Understanding Finance from scratch

Chapter 36: The Financial Crisis No One Can Escape—Know a little about the truth about the financial crisis every day (3)
After 1869, the capital accumulation rate of U.S. banks was as high as 45% to 60%, and the absorption of foreign capital also increased from 1869 billion U.S. dollars in 15 to 1897 billion U.S. dollars in 34, effectively alleviating the shortage of funds caused by the rapid development of the U.S. economy. .Since then, because the US economy has also entered a period of relatively stable economic growth, and it was during this stable period that the total industrial production value of the US gradually surpassed that of the UK, and the US also replaced the UK as the world's largest economic power.But this situation was completely broken in the 20s.

In 1920, the first economic crisis after World War I broke out in the capitalist world.After the crisis, the U.S. economy grew rapidly under the influence of "economic bubbles" such as stocks and bonds, creating a miracle in the history of capitalist economy.From 1923 until the autumn of 1929, productivity increased by 4 percent a year.At the same time, the values ​​of the entire American society are changing.

20世纪20年代的繁荣虽然造就了一个资本主义发展的黄金时期，但这一繁荣本身却潜伏着深刻的矛盾和危机。首先是美国农业长期处于不景气状态，农村购买力不足。1919年时农场主的收入占全部国民收入的16%，而在1929年只占全部国民收入的8.8%，农场主纷纷破产。此时农民的人均收入只有全国平均收入的1／3左右。

Second, the US industrial growth and the redistribution of social wealth are extremely uneven.Industrial growth is mainly concentrated in some emerging industrial sectors, while old industrial sectors such as mining and shipbuilding are underutilized. There is also a crisis of production cuts in industries such as textiles and leather, and a large number of workers have lost their jobs as a result.

During this period, mergers were prevalent, and social wealth was increasingly concentrated in the hands of a few people.The 16 largest chaebols in the United States control 53% of the country’s gross national product, and 1/3 of the country’s national income is owned by the richest 5% of the population; on the other hand, about 60% of American families are still struggling Around $2000 a year, which is just enough for food and clothing.What's more serious is that 21% of households have an annual income of less than $1000.In addition, the potential crisis in the balance of payments has deepened the potential crisis in the US economy.The growing economic power of the United States and the supply of consumer goods vastly outstrip domestic and foreign affordable demand.All this heralds the arrival of a major crisis.

President Hoover, who came to power in 1929, was an "American hero" who made his fortune through personal struggle.In his campaign speech, he promised the people that "every American family has two chickens and every family has two cars".However, due to Hoover's stubborn adherence to the classic theory of liberal capitalism in the economic field, he was unable to deal with the subsequent economic crisis, making his promise a blank check that could never be cashed.On October 10 of that year, an economic crisis swept the United States.The magnitude of the decline in production, the extent of its impact, the high unemployment rate, and the duration of this crisis are all unprecedented.

In the week beginning October 10, Americans lost $29 billion in wealth on the stock exchange.In order to maintain the price of agricultural products, agricultural capitalists and large farmers destroyed a large number of "surplus" products, used wheat and corn instead of coal as fuel, and poured milk into the Mississippi River, turning the river into a "galaxy".By 100, the iron and steel industry had declined by nearly 1932%, and the automobile industry by 80%. At least 95 enterprises had closed down, and a quarter of the total labor force in the country was unemployed.The homeless in the city built simple shelters with wooden boards, old iron sheets, tarpaulins and even kraft paper. The village where these huts gathered was called "Hoover Village", which was intended to satirize President Hoover.In addition, the begging bag of the homeless is called a "Hoover bag", and the car pulled by animal power due to the inability to buy fuel is called a "Hoover car". Also known as "Hoover Blanket".There is a nursery rhyme popular on the streets of New York: "Mellon blew the whistle, Hoover rang the bell. Wall Street sent the signal, and America rushed to hell!"

