Generational Crashes

[Matt1989]

John has speculated that there is a recurring cycle of worldwide crashes, pointing to the 1637 Tulip mania crash, the 1720 South Sea Company crash, the 1789 French Monarchy bankruptcy, 1857 panic, and 1929 crash as the most recent examples. You'll notice that it isn't until 1789 (1857 for the United States) that the generational crashes are aligned with the fourth turning. I inquired about this a couple years ago, and it was put forth that there is a collective remembrance of "generational crashes" which can operate independently of the saeculum.

This is certainly plausible; however, it begs the question (I think it was first posed by Mike Alexander) as to why "collective remembrance" applies to some recessions/depression, and not others. Could it be that the downturns are far more severe in generational crashes than in non-generational ones? While there is some rough correlation, it's far from convincing. What makes the 1857 panic a generational crash when compared to the far worse (and far longer) downturns of 1837, 1873, and 1893? Is it the rapidity of the panic? While 1857 was lightning-quick, so was 1837 and 1893 (1873 was centered in Europe but spread to the U.S.). Speculative bubbles? I see no difference. Shady criminal activity? There needs to be more research on this to determine any kind of correlation, but it wouldn't make a major difference from a public consciousness perspective -- far less than crash severity. Political fallout? The only major direct policy implementation that I'm aware of is the relatively bipartisan reduction of the tariff rate. Financial restructuring was greater for other panics.

So, without any empirical evidence to separate 1857 from the various other 19th century banking panics, I propose an alternate interpretation. My tentative theory is that the fairly recent alignment of financial panics and fourth turnings has, in effect, made them one. "Collective remembrance" has become same for finance as it is for war and all the other nasty side-effects of the fourth turning. The generational cycle and the economic cycle are no longer separate. In creating the 1924 (or 1927) bubble, 1857 wasn't 'generationally forgotten' per se, but the Civil War was.

One last thing. Looking at the discrepancy between the severity of crashes, it would appear that with proper policy (both long-term and short-), the intensity of a generational crash can be greatly alleviated.

[Matt1989]

This still doesn't solve the question of what makes a generational panic prior to the alignment, if there ever was such a thing.

[John]

Dear Matt,

> This is certainly plausible; however, it begs the question (I
> think it was first posed by Mike Alexander) as to why "collective
> remembrance" applies to some recessions/depression, and not
> others. Could it be that the downturns are far more severe in
> generational crashes than in non-generational ones? While there is
> some rough correlation, it's far from convincing. What makes the
> 1857 panic a generational crash when compared to the far worse
> (and far longer) downturns of 1837, 1873, and 1893? Is it the
> rapidity of the panic? While 1857 was lightning-quick, so was 1837
> and 1893 (1873 was centered in Europe but spread to the U.S.).
> Speculative bubbles? I see no difference. Shady criminal activity?
> There needs to be more research on this to determine any kind of
> correlation, but it wouldn't make a major difference from a public
> consciousness perspective -- far less than crash severity.
> Political fallout? The only major direct policy implementation
> that I'm aware of is the relatively bipartisan reduction of the
> tariff rate. Financial restructuring was greater for other
> panics.

When Mike Alexander raised this question, I was able to respond by
scanning a diagram from one of the books he'd authored:



This graph clearly shows that the Panic of 1857 was much worse than
the other panics you mention. Furthermore, it was also known as the
Hamburg Crisis of 1857, because it had a widespread effect on Europe.

The Panic of 1857 was not "lightning quick." It seems that way
because some of its effects were obscured by the run-up to the Civil
War. But during the Civil War, the after-effects of the 1857 crash
were devastating. (After the crash of 1929, there was a big rally in
the spring of 1830. It wasn't until mid-1831 when economic disaster
really struck.)

I posted some lengthy excerpts from a book describing the panic of
1857 in the following article:

** The financial mania continues with "CDOs Squared"
** http://www.generationaldynamics.com/cgi ... 06#e070406

Note that there was a real estate bubble, a commodities bubble, a
railway bubble -- and even a slave bubble. These bubbles all fed
into one another. This is what characterizes a generational crash.
Other recessions may occur, but they don't have this massive,
multiple bubble characteristic.

