The Crash of 1929 Can It Happen Again

He is Chairman of Soros Fund Management LCC, a private investment management business firm that serves as principal counselor to the Quantum Grouping of Funds. He is the writer of The Crisis of Global Capitalism.
When y'all, as an investor, equally a trader, look out at the world, six months, nine months down the road, what kinds of things are you looking for?

The financial markets generally are unpredictable. So that one has to take dissimilar scenarios ... The idea that y'all can actually predict what's going to happen contradicts my way of looking at the market.

Really, I see tremendous imbalance in the world. A very uneven playing field, which has gotten tilted very desperately. I consider it unstable. At the same time, I don't exactly see what is going to contrary information technology. Certainly, a slowdown in our economy would leave the world extremely vulnerable, because the U.S. economic system is, today, the unmarried engine that is driving this very big airplane. And so if that engine were to conk out, you'd have a very serious problem. It's a question [of]: Can you repair the other engines before this i gives out? Because fifty-fifty though people say that we alive in a new world, and the past is not relevant ... cyclical fluctuations are not eliminated. That's my master concern.

... I just desire to clarify ... that what you accept is a very uneven playing field. You have excess liquidity at the center and a dandy deficiency of capital at the periphery. The money is still flowing from the periphery towards the center. And so we ought to find a way to inject liquidity in the periphery. Instead of that, we tin but inject liquidity at the center. The Federal Reserve tin lower interest rates, and has done then.

What you need is a machinery to provide capital to countries like Brazil, which is where coin is fleeing. Interest rates are very high. The country is going into recession. So this is what creates a tremendous imbalance, at the moment, which is not sustainable. It could lead to ... if this engine now gives out, then you accept a problem.

I mean, in fact, there is a sure danger that because of the injection of liquidity, our fiscal markets have become overheated. You take signs of speculation, excessive speculation in areas similar Internet stocks, and and so on. You lot could feasibly have at some betoken a crash that would then have negative effects on the real economy ... In this country. And then, indirectly, on the rest of the world ...

He is a Washington-based journalist who has worked in newspapers, magazines and television for over 35 years. His about contempo volume is One World, Ready or Non, The Manic Logic of Global Capitalism.
Many people think this crisis, that's been with u.s. for the last 19, 20 months, is over. What'southward your view?

My view is nobody knows yet whether this is over or not. But I would remind people, nosotros've had three or four false dawns in the last ii years where the newspapers began reporting that recovery was in sight. Almost ever those judgments were based, non on the real economies in the earth, what people were doing and producing and buying, but on fiscal indicators.

This present moment is very much based on some currencies in Asia that got hammered a twelvemonth agone, take recovered a chip and now seem stable. Stock markets are reviving in some countries. If you await at the real economies, what'south actually happening to industry and commerce in those countries, they're still very negative. So I will feel like we may be coming out of this when I stop seeing unemployment rising in those countries, stop seeing then many bankruptcies increasing--indicators like that, the real health of the economy.

We have, what, 40% of the world in recession or depression still?

Yeah, and we take something like half the world in recession or depression. The German language economy, which is one of the big [ones], has been contracting for two quarters at present. People in Europe are very nervous nearly a European-wide recession. The U.S., it's true, keeps chugging along. On the other manus, we accept a negative personal savings rate. People are spending more than they're earning, despite the fact that wages have been increasing. We have falling profit rates ...

If you lot were a person who had his or her retirement savings in the stock market, would y'all exist worried?

Yes ... I'yard among those who felt it was an inflated toll bubble for a long time, several years, and it keeps going up, defying all sorts of predictions. Still, 1 of two things has to happen. Either the stock market will get down considerably. We hope not all at once, but dramatically ... or those people who have invested their money in the stock market are going to be disappointed by the return. But simply by the arithmetic--if you paid an over valued price for a stock, yous're going to go a smaller return than you anticipated. I don't think we can escape from one or two of those consequences.

