WITH KIND PHOTO
Fed Chair Jerome Powell
There continues to be bad news about bonds, real estate, stocks and other investments, as well as concerns about inflation. Everything seems to be going down except inflation, which is going up.
Fed Chair Jerome Powell and his colleagues on the Federal Reserve Board continue to prioritize fighting inflation. Interest rates are rising and much economic activity is slowing.
However, stock declines are concentrated in volatile technology sectors. Higher interest rates favor savers and long-term investors. Crypto, which is essentially gambling, is stabilizing its crash.
The labor markets remain tight. We are not yet in a traditional recession, and as a result, working people may now be reversing their long-term decline in real relative income.
The global financial crash of 2007-8 is instructive. However, a longer-term perspective provides a more valuable context.
The global economic crisis remains decidedly destructive. The stock market crash of 1929 proved to be the spark for a decade of extraordinary economic depression and human misery.
The fall in stock markets was sudden and steep. From peaking at 381.17 on September 3, 1929, US stocks have fallen 25% in two days.
November 1929 brought a recovery, but it proved fleeting. Stocks drifted to an all-time low of 41.22 in July 1932. At the height of the selling frenzy, they traded at volumes not revived until the late 1960s.
Stocks did not return to their 1929 peaks until the 1950s, in stark contrast to more recent experiences. Public distrust and hostility towards bankers determined political life in America for decades.
Extremism flourished at home and abroad, including Adolf Hitler’s Nazi Party in Germany. The Second World War followed.
After the financial crash of 2007, banks collapsed and others remained solvent only through emergency government aid. Founded during the Great Depression, the Federal Deposit Insurance Corp. proved up to the task of protecting individual depositors.
The bankruptcy of the investment bank Lehman Brothers in 2008 illustrated the extent of the crisis. Nonetheless, continued government intervention restored financial stability and supported the recovery.
Commercial banks became more regulated, with capital requirements increasing as part of the bailout. In 2010, the Dodd-Frank Act became law, including Paul Volcker’s important initiative to re-separate commercial and investment banking.
As Chairman of the Federal Reserve, Mr. Volcker defeated inflation in the early 1980s, and that example informs the current effort. Traditionally, the money supply and interest rates were the most important instruments.
The Fed controls a relatively small portion of the total dollar today. At the same time, the dollar’s global reserve role facilitates ongoing private investment worldwide. Most importantly, markets are generally more fluid and resilient today.
Finance is a component of our complex economy. Money is a commonly accepted medium of exchange, but tangible value comes from the labors of vast, diverse groups of people.
Here’s what we Americans should remember: First, the US has the most productive economy in the world. Our gross domestic product has doubled roughly every two decades since 1940.
Second, be active as a citizen. Reputable, sustained public oversight of financial activities is essential.
Third, as an investor, do your homework. One resource is the classic book by Dodd and Graham, a professor and a Wall Street genius respectively, first published in 1934 and regularly revised.
The basic truths of investing remain unchanged.
The central importance of committed and committed employees also remains unchanged. The currently high demand for employees underscores the correctness of this observation.
To learn more, read “Security Analysis” by Benjamin Graham and David Dodd. Arthur I. Cyr is the author of After the Cold War – American Foreign Policy, Europe and Asia (NYU Press and Palgrave/Macmillan). He is also director of the Clausen Center at Carthage College in Kenosha, Wisc., and a Clausen Distinguished Professor. He welcomes questions and comments at [email protected]
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