Having looked at the current global economic climate, one can’t help but wonder whether looking for learnings from the crash of 1987 is in fact looking far enough back. Let’s take another look, but a little further back in history.
The most famous crash of all time must surely be the 1929 Stock Market Crash. The 1920’s had been a time of boom and following WWI had seen the introduction of new technologies such as radio and the modern day car, which in turn had meant a large increase in industrialization.
The economy was booming and air travel was becoming widespread. This period was very similar to the dot-com boom of the late 1990’s as new and life changing developments were being introduced to the wider population.
Pre 1929 Stock Market Crash was a time of the original millionaire, when the term millionaire meant a great deal more than simply being a modest sized house owner. In terms of today we would maybe need to compare a billionaire to understand historical equivalency. These were days when ordinary individuals were encouraged to invest in the stock market, and in an era which became known as "The roaring twenties", similarly to the late 1990’s people couldn’t, or wouldn’t consider that stocks could ever go bust. Sound familiar?
Prior to the 1929 Stock Market Crash economists were involved in the hype and were advocates of "margin". Margin effectively meant that investors would buy stock on loan and for every dollar invested from their own pockets margin users would leverage nine dollars worth of stock. This was an excellent way to invest money in these times with one major flaw;
Whilst for every dollar invested they would effectively see a tenfold normal return, this actually meant that any loss would be compounded in the same way and could leave margin users in serious debt with their brokers literally overnight.
When the bubble (well, to me the layman it appears to have been a bubble) eventually burst it caused mayhem on a scale which has not been repeated since. In fact the Dow Jones which had increased fourfold in a decade dropped 25% in the first two days after the 1929 Stock Market Crash and didn't bottom out until 1932 some 4 years later.
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I imagine people are wondering time and time again, why does history keep repeating itself? Well, it appears that government have indeed taken the learning’s from the 1929 Stock Market Crash and the years that followed and come to the conclusion that the only way forward is an intervention on a grand scale by government.
Thankfully, some might say, governments across the world have this time around signed up to this idea and early indications are that the real depth of the crisis may have been averted for now. However, I do wonder having spent future budgets in this financial year what is yet to come?
Put your seat belt on, the real ride may be closer than we think.
Also read about the Stock Market Crash of 1929.
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