When people observe that that's the case, that they're not really going to get that 12%, 15% appreciation in their money, maybe they will accept that maturely and simply take it. History tells u.s. that that's not what happens. What happens is people say, "I'chiliad getting my coin out of here, because I'one thousand not getting what I thought I was promised by the market. And then I'll put information technology somewhere else." If a lot of people do that at once, then you've got a financial panic and crunch.

... ultimately, the problem in the stock markets--you can argue over whose numbers you're using--but basically those stock markets are predicting a continuation of extraordinary turn a profit levels, double digit profits from companies at the very time those profit rates are coming down and have been for a year and a half now.

Somebody'south got to exist wrong. I don't call up it's the companies. They can see what's happening ... The plummet in need in overseas markets and the falling crisis for goods ... that put a squeeze on American companies even if they aren't large overseas exporters, because you've got all these foreign appurtenances pouring in here. It makes it impossible for a company to raise its prices. Probably it has to cut prices. That squeezes profits. If you squeeze profits long plenty, then the company's got to cut back on new investment. You see you're in a concatenation of bad events. That'south where we are. Peradventure we'll glide out of it and bottom out and things will turn around, only I wouldn't bet my mortgage on that at this bespeak.

Looking at the global economy, yous recollect we're at a critical moment and that nosotros accept been for the last yr or half twelvemonth. What is your sense? What is it based on?

The disquisitional moment that faces the global organization now is: Will governments be wise enough to learn from these catastrophic events and reform the system? That is, impose some rules on, specially, global financial markets, but another aspects as well. Not to shut it down, but to keep it alive and moderate its pace and help countries protect themselves confronting the ravages of fickle financiers running in and out of their economic system.

I am gloomy at the moment because I don't see much prospect of those reforms being done seriously in a timely manner. If they're non, then information technology is very articulate that we'll be back in crisis, whether that's six months or 18 months or two years from now, I don't know and nobody else could say. But the fundamentals are now articulate and we're not acting on them ...

He is a well known military strategist and consultant, and Senior Fellow at the Heart for Strategic and International Studies in Washington DC. He is the writer of Turbo Commercialism: Winners and Losers in the Global Economy.
Do you think the possibility of a global recession, if not low, is a very real one right now?

As we speak, the possibility of a global recession is a very real ane. On the ane paw, you have the base of operations of the world economy. Y'all have the impoverishment that comes from very low commodity prices stretching from Wisconsin to Chile, Wisconsin pork bellies, Chile copper, everything in betwixt, the oil in Venezuela, so on. It affects entire countries ... Somebody should be out at that place pumping demand into the system. Instead of pumping demand, nosotros have the United States running a surplus considering of the politics of it.

... Now, what was avoided would be the coherent, united, harmonious, and smart intervention by the authorities. Given what happened last October when the crash took place, there were some waves and panic, and people were suddenly afraid that they wouldn't have a pension, their mutual funds would disappear. People asked themselves how much coin they still had invested in the old-fashioned way, you know, just by putting it in bonds and banks.

At that moment, there was no harmonious response. Information technology was all washed past the American Federal Reserve. Alan Greenspan and the Federal Reserve acted. Everybody else talked or did cypher ... I don't call back [the Federal Reserve is] going to be sufficient to forbid the [adjacent] crash, which will come up sooner or later ...

... Information technology's similar having a bully brawl there on the peak of an incline of a slope and when accelerated down, the merely thing supporting it is just the Federal Reserve, the American regulatory financial and command system, considering no global mechanism has been set up; no coordination has really been prepare between the American and the Europe and the Japanese economic controlling entities.

At almost, in that location is a liaison between the central banks, but they only control monetary policy, so nosotros take a contradiction here. We have a global economy with no global financial control mechanism. Therefore, a crash is but a question of time.

He is the old Deputy Undersecretary of the Commerce Department under the Clinton assistants and is now president of an international advisory firm. He is as well an adjunct professor of international and public affairs at Columbia University.
You lot ... [accept] compared global economics to plate tectonics ...