> One last thing. Looking at the discrepancy between the severity of
> crashes, it would appear that with proper policy (both long-term
> and short-), the intensity of a generational crash can be greatly
> alleviated.

That's not true of generational crashes. They're caused by the
deflation of multiple bubbles, and the severity of the crash depends
on the size of the bubbles.

> This still doesn't solve the question of what makes a generational
> panic prior to the alignment, if there ever was such a thing.

The analysis of generational bubbles is different from the analysis
of generational wars (crisis wars). A crisis war timeline is always
local. Even when two nations fight each other in the same crisis
war, they're still fighting different wars.

But a generational crash is more likely to be global. The Great
Depression was the same for Britain and Europe as it was for North
America.

On the other hand, Japan had its generational crash on a different
timeline. See the following:

** Japan's real estate crash may finally end after 16 years
** http://www.generationaldynamics.com/cgi ... 20#e070220

That's not to say that there isn't a need for a lot more research
into this subject, including the 19th century panics. But I've read
enough different sources by this time to be convinced that the panic
of 1857 really was a lot worse than the other panics.

By the way, a couple of years ago, you were always questioning me
about how it the Principle of Maximum Ruin worked. I always said
that I didn't know, and that we'd have to wait and see what happens.

I now find it to be pretty clear how the Principle of Maximum Ruin is
progressing. I assume that's also true for you?

Sincerely,

John

John J. Xenakis
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.GenerationalDynamics.com/forum

[Matt1989]

Side note: Doing a little more research, I found that I underestimated the severity of the 1857-1860 period. However, it doesn't match 1837 or 1893.

When Mike Alexander raised this question, I was able to respond by
scanning a diagram from one of the books he'd authored:



This graph clearly shows that the Panic of 1857 was much worse than
the other panics you mention. Furthermore, it was also known as the
Hamburg Crisis of 1857, because it had a widespread effect on Europe.

John, I'm straining my eyes here, but the graph is tilted so I can't make out quite clearly when the dates are, but the severe part doesn't seem to fit with 1857.

*Edit* OK I found the thread and the data. Moving on.

The Panic of 1857 was not "lightning quick." It seems that way
because some of its effects were obscured by the run-up to the Civil
War. But during the Civil War, the after-effects of the 1857 crash
were devastating. (After the crash of 1929, there was a big rally in
the spring of 1830. It wasn't until mid-1831 when economic disaster
really struck.)

As acknowledged in the T4T thread by both you and Mike, it's debatable whether the Panic of 1857 and recession of 1860 were one financial crisis or two. As far as I can tell, differences post-October 1929-1930 period and 1858-1860 are too dramatic for any economic comparison to hold weight. GDP dropped dramatically in the former period, but rose in the latter.

The figures show that the majority of the financial downturn was felt during the Civil War. Whether that is attributable to the devastation by the financial crisis that *may* have been imported from Europe (which was imported from the United States) or the devastation caused by the Civil War, I can't be sure.

But it's still hard to make the Panic of 1857 special, as there was no standout downturn until the Civil War. For Americans, it should be the Depression of 1860 or 1861; but no one calls it that since it is generally assumed that the main driver was the war.

I posted some lengthy excerpts from a book describing the panic of
1857 in the following article:

** The financial mania continues with "CDOs Squared"
** http://www.generationaldynamics.com/cgi ... 06#e070406

Note that there was a real estate bubble, a commodities bubble, a
railway bubble -- and even a slave bubble. These bubbles all fed
into one another. This is what characterizes a generational crash.
Other recessions may occur, but they don't have this massive,
multiple bubble characteristic.

Before the Panic of 1893, there were speculative bubbles in the form of railways, real estate, mining, and silver -- maybe more.

