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…I humbly submit that the 1920s are…reminiscent of our current decade, the 2020s.
Editor’s Note: These are edited ([ ]) and abridged (…) excerpts from the original article
History doesn’t repeat, but it rhymes. This trusty aphorism, often attributed to Mark Twain, strikes just the right balance between perceptiveness and vagueness…Indeed, periods of history can, on the surface, look new and involve new elements while also sounding eerily reminiscent of earlier periods…[so] what prior period of history rhymes with the present one when it comes to finance?
…Let’s start with the non-financial realm:
1. Both decades were periods of intense culture wars between modernists (progressives) and traditionalists (conservatives)
- …The debates and conflicts between these camps are based on the same subject matter today as they were in the ’20s. Only the specifics are different.
- [please refer to the original article for a detailed discussion on the particulars]
2. Both decades began with a major economic downturn
- …[Similar to] the Great Recession of 2008-2009… the 1920s also began with a devastating economic downturn, worse than the Great Recession by many standards…
- [The original article] documents the severity of the downturn.
3. Both decades were marked by economic growth and prosperity
- …We all know the story of economic growth in the 2010s:
- moderate yet respectable 2%-average annual GDP growth,
- the longest stock bull market in history and
- innovators continuing to find new ways to improve life via the Internet.
- The 1920s were also an age of innovation.
- [Read the original article for a detailed account.]
4. Both decades had similar interest rate patterns
- …After a slight rise at the beginning of…[the 1920s bond yields] fell along with the Fed discount rate for the majority of the decade….The same has happened in the present decade, in which corporations are enjoying some of the lowest cost of debt in history.
- Near the end of the 1920s, just like our own, the Fed crept its main rate back up in order to tame a raging stock market.
- [For more specific details please refer to the original article.]
5. Both decades witnessed a rise in installment plan purchases
- …One study shows that the personal savings rate fell from 12.9% in 1920 to 4.1% in 1930, before shooting back up in the Great Depression to end the decade in 1940 at 12.6% – and an increasing amount of this spending…was channeled through installment buying (by 1927, 80% of radios, 60% of automobiles and 15% of all consumer durables were bought on an installment plan)…This should remind us of our own era…
- Meanwhile, on the top end of the income spectrum, just like in our present decade, the wealthy redirected their savings into investments. While 80% of American families had no savings at all in the ’20s, the top 0.1% of earners enjoyed 34% of the nation’s savings, and the top 2.3% of earners held fully two-thirds of the nation’s savings. Income (including dividends and capital gains) for the top 1% of earners increased by 75% from 1920 to 1929.
- Steadily falling corporate bond yields (i.e. cost of debt) along with high innovation and productivity growth helped corporate profits soar 62% from 1923 to 1929. This certainly “rhymes” with rising corporate profits during our current decade, although those have come without much innovation or productivity growth.
6. In both decades, a large portion of total debt growth was corporate debt
- …Corporate debt expanded rapidly over the course of the 1920s… becoming the largest share of the total credit market by a wide margin by the end of the decade.
- Second only to corporate debt was mortgage debt, which grew by more than eight times just from 1920 to 1929.
- Both of these – corporate and mortgage debt – echo our own decade. Mortgage debt quickly bounced back during the recovery after the Great Recession, and corporate debt roared back even more strongly, now cresting 46% of GDP…
7. In both decades, the Fed’s balance sheet shrank late in the decade
- …At the peak…in 1927, the Fed’s Treasury holdings didn’t quite reach 1% of GDP [whereas]
- In the 2010s, Fed Treasury assets remained well in excess of 10% of GDP. Total assets (including mortgage-backed securities) exceeded 20% of GDP.
- [Read the original article for further details.]
What Does the Future Hold?
It’s clear from the experiences of the Great Depression and Great Recession that deleveraging does not occur unless serious pain forces it to occur so the economy and markets will eventually tread down one of two paths.
- Either monetary policy continues to be accommodative and debt levels remain elevated (or even rising)
- or it ceases to be accommodative and a very painful deleveraging (mainly concentrated in housing, corporates, and municipalities) unfolds.
I think central bankers are too skittish to let the latter scenario play out so that leaves the former but how long can we tread down the path of ever-rising debt? This line of reasoning persuades me that some sort of jubilee (debt forgiveness) scenario will eventually be implemented by fiscal policymakers or monetary policymakers or both...
The future is opaque, but one thing about it is certain: It may not repeat, but it will rhyme.