Dow Reaches 15,000 and The Madness of Crowds

Dow Reaches 15,000 and The Madness of Crowds

The comparisons between current explosion in the US stock market and the book "Extraordinary Populary Delusions and the Madness of Crowds" is astounding!

I have been reading the investment classic Extraordinary Popular Delusions and the Madness of Crowds written by Charles Mackay and I came across an except regarding the Mississippi scheme bubble.  Itreminded me so much of what is happening today that I had to share it.  Please read below:

“Thus the system continued to flourish till the commencement of the year 1720. The warnings of the parliament, that too great a creation of paper money would, sooner or later, bring the country to bankruptcy, were disregarded. The regent, who knew nothing whatever of the philosophy of finance, thought that a system which had produced such good effects could never be carried to excess. If five hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage. This was the grand error of the regent, and which Law did not attempt to dispel. The extraordinary avidity of the people kept up the delusion; and the higher the price of Indian and Mississippi stock, the more billets de banque were issued to keep pace with it. The edifice thus reared might not unaptly be compared to the gorgeous palace erected by Potemkin, that princely barbarian of Russia, to surprise and please his imperial mistress: huge blocks of ice were piled one upon another; ionic pillars, of chastest workmanship, in ice, formed a noble portico; and a dome, of the same material, shone in the sun, which had just strength enough to gild, but not to melt it. It glittered afar, like a palace of crystals and diamonds; but there came one warm breeze from the south, and the stately building dissolved away, till none were able even to gather up the fragments. So with Law and his paper system. No sooner did the breath of popular mistrust blow steadily upon it, than it fell to ruins, and none could raise it up again.

Millions upon millions of paper money were created out of thin air to support the bubble. It eventually burst, driving France into an economic recession.  It’s difficult to not compare what happened in France almost 300 years ago to what is happening in the United States’ markets today. 

The Fed is printing billions in new money every month and our stock markets are exploding to record levels. See this recent article in the UT about the record numbers:

http://www.utsandiego.com/news/2013/may/08/tp-new-market-milestone-dow-15000/

Could the free money policies of the Fed be fueling a bubble that when burst could cause disaster?  Time will tell.

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