the tumultuous 1980s -- 8/25/19
Today's encore selection -- from A Brief History of Doom by Richard Vague. Ronald Reagan's campaign slogan in 1980 had been "Let's Make America Great Again." For his re-election campaign in 1984, it was "It's Morning Again in America." A series of financial crises in that decade would belie that:
"Many remember the 1980s as a renaissance in the United States. Newly elected president Ronald Reagan and Federal Reserve chair Paul Volcker were credited with defeating the inflation of the 1970s. Real GDP growth averaged 3.3 percent. Unemployment declined to less than 6 percent, and the stock and bond market ended the decade up 228 percent and 253 percent, respectively.
"Yet those memories belie stark realities of calamities and crises. The decade of the 1980s was one of the most economically turbulent and crisis laden in American history. Indeed, it was perhaps the most chaotic in terms of the number of sectors adversely affected. The results of the period led to more than two thousand bank failures, more than eight hundred savings-and-loan failures, the junk-bond crisis, the commercial real estate crisis, the Latin American debt crisis, and an energy-lending crisis triggered by an oil price collapse. There was even an agricultural lending crisis early in the decade. In each one of these, it was a rapid buildup in private debt that brought the overcapacity and crisis. This decade saw the largest wave of bank failures since the 1930s. And it saw the largest percentage one-day stock market drop in U.S. history, on October 19, 1987, a collapse parried only when the Federal Reserve flooded the market with unprecedented levels of liquidity.
"Even the achievements of the 1980s should be put in context. The stock market ended up rising 228 percent, but that was less than the gains of the 1960s and 1990s. Real GDP growth was 3.3 percent, but growth in the 1960s, 1970s, and 1990s was just as high, if not higher. Unemployment improved but had been lower in the 1960s and early 1970s, and was again lower in the late 1990s.
"Reflections on this period routinely miss what, economically speaking, was its most important characteristic: the 1980s saw an unprecedented explosion of both government and private debt. This was all the more notable in that it followed thirty years of a significantly improving ratio of federal debt to GDP and flat overall growth in total debt to GDP.
"Indeed, the year 1981 may be the greatest economic dividing line of the post-World War II era, a watershed in U.S. economic history: it was the moment when the era of postwar deleveraging ended and the era of releveraging began -- complete with a quickly ensuing financial crisis. This dividing line also marked the point at which, not coincidentally, U.S. rates ceased their long postwar rise and began their equally long decline.
"The very low level of U.S. private sector debt in 1945 -- it was less than half the level in ratio to GDP seen earlier in the century -- was a noteworthy exception in twentieth-century economic history. It was not just private debt that was low in the immediate postwar period. The United States had low levels in housing, commercial real estate, infrastructure, and any number of other things, a state of undercapacity made more acute by a population boom. This, coupled with the record low levels of private debt, were key reasons that the United States had no notable nationwide financial crisis from 1950 to 1980.
"But, as measured by total debt to GDP, the United States started releveraging in 1981. In fact, in the brief period from 1983 to 1988, private debt to GDP expanded from 103 percent to 124 percent of GDP1 -- one of the largest such increases in the twentieth century. "