Tuesday, November 11, 2008

The Great "Picnic" of 1929

You read about how Ben Bernanke studied The Great Depression. You never really hear him say "Things look similar to 1929", and cite an example or two. Here is a few historical items he has failed to point out.

The Investment Trusts of the 1920’s were the hedge funds of their time. A 1936 issue of Time Magazine stated;

In the twilight of the 1920's, some $7,000,000,000 worth of investment trusts were floated, according to SEC figures. Their total assets were worth about $2,000,000,000 by the end of last year (1935).
That’s a loss of 71 percent!

One of the players of that time was Goldman Sachs a very familiar name today. John Kenneth Galbraith, in his book "The Great Depression of 1929," wrote;

During 1929 one investment house, Goldman Sachs & Company, organized and sold nearly a billion dollars’ worth of securities in three interconnected investment trusts – Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. . . . . .All eventually depreciated virtually to nothing.

So the losses in 1930 just from investment trusts would have been about 5 billion. In today’s money, that figures out to somewhere around 500 billion. (I’m using a multiplier of 100 here. Rental housing in 1928 was $20 per month and rent per month in San Marcos (if you’re real lucky) is $2,000 per month).

As for car manufacturers probably a couple hundred bit the dust. The Dusenberg and the Stutz Bearcat were nice little items in their time.

Bank losses from 1929 to 1933 were about 1.3 billion, so that would be about 130 billion in current dollars.

Before the stock market crash of 1929 stocks were valued at 89.7 billion dollars. In 1932 their value had sunk to 15.6 billion. 74 billion dollars vaporized, in today’s money that would be about 7.4 trillion.

Then if you factor in the fact that the population is 2 ½ times bigger today than in 1930 you could realistically double the amounts we are throwing about. So if we look at 1929 in today’s values, they had a loss of between 8 to 20 trillion dollars.

Normally with this sort of discussion there are charts, graphs and tons of supporting documents. Well this was done on the back of an envelope. We have calculated what the Depression of 1929 cost in today’s dollars.

Do you get the feeling that if things get worse, our "recession" could be worse than "The Great 'Picnic' of 1929?"

Copyright 2008 All rights reserved

11 comments:

Sackerson said...

Hi Jim

I'm doing my own work on the Dow and CPI and will report when I've finally transcribed all the data (it's not in a copy-and-paste form). One point that could be interesting is that the bottom didn't come where people think, if you take into account the wage and price cuts that were an early response to that disaster. Adjusted for CPI, the 20s-30s and mid-60s-early-80s bear markets saw almost identical drops in real value, i.e. about 2/3rds from peak, which if history repeats itself would imply a Dow around 4,000 points in today's terms. And because of shorter-term price cuts, the logic suggests that it will take some years to get there. There'll be a lot of grinding of gears and overheated brakes first.

Anonymous said...

Dear Jim:

It is what it is, whatever that may be. If as you say, this one is the big "D", then would it not be best to go buy a cheap 5 acre parcel, put a doublewide on it ("free and clear"), and have a place to hunker down, if all this comes to pass? Do you get my point. Is not everything else just talk and speculation? Maybe this will just be a repeat of the 1981 recession? With all the money being poured into this by the Fed, does not that one fact alone distinguish this period from the period referenced in the title of your article?

Please give me your detailed thoughts, opinions and a concrete rebuttal. Thanks.

I'm Not POTUS said...

Jim,

Great article below for anyone that wants to explain to a novice the magnitude of what we face.

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1

Jim in San Marcos said...

Hi Sack

I noticed that to. Wages fell by 1/3 in the 1930's. People were begging for a job.

As for a bottom, I think we'll see the bottom when 95 percent of the public doesn't even want to think about stocks let alone buy one.

I'm not too sure how dependable the CPI is in this country, they've removed most of the stuff that has shown an increase in the last 10 years. Too many social programs are linked to COLAS that tie into the CPI

Jim in San Marcos said...

Hi Anon 2:16

I think that whether or not is a recession or depression is immaterial. We are in a disaster and it is getting worse.

There is nothing in history to compare it to. The ship is sinking, this isn't a life boat drill.

Jim in San Marcos said...

Hi Potus

Thanks for the link-- The picture of the bull looks a tad different from the last time I was there.

Sackerson said...

Be fair, Anon, investment's less like science and more like poker, isn't it? You know everything when the cards are all turned over, but that's after the hand has been played.

I think I take your point about it's being possible to overdo the pessimism. Fischer's book The Great Wave points out that in European history since the Middle Ages, each economic cycle has been less generally lethal for the population, since we are gradually building up reserves and resources that we didn't have before.

But a lot depends on what you regard as pessimism, as opposed to realism. Over the last 80 years, adjusted for CPI, the Dow's high have been higher each time, and the lows have been higher, too. We forget how recently the Dow stood at only 1,000 points. However, that also means we shouldn't be too surprised if the next low is c. 4,000.

Jim in San Marcos said...

Hi Everyone

I deleted two comments one of which Sackerson was replying to.
The other was a barb at the first remark.

Remarks that are personal in nature don't belong here.

shortbus said...

Once I realized the short bus had already left without me to the school of economics, I've been making haste since and I visit this blog everyday at least once.

Thank you for your efforts.

Its sad, but at this point I'm hoping for a conspiracy. At least there would be some direction and competence with a conspiracy instead of an ever increasing level corruption and incompetence.

It seems the the Fed is playing a shell game of sorts. Is this the reason they discontinued the M3?

Jim in San Marcos said...

Hi Shortbust

Glad you enjoy the blog.

I guess we are about to pay for the incompetence and corruption you refer to.

As for M3 it can still be figured even though the government doesn't report it any more. Here is a Link to present figures. It looks quite ominous. I'm not sure why they discontinued reporting it. It's not rocket science calculating it.

Thank you for your comments.

P&Cguy said...

POTUS...NOT

Thank you, that was a great read.