That's not to say that there isn't a need for a lot more research
into this subject, including the 19th century panics. But I've read
enough different sources by this time to be convinced that the panic
of 1857 really was a lot worse than the other panics.

Are you referring to the pre-war period or during wartime? If you have the evidence that the crash was worse and unrelated to the war, then by all means, present it when you have the time.

As to my interpretation, the question arises whether it matters if the war caused the steep decline in GDP. The departure of those who grew up during the Civil War partially led to the 1920s bubble i.e. the risk-aversive generations were replaced by the risk-seeking generations (some Missionaries, but mainly the Lost). With the advent of the Civil War, the economic cycle and the crisis cycle merged, and it appears to still be intact. The economically risk-averse generations are also crisis risk-averse, despite the fact that the worst bits of the Great Depression occurred well before World War Two.

By the way, a couple of years ago, you were always questioning me
about how it the Principle of Maximum Ruin worked. I always said
that I didn't know, and that we'd have to wait and see what happens.

I now find it to be pretty clear how the Principle of Maximum Ruin is
progressing. I assume that's also true for you?

Looking at my question 3 years ago, I have to laugh when I think about recent developments. The Principle of Maximum Ruin has to happen because people will believe what they want to... because they have to believe in it. They are so invested (emotionally and financially) in their Pollyannaish outlook that they can't admit that a freight train is about to hit them. I never thought in my wildest dreams that I would witness such collective insanity. It's REALLY mind-boggling.

[Matt1989]

Looking more at figures, I decided that numbers were often misleading, so I went to double check on economic conditions during the Civil War.

From the preface of "Social and Industrial Conditions in the North during the Civil War" by Emerson Fite:

http://www.questia.com/library/book/soc ... d-fite.jsp

Socially and industrially the North was more active and
prosperous than ever before, for the war and war politics
did not subvert these phases of the national life. The
output of raw material from the farms, the mines, and
the forests was unusual, and transportation and manu­
facturing activity was extraordinary; practically all
branches of commercial life flourished. Both capital and
labor were alive to their respective interests and made
definite advances toward present-day conditions; there
was progress in public improvements, while generous con­
tributions for educational, charitable, and religious pur­poses,
and even lavish expenditure upon luxuries and
amusements, were not lacking.

Wow! That was unexpected.

For the South, quite the opposite. That was a REAL depression.

(As a side note to all who may be perplexed at what this college student is doing: I got so wrapped up in this that I totally forgot it was Friday night. I swear, I do not usually spend my Friday evenings researching 19th century economics! Well, not usually, at least.)

[Matt1989]

http://www.ft.com/cms/s/0/50e2255e-0025 ... ck_check=1

We think we know the story of "tulipmania": the 17th-century Dutch dropped fortunes on tulips, ruined their economy, even killed themselves over the bulbs. In short, tulipmania is remembered as the first market bubble. It has been used as an analogy for subsequent ones, most recently during the dotcom boom. However, Anne Goldgar tells us at the start of her excellent debunking book: "Most of what we have heard of it is not true." For instance, Goldgar couldn't identify a single person bankrupted by tulipmania. In this dense academic work - with longueurs for readers who aren't themselves tulipmaniacs - she tells a new story.

Tulips arrived in Europe in the mid-1500s, probably from Turkey. At the time, ships from the East were filling the Dutch Republic's ports with previously unseen flowers, spices and plants. Goldgar quotes the estimate that 20 times more plants were introduced to Europe in the 16th century than in the previous two millennia.

Some pointed out that tulips were useless. The flower has no scent, no medicinal purpose, tastes disgusting (as many Dutch discovered during the "Hungerwinter" of 1944-45), and is apparently no aphrodisiac. Most varieties bloom only a week or two a year.

But the new Dutch gardeners and collectors appreciated plants for their beauty, not their utility. These merchants and craftsmen grew tulips much as they collected paintings. Indeed, many tulip traders were also art collectors, dealers or painters. They sometimes traded art for bulbs (though paintings never approached the prices paid for flowers). The best analogy for tulipmania is therefore not the dotcom boom but today's art market, in which a work by a young artist can cost as much as a London flat. Buyers of tulips chased beauty and status as much as profit.

