(Note: I’ve been working on this post since last Friday; apropos of my work, Captain Ed Morissey posted a similar commentary about the state of the economy vs. our reckless plunge into massive deficit spending. I’ll take those similarities to mean that I was on the right track, particularly with respect to the 1970’s.)
Remember the last eight years, when Democrats ripped President Bush at every opportunity for “throwing away the Clinton surplus” and engaging in “out of control deficit spending,” thus “dooming our children to pay for his enormous mistakes”? Remember how Democrats pilloried vice president Cheney for defending President Bush’s post-9/11 discretionary spending decisions by declaring that in the short term, when you are trying to stimulate growth, “deficits don’t matter”? Remember the big “pay as you go” budget pledge made by Democrats in 2006? Remember how nothing, not even the tech market crash, not even the massive accounting scandals that sank numerous Fortune 500 companies, not even the 2002 bear market, and not even the military action spawned by the 9/11 attacks could justify the Bush Administration’s deficit spending?
My, how times change.
Things are bad, there is no doubt. And this past year’s economic meltdown was unusually hard on the real estate and finance sectors, which is where Americans invest most of their privately held wealth. Fewer dollars in the bank means fewer dollars to spend, and so our economy is now in the midst of a full-blown recession.
As can be expected, Washington, DC’s answer is “spend more.” While common sense tells us to spend less when we have less, the government has the luxury of being able to go deeper and deeper in debt by printing money and selling treasury bonds. And President-Elect Obama has wasted no time taking advantage of that luxury. All indicators seem to be pointing to a 2009 Federal budget deficit somewhere between $1.2 trillion and $1.8 trillion. Trillion. T-R-I-L-L-I-O-N. Or up to 12.5% of our current GDP.
Why? Because we are told that the recent economic downturn is so serious that without a significant cash give-away by the Federal Government things will continue downhill and we will be stuck in a years-long recession. Naturally this means we all have to make sacrifices. Well, except for most of the Federal Government, that is.
I can accept the reasoning behind the emergency cash infusion for banks at the end of last year, but I am extremely skeptical about a continuing need for federal “bailouts” in the private sector. So I decided to look at the Dow Jones Industrial Average from 1920 up to the present, in order to see how many serious market downturns we have weathered, and to determine if we are in a bear market/recession cycle so unusual and so catastrophic that the government has no choice but to do something — anything — in order to end it.
The Dow Average is not a perfect indicator of recessions, but its track record in that regard is rather good. Most of the recessions of the last 80 years corresponded with market drops, but not every market drop produced a recession. The 1945 recession actually occurred during a 20 percentage point gain of the Dow index. The Dow Index’s 27% post-9/11 drop during 2002 had no corresponding recession, nor was there a recession after 1987’s “Black Monday.”
Here is what the stock markets of the last 90 or so years have looked like:
The period between 1920 and 1940 is obviously defined by the Great Depression, but the nation’s economic downfall didn’t happen all at once. The 1929 crash erased about 48% of the market’s value, yet the market gained back nearly half of that loss during 1930 until the effects of Herbert Hoover’s ill conceived economic “fixes” (income tax rate increases, tarriff increases, and a freeze in the money supply) started a downward trend. By the end of 1931 the market lost all of the nearly 300% gain that it made between 1924 and October 1929. The market eventually bottomed out in mid-1932. By that time, it was down 89% from where it had been just three years before. In other words, a dollar invested in the Dow 30 in 1929 would have been worth only 11 cents in mid-1932. By 1934 the Dow Average had doubled from its 1932 low, and by 1937 it had gained another 50%. But that 50% gain was wiped out in another severe recession that began in the middle of 1937. This downturn is now attributed to the Roosevelt Administration’s unrealistic artificial wage and price controls and its ongoing legal persecution of industries that performed well while the rest of the economy was down.
The period 1940 to 1960 was the century’s first true era of spectacular sustained market growth, with the Dow quadrupling in value from 150 points in 1940 to 680 points in 1960. The only major market drop (33%) occurred during the 1941-1942 period that marked America’s entry into WWII. This twenty year period was remarkable for its low inflation and the advances in electronics and computers following the war. Even so, the Dow still suffered during the 1957 recession, losing 20% of its value by the end of that year.
The period between 1960 and 1980 was largely one of stagnation. The Dow Index finished 1980 at around 840, up only 19% from its 1960 value of 680 points. The technological advances of the space race (satellites, computers, etc.) were obviously not enough to offset the massive stagflation of the 1970’s, which actually makes the dull percentage point performance of the Dow Average seem even worse. Throughout the “Oil Embargo” recession of 1973 and 1974, the Dow average shrank 45%, ending the year 1974 at 577 after reaching a peak of 1050 at the beginning of 1973.
The period between 1980 and 2000 was another era of incredible market growth. This even includes the ominous “Black Monday” of October 19, 1987, when the Dow average fell 20% in one day, the largest one-day market drop in US history. By the end of October, the US Dow average was off 35% from its mid-year high of 2700 points. It ended the year down over 40%.
Following the stock market crash, a group of 33 eminent economists from various nations met in Washington, D.C. in December 1987, and collectively predicted that “the next few years could be the most troubled since the 1930s.”
The Dow recovered its 1987 losses by mid-1990, only to take another 21% dive that year. But after that, the Dow gained an unbelievable amount of momentum and ended the year 2000 at 11,500. That’s just a little over an order of magnitude (10x) growth in twenty years. Just like the 1940-1960 period, very low inflation, low interest rates, and the incredible growth of technology (cell phones, computers, and the Internet) contributed to overall economic growth during the 80’s and 90’s.
So what about the last ten years? Interestingly, they strongly resemble the years 1960 – 1966. The marked bottomed out in 1962 (the Dow was off 28%), similar to the post-9/11 drop in 2002 (27%). The 1963 – 1965 market recovered and grew by 25%, but shed all of that growth in 1966. The Dow grew 45% between 2003 and 2008, but ended the month of November 2008 with a 45% drop in index value from its all-time high of 14,164 in October 2007. We tend to remember the 1960’s as a period of “prosperity” but the history of the market seems to tell a different story. And after the lackluster 1960’s, we had the recession and inflation-driven 1970’s. Does a similar situation await us in the next decade?
According to the historical data, the United States has suffered five periods between 1920 and today where the value of the stock market dropped greater than 40% — 1929 to 1932, 1937, 1973 to 1974, 1987, and 2008. Both of the market drops during the 1930’s were either worsened or directly caused by misdirected government intervention. And the 1970’s was defined by Keynesian economic policies throughout the Nixon, Ford, and Carter administrations, beginning with Nixon’s wage and price controls and ending with Carter’s attempts to manipulate the market through interest rates and cap the cost of energy through excessive government regulation. In contrast, despite the suddenness and the size of the 1987 market drop, the Reagan Administration eschewed an overblown response, and the market recovered on its own. Liberals like to point out that most major recessions have occurred during Republican administrations. But market data also indicates that the longest and most damaging recessions occurred during times of heavy interventionist government policies, the kinds of policies strongly supported by today’s Democrats.
It would seem unlikely then that we HAVE to spend trillions of borrowed dollars if we want the economy and the markets to recover. We will be in even bigger trouble if spending is supplemented with tax increases and attempts to punish successful industries (oil windfall profits taxes immediately come to mind). For the time being, we are probably stuck with “Hope And Change®” with a mind-boggling price tag, because that seems to be what people want. But we would be wise to keep as much restraint on spending, tax increases, and regulation as we can. That is, unless we want another repeat of the 1970’s.
And personally, I can’t stand corduroy.