A Depression Coming? Not Likely
Expect to see a recession similar to those in the 1970s and early 1980s.
By Knight Kiplinger, Editor in Chief, Kiplinger publications
November 20, 2008
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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.
Reader Comments (29)
Posted by: Rodger Malcolm Mitch at 11/20/2008 08:37:41 AM
Relative to the federal debt, you said, "Someday all of this borrowed money will have to paid off by inflation or higher taxes -- most likely by both." That is dead wrong. Reducing the debt would be the worst possible act. Every depression in American history (There have been six) has been brought on by several years of federal surpluses. Every recovery has been effected by federal deficits. A growing economy requires a growing supply of money. Federal deficits are the government's method for adding money to the economy. Taxes reduce the amount of money in the economy. The belief that the federal government must be "paid back" is largely responsible for the government's timid reaction to the current recession. As a sovereign nation, the government never needs to be paid its own money, nor should it be...
Posted by: Gary Kratochvil at 11/20/2008 10:47:14 AM
Mr. Kiplinger states that the market dropped 50% in the bear markets of 2000-2002 and 1973-1975. In fact, the 73-75 decline in the Dow was 45.10% and 00-02 decline was 37.80%. As of yesterday's close, we are already at a decline of 43.5%. Once we cross the 45% mark (likely this week), we WILL be in the worst market since the Great Depression.
Posted by: bg at 11/20/2008 01:18:48 PM
In mid summer, Hank Paulson told the American public that the worst is behind us and he gave similar comments to make us feel good....how can a smart person not be alarmed that unemployment will continue to trend up to double-digits and the implications of such a trend will have on Social Security and retail spending. To me, this feels like a deep and protracted cycle that will not reverse until a dramatic world event (i.e. middle east peace or a global war) will shake things up...
Posted by: JD at 11/20/2008 02:25:48 PM
Excellent article; well worth reading for many people. The irony is, many of the mistakes you say we are now too smart to make have actually appeared recently in the form of very popular campaign promises (Smoot-Hawley, for instance). Fortunately, if history is any indication, these promises will go unfulfilled.
Posted by: Greg Harper at 11/20/2008 02:47:36 PM
I think two mistakes are commonly made when talking comparisons with the Great Depression: 1)No one acknowledges that the high skill levels of self-sufficiency that still existed in the 30's probably greatly moderated the hardships on many families. 2)Greater globalism is consistently touted as a saving moderating factor, even though the most global thing of all, finance, has not only failed to do so but to date seems to have contributed to the problem. The captains of globalization such as Mr. Kiplinger can't yet bring themselves to question this premise.
Posted by: Robert at 11/20/2008 04:40:21 PM
This is not very comforting. I know many people in debt up their eyeballs. I remember my parents struggles in both those recessions. They had very little debt. They both worked extra jobs to keep us in clothes, food and home. This recession is based totally on over leverage and debt. Not a growth slowdown. Now the debt of the country has caused a slowdown in growth. Coupled with the oil battle and myth of global warming this country will have a tough time growing.
Posted by: Brian at 11/20/2008 05:24:55 PM
The collapse of the largest credit bubble in the history of the universe will not end gently. The distortions, imbalances and malinvestments of the past few years are far greater than anything that occurred in the 1920s. And government policiies are certain to make things vastly worse. The Depression is not coming; it is already here and accelerating to the downside.
Posted by: Roger at 11/20/2008 07:02:14 PM
I'm not sure if a depression is coming but I think it's wise to invest right now in a stick with a rag on the end of it to hold your belongings.
Posted by: Ron Hamilton at 11/20/2008 08:30:57 PM
My experience with most of those expressing their views, that it is usually on the optimistic side. I didn't worry about the previous bear markets,down economy,job losses, etc. in the past as they didn't really affect our family. Now that I am retired, it is a different story. I do believe that we are going into a depression. Those using statistics saying that we may be going into a recession, are far behind what has and is already happening.