While knowing about flowers was part of being a wealthy civilised Dutchman, Tulipmania was limited to "a fairly small group", writes Goldgar. In lore, Dutch chimney sweeps spent their savings on bulbs, but in fact the buyers were mostly merchants and craftsmen from the province of Holland. These are the smug burghers we know from portraits of the era. Many were Mennonites.

Some contemporary pamphleteers attacked the trade, baffled by what one Englishman called the "incredible prices for tulip rootes", and disquieted by the godless materialism of it all. They feared, wrongly, that the trade subverted the social order by making poor people rich. As almost no other contemporaries wrote about tulipmania, these biased pamphlets informed most later accounts.

Most tulip tales we know, scolds Goldgar, "are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism".

The bubble grew from late 1636. Perhaps it was because a terrible plague was just ending, and the Dutch splashed out in "the euphoria of survival". Prices of Switsers bulbs, to cite one example, rose 12-fold from new year of 1637 to peak on February 3 at 1,500 guilders a pound. That was about four years' income for a master carpenter; a modest house in Haarlem cost about 1,000 guilders.

The crash came in early February 1637, when prices fell by approximately 90 per cent. Nobody knows what prompted this. It might simply have been the excess of sellers lured by the boom. Yet the effects were modest. It's a myth that tulipmania devastated the Dutch economy. How could it, when so few people traded tulips? Even those who did survived the crash. Tulips were merely a sideline to their real professions.

In any case, Goldgar explains, few buyers actually paid the exorbitant prices they had agreed. The crucial point is that this was a futures market. The flowers spent most of the year underground. Trades were made constantly, but were only paid for in summer when the bulbs were dug up. In the summer after the crash, most buyers simply refused to accept and pay for their bulbs. Some paid the sellers a small recompense, usually less than 5 per cent of the agreed price. These modest payouts don't seem to have ruined anyone. Rather, tulipmania damaged the code of honour that underlay Dutch capitalism. When buyers reneged, trust suffered. Tulipmania was a social crisis, not a financial one, argues Goldgar.

The final myth is that the crash put the Dutch off tulips. In fact, a form of tulipmania never died. The famous bulb fields in my home region around Leiden date from long after 1637. Today the Netherlands has 90 per cent of the international flower trade. Fortunes really are made in tulips.

[Matt1989]

Arkham '80 writes on on TFT wrt Tulip Mania:

Based on recent reconstructions of the historical data, the tulip mania was not a speculative bubble, but a rational market response to legislated changes to tulip futures contracts, which transformed them into options.

Links to the following:

http://www.slate.com/id/2103985/

FTA:

During the dot.com bubble and its collapse, economists and historians increased their study of market crazes of the past, particularly the most ludicrous one of all: the 17th-century Dutch flower bubble. The classic description of Tulipmania appeared in Clarence Mackay's 1841 classic Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, "In 1634, the rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade."

The normally sane Dutch bourgeoisie got carried away and bid up prices of tulip bulbs spectacularly in winter 1637, only to see them crash in spring. One bulb was reportedly sold in February 1637 for 6,700 guilders, "as much as a house on Amsterdam's smartest canal, including coach and garden," and many times the 150-guilder average income. As Earl A. Thompson, an economist at the University of California at Los Angeles, and Jonathan Treussard, a graduate student at Boston University, note in a working paper, "the contract price of tulips in early February 1637 reached a level that was about 20 times higher than in both early November 1636 and early May 1637."

Sounds like a bubble. But it wasn't, asserts Thompson, who is working on a history of bubbles. Tulip-bulb investors were neither mad nor delusional in 1636 and 1637. Rather, he says, they were rationally responding, in finest efficient-market fashion, to overlooked changes in the rules of tulip investing.

