Take a look at the two graphs that appear below. Both track the Dow Jones Industrial Average from Feb 15 of one year to Feb 13 of the following year. Which graph would you rather be on?
Both graphs show a low point of around 43% off the DJIA high for that 52-week period. The top graph (A) has a high that occurs shortly before the drastic decline, and recovers a bit to a 30% loss at the end.
The high point in the bottom graph (B) occurs much earlier, there is a steady decline before a big drop, and then the DJIA fluctuates wildly but keeps downward to a loss of 41% at the end.
Graph (A) represents the year between Feb 15, 1929 and Feb 13, 1930. Graph (B) represents the year between Feb 15, 2008 and Feb 13, 2009.
The recovery in graph (A) ends around April 1930. By Feb 1931, the market has lost 50%; by Feb 1932 it has lost 79%; by July 1932 it has lost 90%. The DJIA doesn’t get back to its pre-crash number until 25 years later, in Nov 1954.
I can’t tell you what’s going to happen with graph (B). So, which do you choose?
The correct answer is (C); I’d rather not be on either of those two graphs. Unfortunately, we don’t get to choose. Or maybe that’s a good thing: we have one less thing to worry about.
In 1905 George Santayana wrote Reason in Common Sense, which included this aphorism: “Those who cannot remember the past are condemned to repeat it.”
(“History repeats itself” is a proverb dating back to the mid-sixteenth century, but nobody remembers that so we are condemned to repeat Santayana.)
I’ve been reading a lot about the Great Depression these past few months, as a way to understand where we might be headed, and to see if there were any mistakes we made then that we should be trying to avoid now.
If you’re interested in the subject, I recommend The Great Crash, 1929 by John Kenneth Galbraith. Here’s where you start to see history repeating itself: today’s Bernard Madoff Ponzi scheme gets its name from Charles Ponzi, whose original system (it involved international reply coupons and exchange rates on stamps) came to an end in 1920. By 1924, out on bail and awaiting an appeal, Ponzi took part in a Florida real estate bubble that burst shortly afterward.
The problem with a Ponzi scheme, or any kind of speculative bubble, is that it only works as long as you have new buyers to drive prices up. Galbraith notes that Americans in the Twenties displayed “an inordinate desire to get rich quickly with a minimum of physical effort.” That made the Twenties a great time for speculative bubbles.
In the past twenty years, Americans didn’t just want to get rich quickly with a minimum of physical effort, like the kid in the E-Trade commercial. We did our counterparts in the Twenties one better: we found ways to live as if we were rich, without actually getting rich at all.
We did this with easy credit. We could borrow for what we couldn’t afford today, or flip our homes tomorrow. It didn’t hurt that the prices of all the things we wanted kept going down. It didn’t matter if most of the better jobs went overseas. As long as our stock portfolios and homes kept increasing in value, we’d be okay.
This only works as long as you have new buyers.
Those who cannot remember the past are condemned to repeat it. We’ve made some of the same mistakes, and some new ones. In the past dozen years, we removed financial controls that were put in place as a result of lessons learned in 1929.
Now, as then, we argue over whether government should spend more or focus on balancing itself. (Hoover focused on controlling spending, and things got worse between 1929 and 1932.)
History doesn’t exactly repeat itself; it rhymes. There are strange echoes, distortions like the kind you see in a fun house mirror. Sometimes you recognize it, and it’s like déjà vu: the feeling that you’ve seen this before, it’s happened before, but just not exactly like this, and you’re not sure what happens next. It would be nice to know what to do, right now. You think you know, but you can’t be sure. The answer seems to be on the tip of your tongue.
That feeling? It’s called Presque vu.