Posted by: Nomen at 11/20/2008 09:53:10 PM
Mr. Kiplinger. While I find your financial publication to be one of the best, I don't share your optimism nor interpretation of the current situation. I'm not a big fan of conspiracy theories but our current crises seem to be by design. Why did our government do nothing to help consumers last year when the price of oil soared and are now blaming Detroit's resulting distress on fuel guzzling SUVs and pickups along with a lack of foresight? The blue collar union workers are also being blamed for high wages, pensions, and health insurance preventing the companies from competing. No one wants to mention the concessions those workers have already made over the last 10 years and jobs lost while executive salaries have soared. No one seems to want to acknowledge that those same workers wages ADJUSTED for inflation have not gone up in 35 years. Much of the pension plan offered was to get the workers to retire early so that their jobs could be outsourced...What I now hear on the news from both parties in Congress appears to be more of a union busting scheme than any concern for saving the automakers,workers jobs or our economy. They didn't have any trouble bailing out Chrysler a few years ago but now want them all to go bankrupt. WHY? Marriner S. Eccles, Chairman of the Federal Reserve during the 1930s, stated that the Great Depression was the result of a great inequality of wealth and income in the U.S.(Doesn't this sound like the current Fat Cat lust for cheap labor with it's union busting, outsourcing and illegal immigrant workers?) Our government has done little over the past 30 years to make America energy independent. Why not? Only token amounts have been spent on alternative fuels or green sources of energy. The government deregulated much of the financial industry. Why? It's amazing how quick the manufactured subprime crisis could get a $700 billion bailout from Congress but roads, bridges and alternative energy could not....If the 1930s were so tough when 80% of the people lived on the farm,raised gardens, and canned their own food, how will our urban society survive with poverty wage jobs and food stamps?...A Depression Coming? MOST Likely
Posted by: MarciaC at 11/21/2008 12:05:01 AM
The unemployment number is wrong. The author, like those putting lipstick on a pig, "forgets" that both Reagan and Clinton manipulated the method of counting the unemployed to make it look better. If we were still using the method used during Carter's term, we'd see that in honesty it is more like 12%. Today we read that the new numbers for people losing their jobs have skyrocketed. And since part time workers who only work occassionally are counted as "employed" that just covers up more major problems. Citi group just announced it will fire 52 THOUSAND employees. Wake up and smell the depression.
Posted by: R.Smith at 11/21/2008 02:59:27 AM
Where do I begin?? This over optimistic article is out of touch with what is happening in the economy and our financial system. We are in the midst of a financial meltdown. I was in the 1982 recession in Detroit. It was nowhere near as bad as now. The financial markets were not disintegrating then. Major corporations were not going BK at such an astounding rate. (Yeah I know about Chrysler.) The social safety nets will not be able to handle what is coming. We have major banks collapsing now. And we do not have the leaders to lead us out of this mess. And we have entered this disaster in the worst possible financial condition with trillions of dollars of debt we owe. When we entered the great Depression, we owed no one, unlike today. We are also on the verge of social instability when the economic order is finished crashing. The future is very gloomy indeed. Say your prayers because the US of A needs them.
Posted by: JohnW at 11/21/2008 12:13:26 PM
One person's recession is another's depression. Whether you have a good job and just pay a bit more for goods and services, or lose your job amid rising prices is determinate in your assessment of the crisis. After being asked not to retire at New Years, my company decided to close my office six months later, after my retirement account had lost much of its value. I'm feeling much more like unemployed than retired. Its true, I'd have been in the same sinking boat either way, but there seems to be more folks in my life raft this week than in January. When I start selling apples (the fruit), I'll believe its a depression. Today, I have hope that someone is going to realize the bargains on the market and I can watch the Dow climb out of this mess before I have to sell Apple (stock).
Posted by: Bob at 11/21/2008 04:56:03 PM
Somehow as I read stories like this I am reminded of an old saying that we had on the farm. "The old cow only has to bump into the electric fence once to know what the limits are but the farmer gets shocked many times." What's my point? Well we had an oil embargo in the 1970's with skyrocketing gas prices,the bailouts of the airlines and railroads along with Chrysler, and of course the deregulation and resulting failures of the Savings and Loans. Just how many times do government and business leaders have to bump into the hotwire to learn what the limits are? Our economic experts don't seem to have a clue. I think we all are about to lose the farm.
