding evolution in its political machinery and methods [or its workweek! - ed.]." Donald Day, Will Rogers - A Biography (David McKay: New York, 1962), p. 243."On the surface, the 1920s were joyous years - the years of the Sunday drive and the big football weekend, the raccoon coat [compare today's platform shoes, nose rings, tattoos], the speakeasy [compare today's Starbucks (legal) and drug hangouts (illegal)], Rudolph Valentino and Clara Bow [compare Johnjohn Kennedy and Princess Di] and Lindbergh [compare today's highflying Bill Gates] - when, as Fitzgerald wrote, 'The parties were bigger...the pace was faster...the shows were broader, the buildings were higher, the morals were looser and the liquor was cheaper.'
"But this was only on the surface. The '20s were also a time when tens of millions of Americans - colored people, rural folk and intellectuals - felt profoundly alienated from the society in which they lived. Looking back on the decade, the nation seemed close to falling apart [cf. today's widening income gap] - not sharply and violently and painfully as in 1861, but fissuring and crumbling like some of the great empires of ancient times - a glittering surface covering deep fissures." (Life History of the U.S., vol. 10, p. 119.) The parallels between our period today and the 1920s’ "glittering surface covering deep fissures" are many and ominous -
Downsizing and hidden unemployment - "Disregarded in the [1920's] hullabaloo of limitless prosperity were two million citizens out of work...." (From p. 251 in Robert Heilbroner's *Worldly Philosophers, 6th ed., Simon & Schuster, 1986.) On today's supposedly 'low unemployment,' see Lester Thurow's "Jobless figures deceptive - Numbers no longer mean what they used to mean" from the 4/20/99 Boston Globe page C4, near the top of our unemployment page. Today also we can add our 1.8 million prison population, but then, maybe we'll turn up some figures on a prison bulge in the Roaring 20s and give prisons their own paragraph. Meanwhile, there's a long corelation between unemployment and crime, which some still view as coincidental, but for recent research, see "The crime fighter - A study cites the role of jobs," op ed by Bob Herbert, NYT, A27 on our goodnews pages, item 3 under 7/20/2000.
Multiplying mergers and acquisitions (M&As), all too often in banking, and especially by financial and holding companies that had no particular knowledge of or interest in the mission of the firms they were buying (market share and stock price was their sole interest - forget about product/service, employees, customers...). When your broad consumer base is not growing, it gets harder and harder to grow market share in any other way but acquiring it via takeover. But that kind of share growth is mere redistribution of a fixed lump of consumption. By itself, it makes no contribution to growing the overall market.
Here's what Will Rogers and his biographer have to say about mergers before and after the onset of the Great Depression - "'The business of the United States is business,' said President Coolidge [and Reagan, Bush Sr., Clinton, Bush Jr. today], and under his rule...the greatest consolidation of companies in history had taken place. In 1919 only [438] mergers of [manufacturing and mining] companies...took place. By 1926 over 3,500 concerns had gone into holding companies.... [Said Will Rogers,] 'A couple of years ago no business seemd to be up to date unless it had its "holding company".... The title "holding" seemed like you had something so the suckers went for it.... But now [after 1929] the stockholders find out that all they were holding was the bag.... So that's what's the matter with your Wall Street.... You can't go out now when your business ain't doing so good and merge with something else that's doing worse and form a "holding company" and issue stock [like you could in the 20s].... What you got nowadays you got to 'hold' yourself.... The buyers are looking in the bag now before they hold it.'" Donald Day, Will Rogers - A Biography (David McKay: New York, 1962), p. 243, 270.
Boundless happytalk, dubbed as early as 1931 a 'conspiracy of optimism'. For example,
"The fundamental business of the country...is on a sound and prosperous basis," said President Herbert Hoover, four days before the Crash of 10/29/29.
The Roaring 20s were years when most literate Americans had no idea there was a huge problem spreading below the surface. Unlike Roosevelt (Teddy) and Wilson, who dominated their eras, neither of the 1920s presidents (Harding and Coolidge) made much difference in his country's life. "The minds of Americans were not on legislative matters or contests for office. People were preoccupied with ways of making money, with prohibition [cf. today's drug war], sports and amusements and, sometimes, with questions of race or religion. Perhaps in that smug, self-centered time, there was little that any man could have done to shake the prosperous country out of its complacency." (P. 69, Life History of the U.S., Vol. 10.)
