Another Great Depression?
by admin on Nov.25, 2008, under Economics
Market commentators everywhere are uttering the word “Depression.” While this is great for effect and probably helps with ratings, it gives pause to many who are looking to invest in this environment. Bargains with the prospect of a recession might be viewed as overpriced risk assets when looking at a possible depression. While even the best professional economists have a difficult time predicting the future of the economy, here are some things to consider in the current environment which are far different from what was going on during the Great Depression.
1. We did not have the FDIC in 1929. Banks failed and depositors were left with nothing. This caused a run on the banks, which in turn caused an exponential contraction in the money supply.
2. We have massive government intervention today. In 1929 the government had a lassie faire attitude.
3. Today we have margin requirements for investment that were not in place in 1929.
4. We now have the Securites Act of 33 and Securities Exchange Act of 1934. These acts provide the tools to prevent and prosecute the type of market manipulation that was taking place in the years leading up to 1929.
5. There was a weak banking structure in 1929 relative to the one we have in place today.
6. Arguably economic intelligence has advanced since 1929. Thanks to a Depression era government we now know that “belt tightening” efforts to balance the national budget caused a decrease in economic activity. As part of depression era “belt tightening,” taxes were increased adding additional stress to the economy.
7. In 1929 we were on a gold standard. The use of this standard contributed significantly to the massive deflation seen during that era.
8. Foreign lending stopped. This destroyed a mechanism for balancing foreign accounts. The mechanism we were left with was reduced exports. Foreign trade was stifled further by the Smoot-Hawley Tariff Act. In 1929 we were a net exporter of goods rather than a net importer.