... When you expect at the global economy, one way to view it is using a plate tectonic model where in that location are mistake lines all the way around. When there's a shift of one of these mistake lines, especially a big shift, it can exist felt all the way effectually the world and we saw that last summer.

There was a fault line underneath the Russian economic system. It shifted. The touch was on Brazil where at that place was some other fault line which shifted and caused a problem throughout Latin America. You saw that with the Asian financial crisis where there were fault lines under a number of these economies that we reset into disequilibrium as a consequence of too much uppercase and too many foreign-denominated loans coming in while currencies were valued wrong ... Well, that fault line moved and what happened? Demand fell off enormously, and that's how the energy was passed through this system of economic plate tectonics, if you will, and it affected the countries of Latin America. Why? Because most of them consign commodities--forty% of Republic of chile'southward exports is copper, and 40% of their exports goes to Asia. And then at that time all of a sudden you've got a consequence in Chile.

Even to this day there are error lines that could shift and could set off another set of these things. Wall Street with an Internet bubble in the eye of information technology is a mistake line. Nihon with a weak fiscal system and dubiousness about whether the authorities's latest round of reforms after round of reforms over the form of the past decade, are going to piece of work is some other fault line. China, with the value of the yuan and whether they're going to cheapen, is another fault line. A spreading war in Kosovo, a disharmonize in the Center East near the source of oil, these are fault lines that exist out there. We have to recognize that in the global fiscal system correct now these aren't isolated, these aren't remote from united states of america. They tin can touch on us and they tin can affect other markets in a fairly firsthand way.

So yous don't think that this rolling crisis is over?

... Personally, I'one thousand a little worried because I call up in that location is a bubble in the centre of the Wall Street economy. No one should accept any confidence in the Japanese ability to fix their problems, considering they haven't been able to do it so far and they oasis't taken sufficiently dramatic steps, although they may. The Chinese could be spooked by a variety of other things and need exports to produce hard currency ... Nosotros are yet in an era or menstruum in which confidence is not restored, and until it is restored, until in that location is a deep sense that we're back on the up runway, we stand up vulnerable to upsets similar the upsets we've seen in the past year.

Is at that place a danger that the wrong lessons are being drawn from the crisis of the last yr and a one-half, two years?

... Not only is in that location a danger, at that place'southward a certainty that the incorrect lessons are beingness drawn by some people. By virtually of the people at the eye of the international financial system, are the incorrect lessons being drawn? I don't know. I don't see the IMF being highly responsive to this. I don't see it having learned its lessons. I see that lending $5 billion more to Russian federation seems to me to exist at best an accounting transaction, at worst some other waste of money. I see however an absence to be able to address questions of social equity in an constructive mode, so these things volition take a while to formulate, but the general trend within the markets is to exist adequately thoughtful well-nigh this at the highest levels, and there is a general movement toward understanding things better ...

Role of the problem is that in emerging markets, just equally some of them are not highly liquid financial markets, they are non highly liquid information markets, and as a event a little bad data tin cause quite an upset just as an inflow of too much money or an outflow of too much money can cause quite an upset of these markets.

So they're still volatile? They're still erratic?

Volatility is the toughest consequence to bargain with because the pipelines are getting bigger and bigger through which money goes. It allows it to become in rapidly. It allows it to become out rapidly. The corporeality of information people have allows them to brand decisions very chop-chop. The mentality of a lot of these investors is non a long-term mentality in terms of the portfolio investors, and volatility is a big risk for a lot of these places. That'southward why you'll see some kind of modified capital controls in a lot of these countries growing even though that has not been for a long time the policy of international financial institutions.

It's but inevitable in a medium- and a small-sized country that they want to protect themselves against that kind of disequilibrium. You will e'er encounter greed and self-interest drive markets to places that reason wouldn't.

He was a peak portfolio managing director for George Soros's Quantum Fund, a private investment fund, from 1992 to 1995. He left the money direction business in 1996.
It'south like we're talking about some chess game in the heaven. Most of u.s.a. don't even have any idea ... that this game is going on.