How intense was the happytalk of the 1920s while the Great Depression was gestating?
One sample. "Over and beyond the [1928 presidential candidates, Hoover and Smith,] there was Coolidge prosperity. 'Republican efficiency,' said the advertisements in the newspapers, 'has filled the workingman's dinner pail - and his gasoline tank besides - made telephone, radio, and sanitary plumbing standard household equipment and placed the whole nation in the silk-stocking class. Republican prosperity has reduced hours and increased earning capacity [but neither enough for balance], silenced discontent, put the proverbial "chicken in every pot" and a car in every backyard, to boot. Wages, dividends, progress and prosperity say "Vote for Hoover".'" Quote on p. 6 of Gene Smith's *The Shattered Dream (McGraw-Hill 1970).
The really dangerous thing about the happytalk, then and now, is the "silenced discontent". It's like today's China where youth sex supposedly "just doesn't happen" so kids with sexually transmitted diseases (STDs) hesitate to see a doctor. For millions of Americans living apart in their beautiful wealthy suburbs, there are simply no big social problems - none whatsoever. They just don't get it. Life is a pleasant round of chauffeuring the kids to sports and grocery shopping at the well-stocked and pleasant first-class supermarkets. "Crises" are leaving the dog or the kids in the car while you shop, or being late to pick up your spouse from the commuter rail. For systems designers, the point here is the total lack of an effective feedback mechanism. No cybernetics, no sustainability.
Manic stock prices, with "technology" stocks (as then perceived) leading. With astronomical wealth concentration, the top 1% hasn't the time to put it anywhere else. And whereas today, the average American may be involved via his pension, 401K and fund managers, in the Roaring '20s he had directly "assured his own fate by eagerly buying fantastic quantities of stock - some 300 million shares - it is estimated - not outright, but on margin, that is, on borrowed money." From Robert Heilbroner, ibid, p. 252. In the 1920s the Federal Reserve had little precedent for setting margin requirements to head of a stock bubble. Today the Fed, though worried about the bubble effect (runaway inflation) in the stock market, has forgotten its margin requirement setting role since its last use of it in 1974. See Louis Uchitelle's "Finding the steam valve on an overheated market" in 9/05/99 NYT sec.3, p.4 and Floyd Norris' "Fed learns bartenders are more popular than bouncers" in 10/22/99 NYT, C1.
Loose accounting standards and an upsurge of rule-stretching. "Since 1998, there has been a surge in the incidents of large public companies stretching accounting rules..\..said Lynn Turner, the former chief accountant for the SEC [and current] director of the Center for Quality Financial Reporting at Colorado State University.... The amount of gimmickry and outright fraud dwarfs any period since the early 1970's, when major accounting scams like Equity Funding surfaced, and the 1920's, when rampant fraud helped cause the crash of 1929 and led to the creation of the SEC, he said." See Alex Berenson's "Watching the firms that watch the books" in 12/05/2001 NYT, C1, C8.
Disaster-inviting low margin requirements on stock purchases. At the "bucket shops" of the 1920s, you could 'buy' a $100 share for a dollar. That's a margin requirement of only 1%. "A quarter of that dollar was commission, and the rest was the margin. So if the stock fell 75 cents, your margin was wiped out and the dollar was gone.... 'It doesn't take much of a [stock market] reaction to wipe out a margin of only 3/4 of a point..\..The business was tremendously profitable,' wrote Edwin Lefevre in his 1923 classic, 'Reminiscences of a Stock Operator'.... Now the basic idea is back, albeit under a fancier name. The futures markets want to trade 'single-stock futures,' which...are virtually identical to stocks.... Once they become legal, you will be able to buy single-stock futures by putting up pennies on the dollar, in sharp contrast to the stock market, where you have to put up half the purchase price.... Not unlike the old bucket shops, futures markets have intraday margin calls. If your stock future declines, you must put up more cash immediately or be wiped out...." See Floyd Norris' "Let's take a flier: The return of mega-leverage to stocks," 6/30/2000 NYT, C1.
