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What are the odds that this economic slump will deepen into a genuine depression not seen since the 1930s? In my judgment, it's not likely. Instead, I foresee a moderately severe recession.
We're all hearing more and more comparisons being drawn to the Great Depression. Yes, we're in the worst financial crisis since that era, but by no means the worst economic crisis since then -- not comparable to, say, the mid-1970s.
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Former Goldman Sachs chairman John C. Whitehead got a lot of attention last week with his statement that the federal government could face a downgrading of its credit rating, aggravating the recession. The result, he said, "would be worse than the Depression." Now, "would" is a squishy word in forecasting, but the headlines screamed, "Whitehead Sees Slump Worse Than Depression."
Whitehead, a distinguished American of 86 years, was an adolescent during the 1930s, so he should remember those horrible times well. I wasn't born until after World War II, so my knowledge of the Depression comes largely from books. Here are some things I've learned:
The Great Depression was a global economic collapse of unfathomable magnitude, and today's statistics of pain would have to be multiplied manyfold to match those of the 1930s.
And the Depression was preventable -- if governments worldwide had responded earlier and smarter after the stock market crash of 1929. The lessons learned since then greatly reduce the likelihood of a reprise of that decade of hardship.
Shrinking production
America's national output plunged for four straight years, 1930-1933, with a total drop in dollar value of some 50%, because of a combination of lower volume and falling prices (deflation).
The massive federal spending of Franklin D. Roosevelt's New Deal caused the gross domestic product (GDP) to rise from 1934 through 1937. Then the nation was shocked by a severe relapse (the "Roosevelt Recession") that saw national production fall in 1938. The Great Depression was finally ended not by the New Deal, but by rising U.S. industrial output in 1940-1941 to aid our allies in Europe, under assault by Adolf Hitler.
By comparison, in this recession we're likely to see several quarters of low-single-digit declines of GDP over the coming year. A 7% quarterly contraction, last seen in mid-1980, would be highly surprising in this slump, and most quarterly declines will probably be smaller, on the order of 2% to 4%.
Unemployment
In the first year after the stock market crash of 1929, unemployment tripled from 3% of the labor force to 9%, and then it kept on rising -- from 16% in 1931 to an appalling 24% in 1932. That's nearly one out of every four workers, in an era when most families were supported by one wage earner. The New Deal's public works programs cut joblessness dramatically, but it was still running at 14% in 1937 and soared again to 19% during the 1937-1938 relapse.
Today, by contrast, we're just north of 6% unemployment in households typically supported by two earners, which staves off severe hardship while the jobless worker looks for new employment. At Kiplinger, we expect the unemployment rate to peak at 8% to 9% over the coming year as layoffs continue in sectors ranging from construction and autos to finance and retailing.
Personal Savings
With no federal deposit insurance in the early 1930s, the failure of some 9,000 banks caused an estimated $140 billion in depositor losses. Many Americans saw their entire life savings wiped out. But today's bank failures measure in the hundreds, and not a dime of insured money has been lost. Even depositors who were over the FDIC limits have received some protection. For example, in the July 2008 failure of California's IndyMac Bank, half of depositors' uninsured funds have been returned to them and more may eventually be recovered.
POSTED BY: sheeple (December 02, 2008 07:43 AM)
Yes, this rather mainstream assessment of the present financial crisis is completely and utterly correct. Of course there is nothing to worry about- because the media says so.....right o'. Question- Who or what branch of the Federal Government is asking the media to put out these reassuring essays to ease our doubts?...OK I'm paranoid. Still, facts are facts. People need to uncover for themselves the actual FACTS regarding the 29' Depression- You sir, are simply submitting a synopsis of what happened AFTER the 29' crash occurred, and then trying to compare that with conditions NOW, where a crash, actually strongly likely, has not yet technically occurred...Just remember, people; that Mr. Kiplinger's assessment of a "moderately severe recession" is only...a few percentage points away from the definition of a technical depression- time to button down the hatches, people!
POSTED BY: Joe Honick (December 03, 2008 08:06 PM)
Totally missing from this analysis is the massive change in the international economic makeup, especially in China where I find myself on business again. Despite US media stuff, China may well become an engine of investment in the US, with others looking for profitable opportunities in real estate foreclosures with a view to the long term. Such things did not exist in the depression years of the '30's. What has occurred now, due to such huge reach of the internet and other media, is the virtual death of public confidence in private and governmental sources. No matter the hype expressed by Kiplinger, lack of trust is hard to repair. Many warned about the subprime and other factors several years ago and heard only it was a panicky reaction then.
POSTED BY: Kate (December 07, 2008 01:17 PM)
All I have to add is that I'm getting a kick out of the comments from the "armchair economists". Yeah, I'll listen to you over Mr. Kiplinger with his decades of experience and knowledge of the markets. (rolling eyes) I am highly entertained by those who pretend to have a crystal ball, instead they only have misguided opinions and a big mouth. Kinda like Jim Cramer who told folks to pull money out of the market at a low??? Are you kidding me??? Basically what I took out of this is that we need to remember how bad it was in the 70s and start saving again. Americans have been way overspending the past 5+ years and now the bills are due.
POSTED BY: Dan (December 12, 2008 11:24 AM)
Complete bunk, ladies and gentlemen. This typical orthodox position on the recession takes virtually nothing into account: for example, it completely neglects to mention the biggest liquidation of wealth in the history of money: the babyboom retirement. It also totally neglects the frugality movement stimulated by the environmental movement that is kindling a new generation of consumers committed to living with less. This position is so out of touch with demographics and social changes. It is however, very (good) advice for the 1950s!
POSTED BY: alfern73 (January 23, 2009 09:55 AM)
...An economic depression worse than anything we have ever seen is coming, there is nothing that will stop this from happening. The dog and pony show is now over and the time to collapse the world economies is now. This writer has no clue what he is talking about. Brace yourselves everybody,,prepare.
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