Great Depression vs. 'Great Recession'

[scandal 951]

The statistic I found most dramatic is the comparison of increase in money supply, 17% in the 1930s versus 125% today.

The Fed was famously tight fisted following the 1929 crash and refused to inject liquidity to stabilize the credit markets.

Bernanke, a student of that era, has clearly gone the other way. The open question is: has he got it just right, or has he overshot?

Are we looking at a huge inflation problem once all that excess liquidity gets absorbed by the market?

Time will tell.

A few more obvious observations: (1) it ain't over yet. Our modern recession can still get much, much worse before it gets better (2) I'd rather live in our era than the 1930s. Today we have FDIC insured banks, unemployment insurance, Medicaid, welfare and food stamps. Back then they had none of those things. The New Deal and Great Society don't look so bad, eh?

http://money.cnn.com/news/storysupplement/...ion_depression/

Great Depression vs. 'Great Recession'

Comparisons between this economic recession and the Great Depression are common, but the granddaddy of all downturns was far worse.

By David Goldman, CNNMoney.com staff writer

Great Depression

Bank failures 9,096 – 50% of banks (Jan. 1930 – March 1933)

Unemployment rate 25%

Economic decline -26.5% (1929 - 1933)

Biggest decline in Dow Jones industrial average -89.2% (Sept. 3, 1929 – July 8, 1932)

Change in prices -25% (1929 – 1933)

Emergency spending programs 1.5% of GDP for 1 year (Increase in 1934 budget deficit)

States’ response Raise taxes, cut spending

Increase in money supply by Federal Reserve 17% (1933)

‘Great Recession’

Bank failures 57 – 0.6% of banks (Dec. 2007 – May 2009)

Unemployment rate 8.5%

Economic decline -3.3% (Second quarter 2008 - first quarter 2009)

Biggest decline in Dow Jones industrial average -53.8% (Oct. 9, 2007- March 9, 2009)

Change in prices +0.5% (Dec. 2007-March 2009)

Emergency spending programs 2.5% of GDP for 2 years (2009 American Reinvestment and Recovery Act)

States’ response Federal stimulus plan gives fiscal relief to states to lessen impact of tax increases

Increase in money supply by Federal Reserve 125% (September 2008 – May 2009)

[fozzie 41]

Great Depression

Change in prices -25% (1929 – 1933)

'Great Recession'

Change in prices +0.5% (Dec. 2007-March 2009)

Why can't the prices drop 25%? I think if people had stopped spending completely we would see a drop in prices to entice people back in. Unfortunately many companies are raising prices to cover increased costs. The only thing that seems to have fallen is the house market.

[scandal 951]

Great Depression

Change in prices -25% (1929 – 1933)

'Great Recession'

Change in prices +0.5% (Dec. 2007-March 2009)

Why can't the prices drop 25%? I think if people had stopped spending completely we would see a drop in prices to entice people back in. Unfortunately many companies are raising prices to cover increased costs. The only thing that seems to have fallen is the house market.

Well, because that would be deflation. Which most economists see as far, far more grave and dangerous than inflation. A "balanced" economy, in modern theory at least, should be running a positive inflation rate of approximately 1-2% (which happens to be where we are now).

Why is deflation considered bad? Because deflation is basically about too much supply and insufficient demand. Since customers don't want to buy their goods and services, companies lower prices. This can lead to a downward spiral of lower profits for businesses (since they are lowering prices), hence they cut back inventory, production, and staff. This even further reduces demand (laid off workers don't buy stuff), so we just go downhill, cutting back production and GDP, and increasing the ranks of the unemployed and a general mood of pessimism.

Are we headed for deflation this time around? An argument hotly debated amongst the experts. Here's an apt article from February. Conditions may have changed since then but the debate is hardly over.