In 1929 Wall Street experienced one of the most extreme crashes of modern financial markets, with the Dow Jones, the benchmark index of the time losing 89% of its value over a two and a half year period. It sparked the beginning of the great depression, with the market taking 15 years to regain its former highs.
In 1927 — 2 years prior — John Maynard Keynes, the most influential economist of the 20th century, and the founder of modern fiscal and monetary policy stated that “we will not have any more crashes in our time”.
Fast forward to June 2017. Janet Yellen is the head of the Federal Reserve, overseeing the USA’s monetary policy. One of the most powerful economists alive. What’s on her mind? Surely that’s an important question.
“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”
While I’ll admit today’s graph is not nearly as dizzying, it still does have many people scratching their heads at this unreasonable strength in equities. The rise in derivatives means governments control a lower percentage of the money pool. The Fed has less ability now to influence markets than they ever have in the past. Power money is not so powerful anymore. Hence the need to resort to desperate attempts to keep pushing markets higher with QE, Helicopter Money and — my personal favourite — “Whatever it takes”.
What would the Fed need to do to prevent further crashes if suddenly everyone was using some alternative to US Dollars — something that they had no control over? How scary would that be? I hope that will not be in our lifetimes.