Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Historical InsanityMarket Insanity

Economic Catastrophes You have Never Heard of

Popular mythology teaches that the economy is usually stable but permeated by the occasional Bubble or panic. In reality, the economy is chaotic and unstable, and history is made by constant economic catastrophes.

Accordingly, history is full of economic catastrophes you have never heard of. Studying these catastrophes will teach you that the economic stability we value is a comforting illusion.

However, many of those economic catastrophes are fascinating and entertaining. A few interesting economic catastrophes you have never of include:

The Great Florida Real Estate Bubble

Southern Florida was one of the emptiest and most remote areas of the United States until World War I. However, the area had a warm winter climate and wonderful beaches that were a few-days’ train ride from New York and other northeastern cities.

The First World War cut wealthy Americans off from their traditional vacation grounds on the French and Italian Rivieras. Meanwhile, America’s favorite Mediterranean climate playground, Southern California, was a week’s train ride away. Southern Florida, on the other hand was two or three days’ train ride from New York.

The result was an influx of affluent Americans to new cities, such as Miami and Palm Beach. Middle Class Americans followed the wealthy to Florida and began buying land. Real estate developers began cashing in.

Lucky, landowners made fortunes selling swampland to northerners. One man saw his lot’s value increase from $1,700 to $300,000 in a few short years, Bubble Bubble’s Jesse Columbo writes.

By 1922, some editions of The Miami Herald were among the world’s heaviest newspapers, because of all the real estate ads. By October 1925, the amount of building materials being shipped to Miami was so great railroads could not carry them. Instead, the railroads refused to carry building materials.

South Florida property prices began falling shortly afterwards. As in 2007, a wave of foreclosures followed the real estate price collapse. The foreclosures were so bad that some economists believe the Florida Real Estate Bubble helped trigger the Great Depression.

By 1930, the real estate collapse had transformed Florida into a bleak and remote area with few economic prospects. Florida’s economy did not recover until after World War II.

The Long Depression

One historical period often compared to our own is the Long Depression, the era between 1873 and 1896.

To explain, the Long Depression was a long period of deflation, an economic contraction punctuated by dramatic economic crises. Similarly, the Long Depression was a period of great technological innovation and economic upheaval.

For instance, Thomas Edison invented the light bulb and the phonograph during the Long Depression. Other Long Depression inventions included automobiles, the machine gun, electric trolley cars, the telephone, and alternating current. Hence, electrification began during the Long Depression.

The Long Depression began with the Panic of 1873 that triggered a massive contraction in the United States. For instance, 18,000 businesses, 89 railroads, 10 states, and hundreds of banks went bankrupt between 1873 and 1879 in the United States.

TS Lombard global macroeconomist Dario Perkins believes the world is experiencing a second Long Depression, MarketWatch reports. Notably, the current low-inflation in the United States began with the economic crash of 2007-2008.

Moreover, economic growth and technological innovation are not leading to income growth and economic expansion. Instead, income inequality is rising to new highs. The first Gilded Age of the late 19th Century had a similar pattern.

Perkins blames deflation, constantly falling prices, driven by globalization for part of the situation. “U.K. inflation averaged -1.4% between 1873 and 1888,” Perkins writes. He notes that prices fell because of  “Industrialization plus huge advancements in transportation and communication allowed mass production and the shipping of agricultural products and cheap manufactured goods.”

One result of deflation was wage stagnation. Another was Populism, a mass movement of lower middle and working people demanding economic relief. Another result of Deflation and Populism was the popularity of Socialism and Progressivism in the United States. Progressivism was a movement that wanted a highly regulated and planned economy.

“Most socialist parties were also founded in the late 1800s,” observes Perkins notes.” “Some feared a Marxist revolution,”  Perkins writes of Gilded Age intellectuals.

Today, we usually forget the Long Depression because of the Great Depression’s hold on popular memory, especially in the United States. However, the Long Depression could hold more lessons for our age than the Great Depression.

One frightening possibility is that our own economic malaise could last as long as the Long Depression (23 years). Hence, today’s policy makers need long term solutions rather than short-term stimulus.

The Black Monday Crash

Black Monday; 19 October 1987, is among the scariest stock market crashes in human history.

To explain, stock markets throughout the world fell by over 20% in a single-day on Black Monday and nobody knows why. One popular theory is that a computer program driven trading model called portfolio insurance strategy caused investor panic.

Others speculate the deliberate depreciation of the US dollar via foreign trade and monetary arrangements caused the crash. One reason the Black Monday Crash was so bad was that automated trading strategies flooded the markets with sell orders. The market fell because computer programs began liquidating huge blocks of stock.

The crash became a domino effect because it automatic stop-loss orders triggers that stopped stock buying. Meanwhile, the same programs began selling.

Black Monday was strange because the market recovered as quickly as it fell. Moreover, the Crash did not lead to economic catastrophe as in 1929 or 2008. Instead, Black Monday marked the beginning of an economic recovery that lasted throughout the 1990s.

Black Monday is important because it was the first “Flash Crash,” in other words ,the first market crash caused by technology. Since then, there have been other Flash Crashes including 2010.

These three economic catastrophes teach us that Economic Chaos is the norm and Economic Crises are a normal part of life. Hence, smart people learn to anticipate economic crises and take advantage of them if they want to survive and make money.