But later, due to the outbreak of the "Second World War", the United States successfully transferred the impact of the economic crisis to Europe. Supply has established itself as the global economic hegemony in one fell swoop.

However, after the "World War II", the United States has experienced the impact of economic crisis many times, and this financial tsunami is even hailed as the best example of a rare economic crisis in a century since the "Great Depression" in 1929.Through this financial tsunami, it is not difficult for us to find that no matter how glamorous the U.S. economy looks under the packaging of "irrational prosperity", the essence of the U.S. economic model is still "from bubble to bubble" "bubble economy".

Inescapable economic cycle

一些经济学家认为，美国上一次金融危机是2000年的科技股泡沫的破灭。当时，纳斯达克从1998年10月的1569点上升到2000年3月的5132点后，就开始暴跌。从2000年3月暴跌到2002年10月，从5132点暴跌到1108点。跌幅超过八成，下跌时间为2年半。

From this point of view, the last high point of the US economy was in 2000, about eight years from now.In other words, about eight years is an economic cycle.Crisis, depression, recovery, prosperity, an average of 2 years a development stage.

What is the stage of the economic cycle mentioned here?What are the types of business cycles?
The business cycle theory has attracted much attention in the financial circle. From the middle of the 19th century to the period before the Second World War, western economists put forward dozens of business cycle theories.In view of the large number of these theories, the League of Nations (the predecessor of the United Nations) specially designated Haberler, a famous scholar at that time, to write the book "Prosperity and Depression" to summarize various previous theories.Since then, many scholars still pay attention to the development of this theory and apply it to many fields of economic life.

Economists divide the business cycle into four phases: recession, recovery, overheating and stagflation.Each stage can be uniquely determined by the direction of changes in economic growth and inflation.Interestingly, the economists found that each phase corresponds to a particular asset class that outperformed the market: bonds, stocks, commodities or cash.

During a recession, economic growth stagnates.Excess production capacity and falling commodity prices are driving lower inflation.Corporate earnings were weak and real yields fell.Central banks cut short-term interest rates to stimulate the economy back to a sustainable growth path, causing the yield curve to fall sharply.Bonds are the way to go.

During the recovery phase, easing policies worked and GDP growth accelerated and was above potential.However, inflation continued to decline as vacant capacity was not exhausted and cyclical capacity expansions became strong.Corporate earnings have risen sharply and bond yields remain low, but central banks remain accommodative.This stage is the "golden age" for equity investors.Stocks are the way to go.

In the overheating stage, the growth of production capacity of enterprises slows down, they begin to face capacity constraints, and inflation rises.The central bank is raising interest rates in an attempt to put the economy back on a sustainable growth path, while GDP growth remains firmly above potential.The yield curve is rising and flattening, and bonds are doing very badly.The stock's return on investment depends on the trade-off of strong profit growth against declining valuation ratings.Commodities are the way to go.

During a stagflation phase, GDP growth falls below potential but inflation continues to rise, usually due in part to oil shocks.Production falls, and firms raise prices to maintain profitability, leading to a wage-price spiral.Only a sharp rise in unemployment can break the impasse.Only when inflation has passed its peak can the central bank act, which limits the pace of recovery in the bond market.Corporate earnings have deteriorated and stocks have performed very poorly.Cash is the best option.

So what are the types of economic crises? For more than 100 years, economists have proposed different lengths and types of economic cycles based on the information they have.

基钦周期：短周期。短周期是1923年英国经济学家基钦提出的一种为期3~4年的经济周期。基钦认为经济周期实际上有主要周期与次要周期两种。主要周期即中周期，次要周期为3~4年一次的短周期。这种短周期就称基钦周期。

Jugra Cycle: The Mesocycle.The medium cycle is a 1860-9-year economic cycle proposed by the French economist Jugla in 10.The cycle is marked by fluctuations in national income, unemployment, and production, profits, and prices in most sectors of the economy.