Yep, I remember that's partially truthful. The nature of the abstract thinking that'southward going on in the investment community is sometimes discernible through comments you run across in the financial pages. But the way in which all of these prices that affect employment and how goods are bought and sold and what countries experience nail and which countries are in stagnation, I don't call back that that connection between how the investor-trader world is setting prices and and then the real consequences is well established.

Or well known to ordinary folks ...

... We're seeing Russia, much of Latin America, most of Asia, become through episodes in their economies, in their economic life, that are as deep and damaging and painful and profound as the Great Low was in the United states. At the same time, the United States is an economic system which is characterized past its proportionately smaller exposure to international trade and international influences, and our stock market's at an all-time loftier. We're at a time when people are nigh religious in their worship of markets. The market is now our main. If you espouse a social goal in America today, someone volition say to you, "No, the market won't support that."

The market is a tool. We should have a political and social consensus on what our objectives are as a society and use markets to facilitate that. Merely now the servant'due south the master. It'due south about as if the marketplace is a religious icon. I run across that mirrored in the very, very high valuation of the United States stock market and the tremendous conviction that citizens have throughout the country that the United States is skillful, is correct. The complimentary market is dandy, and the stock marketplace is where you lot put your money.

People used to put their bank balances into gold or bank accounts or CDs, and so-chosen safe things. The stock marketplace was considered risky. At present the stock market place is where everybody puts their money 'cause that's considered safe and lucrative. That's a bothersome notion to me. Every bit I mentioned earlier, making money is most changes in perception. Our society has such conviction at present that the stock market is a expert identify. That perception is reflected in prices. The change in perception that's going to make stocks go upwards further is becoming even more optimistic.

... The ability for perception to modify and alter valuation in the stock market seems to me budgeted the time when the but news that will exist meaningful is bad news. That will change your perception. That will make my dentist stop lecturing me about how I have to be in the stock market with all of my wealth considering, four out of five years, information technology's better than bonds. Nosotros're at a unsafe bespeak with regard to equities in the United States, and I mentioned information technology's a piddling bit like footling while Rome burns 'cause the world is struggling all around us right now. And if the United states runs into a downward screw, declining stock prices ...

Soros has said if things don't modify, at that place is the existent danger and possibility that we are headed for a worldwide recession, if not depression.

Yes.

Do you share that fear?

I think that George is accurate. There's an quondam maxim by a at present deceased journalist, American, named Christopher Lash, and he said, "Meritocracies are only stable if a big number of people are winners. Otherwise they change the rules."

In the economic issue, if the United states is successful and the rest of the world goes through the kind of transitions and violence that they accept in recent years, and that persists, and for instance, if the U.S. slows downwards, we've talked near it, and information technology amplifies the hurting in other areas, they will not view themselves as bad performers in this organisation. They will try to alter the arrangement.

The nature of the trading system in the globe and commerce is at risk in the electric current time, because large number of people are suffering; large numbers of people have had their lives disrupted and had their expectations about the continuity for growth and progress and employment and wealth aggregating shaken to its foundation. And that sows the seeds of political dissent and the impetus to a modify in the way the world is organized.

He is the Ford International Professor of International Economics at MIT. He specializes in international trade and finance and his almost recent volume is The Render of Depression Economic science.
What is the biggest question in your mind today?

Oh, the biggest question is what about the big advanced countries? This is an enormous human tragedy. But and then far, information technology'southward simply afflicted people who didn't accept that much money to begin with. So in dollars and cents terms, it doesn't really matter that much. The question is: Tin can this thing spread to united states? By us, I hateful, basically, all the advanced countries, all of the rich, stable, democratic countries of the commencement world.

