Despite the wildly optimistic opinions in the mass media, past experience would suggest that the economy is heading for a big slump, even worse than in 1929. The following graphics will give an idea of where we are now, and where we are probably going.
Dow Jones Industrial Average on a linear scale
Dow Jones Industrial Average on a logarithmic scale
S&P adjusted for inflation
The last chart shows dramatically how share prices have increased in real terms since 1982.
Price/earnings ratio (based on previous ten-year earnings)
The P/E ratio is the share price divided by the dividend paid to shareholders. In other words, it is the number of years needed to double one's investment, if the share price remains constant. The trend in the 90's has been to gamble that share prices will rise. Of course if share prices fall dramatically, the original investment may also be lost, unlike a savings account, where interest rates may rise and fall, but the capital invested is safe. (At least in theory, unless the bank goes bankrupt and the government does not guarantee the saver's capital.)
As the graph shows, the P/E ratio in 1999 was at an historic high, far higher even than in 1929.
For more articles and links on related topics see
US economy