When bubbles give way to deflationary forces, the damage can be tremendous.
By James Dale Davidson
The obvious inference is that this time around, the crash that signals the onset of the next and Greater Depression will be of Chinese character.
This may seem quite obvious. But is it? As I write, I have a copy of 1929 Again? by Terry R. Rudd in a place of honor among the unruly stacks of paper on my desk. The book was originally written more than three decades ago in 1986. It was obvious to me when I first read it that Rudd was a real estate professional who shared my premonition of deflation ahead. Like many others, Rudd imagined a home-grown trigger for the next episode of world depression. I don’t.
Why not? Because it would be totally counter to history to see two epic asset bubble crashes triggered in the markets of the same predominant power. Take a look at the patterns of history.
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Tulip Mania and the Dutch East India Company
When you look back on the great asset bubbles and the subsequent crashes that deflated them, you can see that they were concentrated in the markets of rising rather than established powers. The so-called Tulipmania in 17th-century Holland heralded a century of Dutch economic supremacy in which the Dutch East India Company (VOC after its Dutch initials Verenigde Oost Indisch Compagne) became the most valuable stock in world history.
Often described as the first stock company, the Dutch East India Company was founded in 1602. It reached its peak value in 1637 just as the Tulip Mania was at its peak. In that year, the Dutch East India Company was worth an astonishing $7.9 trillion in today's money. The company's value was about equal to the GDP of modern-day Japan’s $4.8 trillion and Germany’s $3.4 trillion added together.
Today's most valuable company, Apple, has grown to be worth 11% of the real value of the Dutch East India Company in 1637. The VOC was worth more than Apple, Alphabet (Google), Amazon.com, Microsoft, Facebook, Exxon-Mobile, Bank of America, Berkshire Hathaway, Wells Fargo, Johnson & Johnson, Walmart, Visa, Chevron, Samsung, AT&T, McDonald's, Netflix, and Tesla combined... A lot of money.
The Dutch East India Company was a terrific investment. It paid 18% dividends for almost 200 years. (That was calculated as 18% of its book capital, not its share price). Seen that way, the dividends were in the range from 5% to 7%. That still seems a lot in an era of Quantitative easing and negative interest rates.
The South Sea Bubble
The next great asset bubble occurred in the markets of Great Britain in the early 18th century when the Dutch commercial dominance was fading and the British Empire was moving to the fore. In 1720, the South Sea Company granted monopoly rights to trade in South America in 1711 reached its peak value equivalent to $4.3 trillion in today's money. When the South Sea bubble burst, many of the leading figures of English society including King George, and his mistresses suffered grievous losses. Sir Isaac Newton also was a headline loser. Newton was one of the greatest geniuses who ever lived. When queried about the South Sea bubble, he was quoted as having said, "I can calculate the movement of the stars, but not the madness of men.” It was a madness to which he was close. Newton lost the equivalent of £3 million in today's terms trading South Sea Company Stock.
Unlike the asset bubbles associated with the rise of Dutch and British hegemony, the asset bubble associated with the rise of the United States was not focused on a single chartered monopoly enterprise like the VOC or the South Sea Company. The bubble that burst in 1929 encompassed the entire New York Stock Exchange. At that time, all the listed issues together had a value at the peak in October 1929 of about $1.14 trillion in today’s terms. Note that US stocks never attained the exalted value of the VOC or the South Sea Company. Although we tend to think of the market in 1929 as extravagantly valued, it wasn’t compared to history's other great asset bubbles. The VOC at its peak was worth seven times all the listed issues on the New York Stock Exchange in 1929, while the South Sea Company was worth 3.77 times the 1929 NYSE.