Kondratieff cycles: long periods or long waves.The long cycle is a 1926-50-year economic cycle proposed by the Russian economist Kondratiev in 60.According to the cycle theory, since the end of the 18th century, there have been three long cycles.The first long cycle is from 1789 to 1849, the rising part is 25 years, the falling part is 35 years, a total of 60 years.The second long cycle is from 1849 to 1896, with a rise of 24 years and a decline of 23 years, a total of 47 years.The third long cycle started in 1896, the rising part lasted for 24 years, and entered the falling period after 1920.

Kuznets cycle: Another long cycle.This is an economic cycle with a period of 1930 to 15 years and an average length of about 25 years proposed by the American economist Kunietz in 20.Since this cycle is mainly divided by the periodic fluctuation phenomenon of the prosperity and decline of the construction industry, it is also called the "construction cycle".

Schumpeter cycle: In 1936, the famous economist Schumpeter put forward after comprehensive analysis of various cycle theories based on his "innovation theory".According to Schumpeter, each long cycle includes 6 middle cycles, and each middle cycle includes three short cycles.The short cycle is about 40 months, the medium cycle is about 9-10 years, and the long cycle is 48-60 years.Marked by major innovations, he divided three long cycles.The first long cycle is from the 18s to 80, which is the "industrial revolution period"; the second long cycle is from 1842 to 1842, which is the "steam and steel period"; the third long cycle is from 1897 onwards , is the "electrical, chemical and automotive period".There are still fluctuations caused by medium innovations in each long cycle, which forms several medium cycles.There are also fluctuations caused by small innovations in each medium cycle, forming several short cycles.

The crushed irrational speculative bubble

As soon as tulips began to circulate in the Netherlands, some astute speculators began to stock up on tulip bulbs in anticipation of rising prices.Soon, under the advocacy of public opinion, people showed a morbid admiration and enthusiasm for tulips, and began to rush to buy tulip bulbs. In 1634, the upsurge of speculating and buying tulips spread into a national movement in the Netherlands.At that time, a tulip flower root that cost $1000 rose to $2 in less than a month. In 1636, a rare species of tulip was worth as much as a carriage and several horses.Faced with such huge profits, everyone was dizzy.They sold their property just to buy a tulip.In this year, in order to facilitate the trading of tulips, people simply opened a fixed trading market in the stock exchange in Amsterdam.As a historian at the time described: "Everyone believes that the tulip fever will continue forever, and rich people from all over the world will send orders to the Netherlands, and no matter what the price is, someone will pay the bill. In the Netherlands that has been so favored , Poverty will be gone forever. Nobles, townspeople, peasants, artisans, boatmen, squires, men, even chimney sweeps and old women in second-hand clothes shops have joined in the speculation of tulips. No matter In every class, people converted their property into cash and invested in this flower." In 1637, the price of tulips had risen to appalling levels.Compared with the previous year, the total increase of tulips is as high as 5900%! In February 1637, a tulip named "Eternal Augustus" sold for as much as 2 Dutch guilders, which was enough to buy a mansion by the canal in Amsterdam, and the average annual income of the Dutch at that time was only 6700 guilders.

Just when people were immersed in tulip mania, a big collapse was imminent.The tulip market crashed suddenly on February 1637, 2, as sellers suddenly sold in large quantities and the public began to panic.The price of tulip bulbs plummeted overnight.Although the Dutch government issued an emergency statement that tulip bulb prices fell for no reason, advised citizens to stop selling, and tried to settle all contracts at 4% of the contract price, but these efforts were in vain.A week later, the price of tulips has dropped by an average of 10%, and those ordinary varieties are not even as good as the price of an onion.In desperation, people flocked to the court, hoping to use the power of the law to recover their losses.But in April 90, the Dutch government decided to terminate all contracts and prohibit speculative tulip trading, thus completely bursting the unprecedented economic bubble in history.

We often hear the saying of economic bubble, so how is economic bubble defined?How does it relate to the economic crisis?

(End of this chapter)