The uneven "boom" - "Especially in the northern cities, Negro leaders (whose people made up a tenth of the nation's population) pointed more and more vigorously to the paradox of the economic and social plight of their race in the midst of boom times.... There were millions of others who also went untouched by the boom. By 1929 the average production worker in manufacturing made only five cents more per hour than he had in 1921." (P.111, Life History of the U.S., vol. 10.)
A high level of immigration - "In 1920, after decades of heavy immigration, the three largest groups [were] Germans, Italians, and Russians...." ("Mexico's one-way remedy," 7/18/00 New York Times, A25.)
Huge consumer debt. "...The average American had used his prosperity [in the 1920s] in a suicidal way; he had mortgaged himself up to his neck, had extended his resources dangerously under the temptation of installment buying...." From Robert Heilbroner, ibid, p. 252. Today we also have unusually high government debt, corporate debt, and debt to buy stocks (see next point re manic stock prices and margin buying).
The decline of unions - "Many companies had waged successful battles against unions, and AFL membership shrank from over four million in 1920 to under three million in 1929." (P.119, Life History of the U.S., vol. 10.) In the 1950s, unions represented about 35% of the American workforce. In the late 1990s, they had shrunk to just under 14% overall, and just under 10% in the private sector.
Rising voter apathy - the apathy level of the 1924 presidential election was not matched again until 1996, a presidential election year when only 49% of the electorate found enough relevance in what the nation's "leaders" were jawing about to bother to turn out and vote.
Rising bankruptcies – “...ignored behind their facade of classical marble, banks had been failing at the rate of two a day for six years before the crash [of 1929]...” (p.251-52, Robert Heilbroner, ibid.).US Industrial and Commercial Failures: 1919-19331919 '20 '21 '22 '23 '24 '25 '26 '27 '28 1929 '30 '31 '32 '33
Source: Statistical Abstract of the United States, 1939
6451 8881 19652 23676 18718 20615 21214 21773 23146 23842 22909 26355 28285 31822 20307Note that 1929 itself was not even an "up" year for bankruptcies (though the following year exceeded any previous). However, 1920-22 showed a huge buildup and 1924-28 a steady increase.
blueprint for this greening of America.]
There were even industry's claims of labor shortage and failure to distinguish between the worldwide skills shortage and labor surplus - "It looks as if industry would have to begin scraping around to get employees instead of laying off anybody" - Alexander Legge, Chairman of the Federal Farm Board, 5 days after the '29 Crash. Recall that the Crash introduced the largest crisis of admitted unemployment (= labor surplus, not shortage) of this century. By comparison, in the 1990s, at least one standard economist has already noticed the current CEO whining about labor shortage (Lester Thurow of MIT's Sloan School) and has lodged a protest - "Even with a ['low'] 4% measured unemployment rate, labor is plentiful.... Some employers [complain about] shortages of specific skills, but even these are relatively infrequent \and\ employers are not complaining about general labor shortages. If jobs are available, people are available to fill them.... Usually the employers complaining about skills shortages are also employers who themselves do no training. They simply want someone else to pay for training their work force. No one should take seriously employers who do no training themselves but complain about a shortage of skilled workers." From Jobless figures deceptive, Boston Globe, 4/20/99, C4.
Most fundamental, the concentration of spending power without spending - "The national flood of income was indubitably imposing in its bulk, but when one followed its course into its millions of terminal rivulets, it was apparent that the nation as a whole benefited bery unevenly from its flow. Some 24,000 families at the apex of the social pyramid received a stream of income three times as large as 6 million families squashed at the bottom - the average income of the fortunate families was 630 times the average income of the families at the base." From Robert Heilbroner, ibid, p. 251.
A triggering financial crisis in agriculture. See also next item for aggravating weather crisis in agriculture (1930s).
A dust bowl (really a parallel with the 1930s) - Remember the big drought during the Depression? Check out this article from the front page of the Science Times section of the New York Times, 4/25/2000 -
Persistent and severe, drought strikes again - Though its advent can be subtle, its costs are huge, by William K. Stevens, NYT, page D1.