Posted by: James at 11/21/2008 07:43:13 PM
I have a new measure for whether or not it is a depression. It is called my footwear test. A year ago I was happily and smugly writing in my financial blog that all was right with the world and that the collapse in the housing market was a minor blip. I was smug and secure in my office and my white collar title, smug and secure in my blue pinstriped suit and my necktie and my starched shirt with my cufflinks in place and watch on my wrist, and my feet were smug and secure in Brooks Brothers captoes and black dress socks. We were smug and secure with out stocks and smug and secure in our house, which was at least stable in value. This year, my investment banker job ended and I became unemployed; our house lost a good chunk of its value; our stocks imploded. My smugness and security has evaporated. I am writing today as I wait for a night shift to begin as a truck driver. I am wearing a polyester uniform with a name-tag and a cap; the pinstripes, the cufflinks and the ties are put away. On my feet are white sweat socks and work boots; the Brooks Brothers captoes and dress socks don’t look right at my new job. I’m even growing a beard. My blue-collar makeover is going well. My wife is working late. I am watching the kids. At the age of 48 I am struggling as millions are. So right now, according to my test, we are in a severe recession. The test question: What am I wearing on my feet? Polished business shoes and black socks equal prosperity. Work boots means a recession. When I am barefoot, it will be a depression. When that happens, look for my size 10 Brooks Brothers shoes on ebay. That will be food money....
Posted by: Mo Louis at 11/22/2008 09:05:14 AM
Chicago's South and West sides, Detroit, Cleveland, to name a few, have been in a depression for almost a year. Most people do not believe the numbers the government puts out anyway. America's entire financial system has been a farce ever since we got off the gold system. Soon our country's credit rating will be reduced to Aa. China, Japan and South Korea will not continue buying our debt. This will leave us with no choice except to simply print money, backed by nothing, not even the confidence of the people....Printing articles which are overly optimistic serves no purpose, simply stated the people do not believe them...We have a lot of changes to make in order for us the people, to realize the real American Dream.
Posted by: Brandon at 11/22/2008 09:58:26 AM
It's about time someone compared apples with apples. I'm so sick of the typical media "bad news sells" mentality. It's refreshing to read something that is slightly optomistic, but totally realistic. I don't know everyone in the country, but the few I do know aren't suffering. We're still going to sporting events, paying too much for our movie tickets, eating out at restaurants too often. I haven't seen any bread lines, yet. It's a possibility I suppose, but we're far from it in my humble opinion. I just returned from my first visit outside the USA. I was in Guinea, West Africa for 10 days. Those people know hardships. We Americans need to get over ourselves and stop complaining. Look how God has provided for us and yet we curse Him. Shame on us.
Posted by: Kat Hartman at 11/22/2008 07:25:36 PM
We are heading to a depression. Don't be fooled by those who do not completely understand all the reasons leading to a depression... MANY are omitted in this article....
Posted by: benny beaver at 11/23/2008 08:16:04 PM
Unfortunately, it appears that you folks at Kiplinger are just as short-sighted as the current administration in assessing the severity of the current situation. Layoff momentum is building. The process is feeding on itself, and the only way out is massive government spending that will create jobs quickly. I don't see that kind of commitment from the current administration or the next one. I see unemployment in double digits by mid-2009, before conventional wisdom gives up. That...is the real definition of a depression.
Posted by: Mrfixit at 11/23/2008 10:54:28 PM
...way off base...Roosevelt saved the country.
Posted by: Shawn at 11/26/2008 04:16:26 PM
If you really believe that a depression is not likely, then there must be something seriously wrong with you. Look around, nothing but false hopes.
Posted by: Robert M at 11/30/2008 09:23:57 AM
Finally some facts! I wish that this was required reading for American journalists.
Posted by: Mike G. at 12/01/2008 05:11:05 PM
What do you mean "not severe" because unemployment will "only go to 9%?" That doesn't include another 50% because people will eventually stop looking for work making unemployment go over 14%...
Posted by: sheeple at 12/02/2008 07:43:31 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 at 12/03/2008 08:06:47 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 at 12/07/2008 01:17:16 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 at 12/12/2008 11:24:08 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 at 01/23/2009 09:55:49 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.
Posted by: Mohan at 07/20/2009 03:13:22 AM
But I don't think we can escape this time... a severe slump is in store for all of us. Primarily because Govts across the globe have kicked the Gold Standards and have printed loads of their Currencies and have accumulated US Dollars. We all know US Dollar is a worthless currency, but we do not want to believe that, even the Govts across the globe (make) the same mistake. If China believes that USD is or is going to be a worthless currency in future, then they are in for a very big trouble. They have created a fiat currency based on the reseverse (USD - another fiat) they have piled up. The NEXT BIG CRISIS THAT WILL HIT US WILL BE CURRENCY CRISIS...HOW IT IS GOING TO HAPPEN AND WHERE IT IS GOING TO HEAD ALL OF US NO ONE KNOWS