As European prices for the dramatic flowers rose in the 1630s, many burgomasters—local mayors—started to invest in the bulbs. But in the fall of 1636, the European tulip market suddenly wilted because of a crisis in Germany. German nobles were big fans of tulips and had taken to planting bulbs. But in October 1636, the Germans lost a battle to the Swedes at Wittstock. Then German peasants began to revolt. The German demand for tulips sagged, and princes began digging up their own bulbs and selling them, say Thompson and Treussard.

The sudden glut caused prices to fall, and Dutch burgomasters began losing money. They were in a bind. Trade in tulip bulbs was conducted through futures contracts: Buyers agreed to pay a fixed price for tulip bulbs at some point in the future. With prices having fallen in the fall, leveraged burgomasters were tied into paying above-market prices for bulbs to be delivered in the spring.

Rather than take their lumps, these politically connected investors tried to change the market rules—and they succeeded. First, they threatened to abandon their contracts and leave planters in the lurch entirely. But ultimately, they ironed out a deal whereby the obligation to purchase bulbs at a fixed price would be suddenly converted into an opportunity to do so. In current parlance, they aimed to transform tulip-bulb futures contracts into tulip-bulb options.

Under the new deal, the investors wouldn't have to pay the high contract prices in the spring unless the future market—or spot—prices of tulip bulbs were higher. (To compensate the planters in case market prices were lower than the contract prices, the investors agreed to pay a "small fraction of the contract price" to get out of the contract, Thompson and Treussard note. Ultimately, that amounted to about 3 cents on the dollar.) On Feb. 24, 1637, the Dutch florists "announced that all futures contracts written since November 30, 1636 and up until the opening of the spring season, were to be interpreted as option contracts," Thompson and Treussard write. The action was later ratified by the Dutch legislature.

The news of these discussions began to filter out into the market in November 1636. Now, when it becomes clear that a contract is to be transformed into an option—the ability to buy something rather than the responsibility to do so—you would expect prices to rise. Why? If the investors in existing future contracts were only going to have to pay a small percentage of the contract price in the end—as was becoming apparent—then tulip planters would have to jack up contract prices significantly in order to recover sums that reflected the spot market prices. And people would be willing to pay the higher prices.

Why? In the worst-case scenario, investors would lose 3 percent of the price of the contract. In the best case, prices would rise above the strike price, and they could make an instant profit while assuming the minimal 3 percent risk.

So, the market exploded. In November 1636, when the burgomasters' plans to screw the tulip planters took effect, traders began to process the impending changes into their thinking. By late November 1636, "buyers had already begun treating the contract prices as option strike prices set at around 10 times the actual prices." As a result, "contract prices soared to reflect the expectation that the contract price was now a call-option exercise, or strike price rather than a price committed to be paid for future bulbs." By February, the price had risen 20 times. "That's what caused the tulipmania," says Thompson.

So, the swift rise in prices for contracts on tulip bulbs in late 1636 and early 1637 was less a speculative frenzy than a market rationally responding to rule changes.

If they're correct—and it'll take someone with far more economic and data-crunching expertise than Moneybox to ratify or debunk their argument—then business writers will have to delete Tulipmania from their handy-pack of bubble analogies.

[mark]

A question:

If my household (composed of different generations) experiences an economic depession (which I believe lkely) what generation are we, because we all will have bit the dust

[The Grey Badger]

A question:

If my household (composed of different generations) experiences an economic depession (which I believe lkely) what generation are we, because we all will have bit the dust

Each generation takes it differently. Your best bet is to read some Great Depression memoirs and see how everyone from the grandparents to the smallest children took it, what they did,how it affected them, etc.

[jwfid]

Hi everyone,

My first post here. I'll post a bio soon. I wonder if we have already had "the crash"? I pulled up some Dow trends on the crash of 1929 and compared it to what occurred this October. Although the crash of 1929 (the October to December timeframe) was worse, I think our crash this last October is on the same scale or magnitude!

This isn't necessarily good news though. I think we are in for a long multi-year bear after the stock market recovers a little from here.

Any thoughts?

jwfid