...In an average year, drought is responsible for about as much economic damage as floods and hurricanes combined. Nor is it a rare phenomenon [but] a persistent and permanent feature of weather and climate, severely affecting some part of the U.S. almost every year...with the world's climate warming as it is..\..
So it is that in 2000, much of the country's midsection and a broad swath of its southern tier from Arizona to Florida - roughly a quarter of the contiguous 48 states...- is already experiencing a moderate to severe drought with the peak months for drought still ahead.... As a new growing season begins in the Iowa-Nebraska-Illinois breadbasket, severe deficiencies of soil moisture are creating a potential new threat to farmers' chonically sagging fortunes.
The water level of the Great Lakes is approaching all-time lows; not since 1965 have Lakes Michigan and Huron been so low.... And as always, drought raises risks of wildfires....
Could another Dust Bowl or an even worse drought be in the nation's future? Based on scientists' analyses of tree rings, ancient soils and other evidence, the answer is almost certainly yes....
[How rare is water already? Here's a 4/25/2000 frontpage headline from the Wall Street Journal -]
Colorado farmers find their water is worth more than their crops...'The only asset we have', by Robert Tomsho, WSJ, A1.
[So it is ecological necessity, particularly with regard to water, that is going to force us to change from a wasteful widening-disparity rising-consumption society (with the Northeast subsidizing the desert fountains of Las Vegas, Phoenix, LA...), to an efficient lowering-consumption narrowing-disparity once-unrealistic "utopia." And Timesizing has a complete first-cut core
International economic crises as potential catalysts. Two samples -
Britain. In 1925, Britain tried to go back on the gold standard, which was OK, but at the same level they came off it in 1914 at the start of the Great War?! This clobbered British exports and triggered a depression in the UK already in the mid 20s, with lots of accompanying problems such as a huge miners' strike in 1926.... See J.K. Galbraith's *Age of Uncertainty (1977) p. 203.
Germany. The punitive reparations prescribed by the "Peace" of Versailles, coupled with some really monstrous financial manupulators like Hugo Stinnes, precipitated a disastrous hyper-inflation in Germany in the early 1920s, and basically, the German economy was a basketcase throughout the rest of the '20s.... See Max Shapiro's "The Penniless Billionnaires," section on the German hyperinflation.
A drug war - to provide a continuous, gigantic and costly distraction. In the 1920s, it was Prohibition, i.e., a war on alcohol, legislated by a 19th amendment to the U.S. Constitution. At the turn of the millennia, it's a War on Hard (and not so hard) Drugs. We should have learned from the failure of Prohibition (the 19th Amendment was repealed in the early '30s) and the success of our recent campaign against nicotine that criminalization is not the way to go. With such a vast, costly and continuous "war" distracting so many good people, it's hard to get the political momentum to focus on the stymied core and center of human progress, the need to cut the Tower-of-Babel arrogance of ever more strained government job creation in favor of simply spreading out and sharing the natural, market-demanded employment.Paul Krugman's list adds four more unique similarities (from his appearance on NPR's The Connection 5/03/99, see also his new book *The Return of Depression Economics) -
Widespread regard for U.S. as a leading world economy
Fabulous technological progress
Speculation against currencies
Booming real estateTwo other similarities Paul mentioned corelate to two of ours -
A soaring stock market (= our "manic stock prices")
A good feeling generally among everybody (similar to our point about "boundless happytalk" - we'd argue that Paul's wording here projects his own circle's good feeling too far)Paul points out that his similarities could also apply to Japan in 1989, just before its dive into depression.All in all, we couldn't be bringing ourselves down faster if we were doing it on purpose. But "fast" when mergers are over 6000/year (late '90s) is a lot slower than when they're around 1000/year (late '20s) because of what that suggests about the greater size and momentum of the economy now compared to then.For more details, our laypersons' handbook Timesizing, Not Downsizing is available at bookstores in Harvard Square, Cambridge, Mass. or from *Amazon.com online.Questions, comments, feedback? Phone 617-623-8080 (Boston) or email us.
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