[PEN-L:126] Re: Why Do Markets Crash?

[eugenecoyle@xxxxxxxxxxx (Eugene P. Coyle)]

        I've been re-reading Polanyi's "The Great Transformation" and came
across a passage referring to the crash of 1929- and later.  He is talking
about the defense of the British Pound and the Gold Standard:

        "This preoccupation which spanned the Arlantic
        brought America unexpectedly into the danger zone.
        The point seems technical, but must be clearly
        understood.  American suppoort of the pound
        sterlingin 1927 implied low rates of interest in New York
        in order to avert big movements of capital from
        London to New York.  The Federal Reserve
        Board accordinly promised the Bank of England to
        keep its rate low; but presently America herself
        was in need of high rates as her own price system
        began to be perilously inflated (this fact was
        obscured by the existence of a stable price level,
         maintained in spite of tremendously
        diminishing costs).  (page 26 of the Beacon
        paperback.)


        Does that describe the 1998 situation?  We have a stable price
level but perhaps a monetary inflation showing up in the stock market and
real estate prices.  The Fed can't raise rates (though it always wants to)
because of Asia.  And the stable price level may be obscuring a big drop in
costs -- hence profits are doing very wll, because prices have not followed
costs down.

        So, will the market(s) crash?

        Gene Coyle