The 1930s Bear Market

There was an interesting article in the NY Times a few days ago which claims that the 1930s bear market wasn't as bad as it appears after adjusting for deflation, dividends, and market breadth.

Historical stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.

But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.

It seems obvious to me that if are to have a recession, I'd rather have one in which my money is worth more at the end of it (deflation) than less (inflation). Most economists, at least those who advise governments, believe the opposite.

One thing that bugged me was that the title compared the 25 years number (prior peak to recovery) vs 4 1/2 years (trough to recovery). Using different comparisons seems like an attempt at sensationalism.

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Plus, as this guy points

Plus, as this guy points out, the article ignores the fact that after that 4.5 year period, the market turned right back around and took a big dip in the recession of 1937.

Cool Pics

This site has some nice visualizations comparing four major market crashes.

There are two economies

>I'd rather have one in which my money is worth more at the end of it (deflation) than less (inflation).

Depends if you are making payments or living on interest paid to you.

If you are a wage earner with a decent long term (union contract) job and want to pay off a 30 year mortgage a two or three percent inflation will help you.

What billwald

What billwald said.

Inflation only affects the value of your money if your money is in, well, money (cash and cash equivalents). That's a stupid place to have your money. Or rather, your wealth.

If your wealth is in non-monetary assets like equities or commodities, neither inflation nor deflation matter to you. If you are net borrower in nominal terms (i.e. you have a mortgage) then you want inflation. If you are a net lender in nominal terms (i.e. you've invested in bonds rather than equities or commodities) then you want deflation.

And, of course, in either case what you actually want is for inflation or deflation to be more than was expected... because the expected amount of inflation or deflation will already have been factored into the interest rates on your mortagage or bonds.