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Memories of 1929 - Part III - "Confidence!"

by Michael Nystrom
December 5, 2006
Arlington, MA

Near the beginning of the documentary The Great Crash of 1929, economist John Kenneth Galbraith warns us:
The United States is afflicted with new eras. Let us not think for a moment that the illusion, the aberration of the 1920s was unique. It is intimately a part of the American character.
Through the 1920's, the stock market soared for nearly eight years without a break, but things started to look a little dicey in the Spring of 1929. The market turned volatile as the economy began to falter. The construction industry was sluggish, and manufacturing was in decline. People were in debt and large sections of the population were poor and getting poorer.

The market turned volatile. But William Durant, founder of General Motors and big time stock operator was confident, and told the people they should be likewise:

"Confidence!" he exhorted, "Not halfway confidence, but 100-percent confidence. This is the real basis for our prosperity!" Everything would be fine, he claimed, as long as the people continued to believe.

And so it was the case. The market stabilized in the Spring and went on to register new all time highs. As John Kenneth Galbraith put it later in the program:
It was the nature of mass illusion. Prices were going up, people bought. That forced prices up further, that brought in more people. And eventually, the process becomes self-perpetuating. Every increase brings in more people convinced of their God-given right to get rich.
The market galloped away to new all time highs with the help of illusion, riding on the back of confidence.

That old fashioned American optimism that created the 1920's boom is still around and well today. But it is not centered narrowly on the stock market - it is ingrained in our culture and permeates the fabric of our being. A national debt of $8.6 trillion, up from $5.6 trillion in 2000 has done nothing to shake American's confidence. $22.2 billion on interest payments last month? Hell, we can afford it. $406 billion on interest last year? If people want to loan us the money - we'll take it, right? Gladly.

The government tells us that deficits don't matter, and in fact are a sign of our economy's strength, not weakness. Confidently, Americans believe it. Weakness is Strength! The fact that interest is the third biggest item on the Federal budget - after (of course) defense and entitlements - is further testament to this nation's enduring strength: Services such as education, infrastructure, and science funding simply don't require nearly as much money. As a world leader in energy consumption, the US spent only $3 billion on all energy research and development last year. This puts the $2+ billion per day of foreign borrowing required to keep the government running in perspective. But don't worry, friend. Be happy. The US has entered yet another new era, this one in which deficits do not matter. Everything will be fine.

A soft housing market, soft manufacturing, a falling dollar, rising inflation, recession on the way, negative savings rate, increasing debts, an aging baby boom population, peak oil and, the granddaddy of them all, global warming? Clearly, none of this matters or the Dow wouldn't be at a record high.

Confidence, friends! Don't think about these things. Just believe.

Just believe.



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As always, comments are welcome on this story.

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Coming next: The Specter of Deflation. If you would like to be notified when this article is released, please subscribe to my low volume announcement list

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Other articles of interest:
Harry Schultz on Recent Gold Activity
Memories of 1929 - Part I
Memories of 1929 - Part II

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COMMODITY TRADERS:
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