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Ten Differences Between Current Recession & Great Depression

The other day I was helping a friend with a school assignment. Sarah needed to find ten differences between the current economic situation and the Great Depression of the 1930's. It seems that questions like this one are cropping up a lot lately, and basicly ask, "Are we in, or are we headed for, another Great Depression?" As one poster put it, "When I listen to Rush Limbaugh and Bill O'Reilly, I get scared. When I listen to President Obama, I feel elated."

We can chalk both the fright and the elation up to public speakers doing their jobs well. Limbaugh and O'Reilly are in the business of selling air time, and it just wouldn't work if they didn't provoke an emotional response. The President is in the business of leading the country; making people feel elated when the chips are down is a great skill to have. But can we rely on either source as an acurate indicator of where the economy is or where it is headed?

I don't think so. It is much better to examine the facts, as far as they can be ascertained, and make up our own minds. Here are the answers Sarah and I came up with:

  • One big difference is the emergence of Keynesian Economic Theory, which is the driving force behind the bailout strategy. In the Great Depression. FDR's attempts to jump start the economy were hit and miss for several years until he adopted Keynes theories into a coherent policy.
  • A second major difference is the current existence of a major social safety net comprised of welfare programs, unemployment insurance, and so on, to protect those that are impacted by the contraction in the economy.
  • Third is the business safety net created by the FDIC and other insurance for depositors in the banking, credit union, and other "thrift" industries.
  • Fourth, is the existence of the SEC and other securities regulations designed to prevent excessive margin purchases, the requirement to have stock brokers and others who work in the markets licensed. and so on.
  • Fifth is the existence of nearly instantaneous communications and trading mechanisms that can allow a news story to have a significant and immediate effect on the markets world wide.
  • Sixth is a much more interconnected global economy. What happens in Tokyo affects Wall Street immediately.
  • Seventh is the much greater availability of mutual funds and other "retirement vehicles" that put money into the market without investor sophistication and that provide penalties for taking it back out. Most retirement savings are now "defined contribution" rather than "defined benefit."
  • Eighth: The US and most of the rest of the world are using fiat currency with very few nations using a gold or silver standard to back their currencies. (Note: The United States Constitution still requires a gold standard, but the Federal Reserve is not using it.)
  • Ninth: In 1929, the US was at peace and recovering from World War I. Today the US is at war in Iraq and Afghanistan. Prosecuting these two wars is costly, and provides an incentive for the government to promote inflationary policies.
  • Tenth: The national debt (the amount of money borrowed by the government in the form of bonds) as a percentage of the Gross Domestic Product (a measure of the overall economy) is nearly four times what it was in 1929/1930.
Some other things we examined: Although the stock market crash of 1929 is considered the beginning of the Great Depression, the market had recovered by early 1930. The real cause of the great depression was the collapse of the banking industry, which had lent heavily to tenant farmers and share croppers in the southern midwest. The advent of the tractor forced many of these farmers to default on their loans, which caused the banks to fail, which started a domino effect. The stock market crash also played into the banking collapse because the banks were lending money to investors, who put the money into the stock market. When the market crashed, the investors were unable to repay these margin loans.

Unemployment peaked in 1933 at about 25% in the third year of the depression, but wasn't that bad through out. In the first two years of the depression, unemployment peaked at 8.7%. Not much worse than current rates.

Some questions still unanswered: Will the Keynesian bailout plan be able to put enough money into the economy to get cash flowing again, or will the economy continue to contract?

How far will housing prices fall before they hit bottom? The credit crunch that is driving this recession was caused by over borrowing against real estate in order to fund concumption. Lending won't start again until real estate prices have bottomed.

Will the infusion of currency into the economy cause run away inflation or will it stabilize a deflationary trend. The credit crunch is causing a deflation of asset values, but since the Keynesian bailout is dumping lots of dollars, including some newly printed ones, into the economy and a large portion of US consumption is from imports (we consume more than we produce), we're very likely to see inflation of consumer goods, especially as the value of the dollar falls against Asian currencies.

Are we in a depression? Not yet. Are we headed toward one? We'll have to wait and see.

Source(s):

http://piggington.com/comparison_between...
http://roissy.wordpress.com/2008/09/30/s...
http://www.scribd.com/doc/5467519/US-Nat...
http://www.huppi.com/kangaroo/Timeline.h...
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