Wall street 1929 all over again

CAMBRIDGE: Any writer of financial fiction would have an easy time setting the stage-ballooning valuations of stocks founded on exaggerated beliefs about the impact of new technologies on productivity, and gross over-confidence in the American model, are placed side-by-side with an all-pervasive global financial fragility, evidenced in the Asian crises, a moribund Japan, and chaotic Russia. All of this makes for a lethal brew. But this may be more than fiction. No one should be surprised if the real final chapter in the globalization story of the 1990s is a crash on Wall Street, well timed to the 70th anniversary of the drama of 1929.

From a "Black Tuesday" revisited, it will be but a short step to world depression. Why? Europe has no policy responses open to it to respond to such a calamity because its fiscal situation is already weak and the new European Central bank is tangled in ineffectiveness and a dated obsession with fighting inflation. Japan will be incapable of responding because its government can't even keep its own economy above water. And in America, where confidence is now excessive and exuberant, who would be surprised if the economy just plain collapses following a stock market implosion.

Here is an outline of the next depression, poised to happen. But do not believe it, people will say; the ingredients are exaggerated, the disaster is not about to come.

Stocks on the New York exchange are overpriced. By any traditional definition, there is a bubble. The value of stocks is almost twice GDP, far more than ever in history and at least a quarter higher than at the peak of Japan's bubble a decade ago. By the Federal Reserve's measure, stocks are overpriced by 40%. Now the Fed must be concerned about slowing American growth. Three years of 4% growth in an economy at full employment is asking for inflationary trouble.