So far, mostly information technology hasn't, only there are some scary things out in that location. The Japanese are fairly shut to entering into a deflationary spiral. The United states of america had one heck of a scare in the autumn when the bail market froze. I think a Fed official in a private meeting, when people asked him what are we going to practise about this, [he] said, "Pray," which was not very encouraging. We got out of that. Nosotros don't quite know how. And then the scary question, the big question is: How immune are the big avant-garde economies? I'd give you 10 to one odds that it's non the 1930s over again for those economies, simply those are non the kinds of odds I'd like to exist hearing.

Aren't we already seeing [people] in the oil industry, steel manufacture, in this country commencement to experience the effects?

Aye. Clearly some groups are hurt, because they are dependent on those markets, or one mode or another are direct in the path of this storm. On the whole, the United states of america' economy remains astonishingly prosperous in the face of what's going on there. There'southward no necessary reason why that can't continue. Merely then, there was no necessary reason for any of this to happen. So you've got to be concerned. The cracking revelation hither is that we don't know what nosotros're doing also as we idea we did. Problems we idea were solved are not solved. Economic analysts like me, economic managers similar the people at Treasury, hopefully know something, simply don't know equally much as we thought we did. That means that problems that we thought were impossible may turn out to be quite existent in the mod world.

In your Foreign Affairs article, you talked virtually whether or not governments would accept enough steps to stimulate demand at this moment ...

If you expect at ii of the three great centers in the advanced earth, Japan, first and foremost, and and then also Europe, y'all offset to wonder, what are they thinking? Expect at Japan right at present. Information technology's an economy that'due south been shrinking for the past 2 years. Prices are falling. Wages are falling, which never happens. You lot say, "Well, they must be moving heaven and earth to get that economy moving once more." The answer is, they aren't. They're spending a lot of money on public works, but they're not printing a lot of coin. When the yen surged in value for complicated market reasons, which is a terrible thing for an economic system that's on the verge of a deflationary spiral, the Japanese really seem to exist proud of it.

So that's scary. That'southward making me wonder, is it really possible that here in the modern world, in that location are people who don't understand even that much and are prepared to take those kinds of risks with a big economy? If you wait at Europe, where they talk about price stability and are sitting there again on the edge of deflation, yous wonder, are they prepared to practice what's necessary?

Meaning, spend money?

Well, in particular, print money. You print money, and you spend money. Print money is the easier culling and the preferred 1, if y'all can do it. Once again, the Europeans offset to talk most the virtues of the stiff Euro, which is the last matter they demand correct now. What worries me most Nippon and Europe is the people in charge seem to be like the old line about French generals, prepared to fight the last war. They remember very well the aggrandizement of the 1970s and early 1980s. They remember the excesses of speculation in their markets during the bubbly economic system in Nihon during the 1980s. Here, they are in a world which is that world turned upside down, where the clear and present danger is deflation, not aggrandizement; where the problem is crashing nugget prices, not overvalued ones. They don't seem to be prepared to make the mental shift. And when they do, it might exist too late.

Add into that mix the U.South. economy running a [budget] surplus. Isn't that a problem at this moment in time?

... Well, so far that's non a trouble, because U.South. consumers are making up for it. What happened is the U.S. government has gone from heavy dissaving to substantial saving. But U.Due south. consumers decided to stop saving altogether at the same time, so it hasn't created a problem.

I'm less worried most the U.S. I don't recollect that we are a contractionary force in the world now, or are likely to be. And in Greenspan I trust--non really, simply the fact is, that the U.Due south., whatever criticisms you tin brand about its policies and for the rest of the globe, our domestic policies are more than flexible, more open minded, than that of anyplace else. That is one of our keen strengths ...

If Asia heads into depression and Europe is in a deflationary cycle, how long exercise we think that we are protected?

Oh, we have to movement fast. The world is non all that integrated. Information technology is possible to have prosperity in the U.S. while the balance of the world is in problem. It's possible in principle, only we'll accept to move fast. If in that location is a slump that spreads to the kickoff world oustside the U.Due south., then we have got to cut interest rates, start spending that budget surplus ... The Great Depression would have been easy to stop in 1930. It was very hard to leave of by 1935. The point is, that the time to act would be chop-chop. I think Washington understands that. Famous last words?

