Not Learning from Our Mistakes

It appears that much like in 1929, and in 2008, leverage in general and margin debt in particular have exploded over the past few years.

It was easy to make money by leveraging up when interest rates were near 0%, but eventually the house of cards comes crashing down.

It took 80 years for the lessons of the Great Depression to be forgotten, but this time, it looks likely that it will be well under 2 decades:

Even I was shocked when I first plotted the data in Figure 56. While the private debt to GDP ratio grew by roughly 40% over the decade of the 1920s, the margin debt component of private debt grew far more quickly, from 1% of GDP in 1918 to 8.5% in 1929. Then it crashed, even more rapidly than it had risen, collapsing to half a percent of GDP in 1931. From then it was quiescent for decades, until a blip during the 1987 stock market bubble and crash, followed by its dramatic rise in the days of the "Greenspan Put",74F to which the '87 Crash gave birth.

This is Chapter 12 from my forthcoming book Rebuilding Economics from the Top Down, which will be published by the Budapest Centre for Long-Term Sustainability and the Pallas Athéné Domus Meriti Foundation. I am serialising the book chapters here. A watermarked PDF of the manuscript is available to supporters.

One look at this chart should be sufficient to understand why the Great Crash of 1929 was both great, and a major cause of the Great Depression which followed it, and why levered speculation, rather than rational calculation, dominates the behaviour of asset markets.

The author goes on to show how classical economic theory ignores the role of credit, and the dangers of credit, which, while an interesting read, is not what concerns me. 

What concerns me is that we are in a speculative bubble that will collapse, probably sooner than later, and its impact will be deep broad, and long.

In comparing the Great Recession of 2008, and the Covid recession of 2020, it is clear that finance and speculation is a far greater risk to our economy than is a disease that has killed millions.