New Era After the Great Depression

The new era after the Great Depression of 1929

Speculative bubbles and their associated new era thinking do not end definitively with a sudden, final crash. People today remember the stock market crash of 1929 as occurring in one or two days. In fact, after that crash, the market recovered almost all of its lost ground by early 1930.

Ends of new eras seem to be periods when the national focus of debate changes and can no longer be upbeat. Often, the ends of bull markets appear to be caused by concrete events unrelated to any irrational exuberance in the stock market.

Notable among these are financial crises, such as banking or exchange rate crises. These financial crisis stories illustrate the complicated factors that sometimes capture the attention of economic and financial analysts. Discussions may focus on these factors and pull attention away from the large changes in public opinion that are reflected in speculative prices.

After the fact, it is known that the run-up in the stock market from 1920 to 1929 was a colossal mistake and that the drop from 1929 to 1932 was another colossal mistake. Virtually nothing actually happened over either of these intervals to the dividend present value.

Fluctuations in stock prices, if they are to be interpretable in terms of the efficient markets theory, must instead be due to new information about the long run outlook for real dividends. The invocation of efficient markets theory to imply that the late 1990s upspike in the stock market is a routine and accurate response to genuine news is simply not correct.