Dad and Chicken Little were both right; the trick lay in the timing and this time, they both hit jackpot!
But, in the end, it had little to do with credit cards. Instead of a payout in a real jackpot, it was more like a “scratch” on the pool table of life.
The underlying explanation of the 1987 crash was the US dollar. You see, the greenback had been way too strong for way too long during the mid-1980s and had contributed to record trade deficits. Meaning, foreign goods were cheap, relatively speaking, and the US was buying all it could get its hands on. On the other hand, sales of American-made products were getting crushed around world due to the super-dollar’s sky-high value in other currencies.
Even I had been in on the game the previous year, loading up on British clothes with the pound at parity to the dollar.
Anyway, too many people chasing too few goods tends to stir inflation. To tamp that down, the Fed raised the discount rate by 50 basis points in September 1987. Equity markets really don’t like that.
Nudging the markets ever more off of a cliff, the Reagan administration made some critical misstatements affecting the currency markets. In response to the financial news on October 14, 1987 that the US trade deficit had hit an all-time high, bond markets tanked and the DJIA dropped more than 150 points, a record drop.
It had been a long bull market since January 1985, more than 2½ years previous. The DJIA had more than doubled despite naysayers, like my Dad, Bernard Olcott, claiming that market was gonna come tumbling down.
“Credit card debt!” “Credit card debt!” “The sky is falling!” “The market will crash!”