There is continuing bad news about bonds, property, stocks, and other investments along with concern about inflation. Everything seems to be going down, except inflation, which is rising. Fed Chairman Jerome Powell and colleagues at the Federal Reserve Board of the United States continue to give priority to fighting inflation. Interest rates are going up, and a lot of economic activity is slowing.
However, stock declines are concentrated in volatile technology sectors. Higher interest rates favor savers and long-term investors. The crash of crypto, which is essentially gambling, is stabilizing. Labor markets remain tight. We are not in yet a traditional recession, and in consequence working people may now be reversing their long-term decline in relative real income.
The global financial crash of 2007~8 is instructive. However, a longer-term perspective gives more valuable context. The Great Depression remains distinctively destructive. The 1929 stock market collapse proved to be the spark for a decade of extraordinary economic crises and human misery. The stock market drop was sudden and steep. From the 381.17 peak on September 3, U.S. stocks lost 25 percent value over two days.
November brought recovery, but that proved fleeting. Stocks drifted to the historic low of 41.22 in July 1932. During the height of the selling frenzy, they traded in volumes not reached again until the late 1960s. Stocks did not return to the 1929 peak until the 1950s, in great contrast to more recent experiences. Public suspicion as well as hostility toward bankers defined American political life for decades. At home and abroad, extremism flourished, including Adolf Hitler’s Nazi Party in Germany. World War II followed.
After the 2007 financial crash, banks failed and others remained solvent only by emergency government support. The Federal Deposit Insurance Corporation, established during the Great Depression, proved up to the task of protecting individual depositors. The 2008 bankruptcy of the investment bank Lehman Brothers underscored the scale of the crisis. Nonetheless, sustained government intervention reestablished financial stability and supported recovery. Commercial banks became more regulated, with capital requirements raised as part of the rescue. In 2010, the Dodd-Frank Act became law, including the important initiative of Paul Volcker to again separate commercial from investment banking.
Chairman Paul Volcker of the Federal Reserve defeated inflation in the early 1980s, and that example informs current efforts. Traditionally, the money supply and interest rates have been principal tools.
The Fed today controls a relatively small share of total dollars. At the same time, the global reserve role of the dollar facilitates ongoing private investment worldwide. Most important, markets today are generally more fluid and robust. Finance is one component of our complex economy. Money is a universally accepted means of exchange, but tangible value results from the work of enormous, diverse arrays of people. This is what we Americans should remember: First, the U.S. has the most productive economy in the world. Our gross domestic product has doubled about every two decades since 1940. Second, as a citizen, be active. Serious, sustained public oversight of financial activities is essential.
Third, as an investor, do homework. One resource is the classic book by Dodd and Graham, respectively a professor and a Wall Street genius, first published in 1934, regularly revised.
The basic truths of investing remain unchanged. Also unchanged is the core importance of committed, dedicated workers. The current high demand for employees underscores the truth of this observation.
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