He is the Galen L. Stone Professor of International Merchandise at Harvard University and the Director of the Center for International Development. He has served every bit an economic counselor to governments in Latin American, Eastern Europe, Russian federation, Asia and Africa.
A growing number of observers have pointed out similarities in certain trends in the 1990s that were too trends in the 1930s. You've written some nigh that yourself ...

In that location's a question whether 1999 is 1929. We had a booming stock market in 1929 then went into the world'southward greatest depression. We accept a booming stock marketplace in 1999. Will the bubble somehow burst, and then we enter depression? Well, some things are not different. The volatility of international capital letter played a big function in the onset of the Slap-up Depression. The volatility of international capital is obviously destabilizing markets today.

There is, in my view, one fundamental difference, though. I recollect information technology really is so cardinal that the analogy doesn't hold in the end. In 1929, the globe was on a gold standard. That meant that every major currency in the world was linking the value of its currency to gold ... with the toll of the currency set up to gilt, you couldn't really practise very much in terms of expanding the money supply in a depression, and and so on. We only got out of the Great Depression every bit countries got off the gold standard, which was a long, arduous, tumultuous and, eventually, tragic process.

The good news for 1999 is, we are non on a gold standard. We have independent national currencies or regional currencies, in the case of the euro. If nosotros did become into a recession, something that's always possible for the U.Southward. or Europe, we could lower interest rates and expand the money supply without worrying virtually the cost of gilded.

If the whole world went into recession, all the major cardinal banks could cut involvement rates and expand the money supply. Indeed, last summertime in 1998, when in that location was an intense moment of fear after the Russian default of a worldwide credit crisis, the Federal Reserve Board cut interest rates several times and successfully overcame that fearfulness. I recall that was important to a good monetary policy. So this is the large difference in my view. Could information technology happen again? It would accept absolutely horrendous policy mistakes. The system itself is a lot safer right at present, because nosotros are not bound by the straight jacket of the golden standard.

Practice you remember that the stock market bubble, only more, the sense of American prosperity, is ever going to be afflicted past what is happening in the rest of the world?

The U.S. is in a chip of a euphoric mood. Euphorias come to an finish. We hope they don't come to an terminate with a recession, much less a crash. There's a lot of strength in the U.South., but there's a lot of froth also. The barm will accident off. We're going to accept to face up up to some realities that we're non fully facing up to right now.

Ten years agone, there was a lot of euphoria about Japan ... [and] fear in the U.Southward., that nosotros're near to be taken over or fully owned past Nihon. Well, this was a lot of hysterical marketplace misunderstanding. Opinions in markets just bounciness off of each other. We see it happening again.

The U.S. has a audio economic system. Information technology also has a cyclical economy. It also has stock market values right at present that are hard to explicate on historical norms. While information technology'due south e'er possible that everything can exist based on the new economic system, information technology'southward also quite possible that we're doing a piffling chip of exaggeration in just how wonderful things are.

Do yous have any sense that Washington policy makers are reconsidering some of the policies? ...

I think within a limited range of issues, they're thinking, "What virtually exchange rate recommendations? What about short term capital flows?" There is some discussion of some real issues. The broader upshot of the real role of the U.S., the foreign assistance attribute of that, who'south going to pay for the security of a global economy? No, we are not doing whatever wide rethinking correct now. This is the end of an administration. That's usually a pretty terrible fourth dimension for whatsoever real ambitious thinking.

Does that worry you?

I've been worried all through this decade. I'chiliad more than worried at the terminate of the decade than I am at the beginning of the decade, considering you have and so many of the poor countries of the world in utter crunch correct now. I don't see that crisis getting ameliorate. I don't run into much existent and serious attention. By serious, I hateful something that might cost us something.

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Source: https://www.pbs.org/wgbh/pages/frontline/shows/crash/etc/again.html

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