Tuesday, October 28, 2008

What a Real Bear Market Looks Like

The nominal definition of a bear market is one in which securities prices drop 20% over a period of time. In today's Wall Street Journal Arthur B. Laffer reminds us what a real bear market is:
I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Laffer has a new book out on the subject: "The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let It Happen"

Laffer says we are making the same mistakes as previous generations of politicians, whether Republican or Democtratic, with hasty solutions cooked up under panic conditions that will set the stage for "the end of prosperity".

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