(We bring in a guest columnist: an expat from Red America. The writer, who wishes to remain anonymous for fear of liberal retribution, says his column is "a blend of compassion, good cheer and intellectual honesty that doesn't shy away from asking: WWJD? as well as WWYDIYWADT? (what would you do if you were a derivatives trader)")
The crisis is over, and from this graph of the Dow Jones average from 1928 to 2008, the situation looks good. "We've come a long baby" is a phrase that keeps on coming into my head. It's too bad they don't sell Virginia Slims cigarettes in Estonia, because money is burning a hole in my pocket and if there was ever time for some decadent habits, it's now, in the early phase of a bull market.
Instead, what do I see as I listen to the news? A lot of people worrying about another Great Depression. If you look at the Great Depression now on our graph, we might as well ask, what Great Depression? You need a magnifying glass to see it. It's smaller than a hobo's turd.
The Great Depression is a classic example of a viral fiction, just as the 1960s were. People have fallen in love with the trappings of both eras -- fedoras in the first case, hippie styles in the latter. Hollywood's liberals and marketers have exploited the accoutrements of each to turn each into a wordless rallying cry against an "evil establishment".
Our graph smashes this myth, showing that there was no stock market back then. Perhaps the people jumping out of windows in 1929 were distraught at the fact that there was no market for liberal schemes? Perhaps they were depressed liberals with delusions of grandeur.
Luckily we've come a long way, baby.
The market started developing in 1950, a couple years after a moderately large conflict (World War II being yet another misnomer -- large sections of the globe were not involved). This suggests a way out of the current correction, but more on that in another post.
The other thing the graph of the Dow shows us is that the market has grown along a fairly regular trajectory since the end of the 1970s. Only in about 1995 did the market suddenly turn a sharp corner and start increasing at a rate that was not credible. You would think that some new productivity tool had been discovered in that year that acted as a multiplier on all economies.
Of course, that's the point -- one should have been discovered. In this case, the financial system generously gave the computer industry all the means -- a boom time -- to engineer a computer network that would revolutionize the world. And instead, the researchers and IT people squandered away the trust and the invested capital, producing a lot of empty gimmick sites.
The same sort of spike happened in 2005, when the financial system invested in homes and mortgages. It could have been "Acreage", it could have been "Great Views!" instead it was tract housing and sprawl and welfare projects for meth addicts. A correction followed.
The moral of the story is this: no more trusting private firms in key fields.
We should nationalize and consolidate broad sectors of the economy. We could start with the Internet and private homes. They could be run by a special agency that is off balance sheet but has special government powers.
Banks (four or so) could also enjoy even more independent status, being allowed to continue to come up with more and more complicated instruments. The government should stand ready with capital in case they get in trouble, but otherwise the role of the government would be small.
Going back to the graph, the million dollar or more question is now this: is the pre-1995 trajectory linear or quadratic?
If it is a straight line, the Dow should be back at an all-time high in about 2016. If it is parabolic it could be only 2 or 3 years.
This is the question derivative traders have to ask themselves. Which curve to bet on?
The other question should be: which sector should the financial system securitize next? I say food -- I see it as a kind of fuel with a definite kinship between calories and monetary units and there must be less volatility here -- but there are many options.