Global Economic Crises

Economic crises in one country can have catastrophic consequences in other parts of the world.

The Great Depression of the 1930s

The Great Depression of the 1930s, began as a financial meltdown in the U.S. with millions of Americans losing their jobs and countless companies and farms going bankrupt.  

When the Federal Reserve moved to restrict money supply after the 1929 crash, it led to an even more severe slowdown in economic activity, which increased unemployment and bankruptcies.  

Faced with a severe crisis in funding, U.S. banks called in loans to foreign countries leading to a collapse in the banking system in such debtor countries as Germany and Argentina.

The U.S. government then raised tariffs and quotas on imported goods, ostensibly to protect U.S. companies and farmers.  But this immediately led countries around the world to raise tariffs of their own, creating a vicious cycle where the economic downturn and isolationism in one country led to a greater downturn and even more protectionism in another - and eventually worldwide depression.

Unemployment reached unprecedented levels of more than 25% of the workforce unemployed in in Germany, Great Britain and the United States.  

In Germany, the economic situation was a major cause of the rise in fascism, with Hitler's National Socialist Party seizing power as the economy failed and inflation soared.

The Worldwide Recession of the 2008

The worldwide recession of the 2008 started with the collapse of the housing market in the U.S.  But the enormity of the financial collapse required a level of government and central bank intervention never before attempted.  

When banks began failing across the globe - primarily because of catastrophic investments in U.S. subprime securities funded by unstable, short-term money market borrowing - it was clear that a full-blown worldwide crisis had arrived.  

Stock market declines of more than 50% in some countries presaged a global economic meltdown.  

The concerted actions of the world's central banks, including the U.S. Federal Reserves, the Bank of England, the European Central Bank, and the Bank of Japan, helped calm things down for a while.  But when entire countries began to go bankrupt - like Iceland and Greece - it was clear that the fallout of the 2008 crisis would last for years to come.

The task facing the Fed as well as the other central banks of the world in 2008 was to somehow solve the immediate problem without setting precedents that would exacerbate future crises.

What caused the 2008 recession?

1.  Some say that the reaction of the Federal Reserve to the meltdown of the dot-com sector in 2000 - increasing liquidity and facilitating drastically lower interest rates - set the stage for the housing bubble and the eventual meltdown of financial markets several years later.

2.  Others say the "savings glut" in the emerging economies in Asia as well as in Germany and other export-oriented countries led to the 2008 recession, during which easy access to mortgages led to overheated housing market from Dublin to Madrid to San Francisco.

3.  Some point to the discovery by banks and mortgage companies in the U.S. that they could make a lot of money by providing loans to home buyers who normally wouldn't be given credit.  

• The market for subprime mortgages really took off when the banks and mortgage companies figured out that they could repackage these dubious mortgages and sell them as bonds to investors through-out the world economy - mainly to cash-flush banks and financial institutions.
• With hundred of billions of dollars' worth of mortgage-backed securities traded annually by 2007, the market for subprime debt had become bigger than the entire market for U.S. Treasury bonds - the biggest bond market in the world at the time.  

1929 Wall Street Stock Market Crash

World facing worst financial crisis in history

World facing worst financial crisis in history, Bank of England Governor says


The world is facing the worst financial crisis since at least the 1930s “if not ever”, the Governor of the Bank of England said last night.

Mervyn King, Governor of the Bank of England Photo: PAUL GROVER

By James Kirkup

10:00PM BST 06 Oct 2011

941 Comments

Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

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Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”.

The Monetary Policy Committee [MPC] also said that the inflation-driven “squeeze on households’ real incomes” and the Government’s programme of spending cuts will “continue to weigh on domestic spending” for some time to come.

The “deterioration in the outlook” meant more QE was justified, the Bank said.

Financial experts said the committee’s actions would be a “Titanic” disaster for pensioners, savers and workers approaching retirement. Sir Mervyn suggested that was a price worth paying to save the economy from recession.

Under QE, the Bank electronically creates new money which it then uses to buy assets such as government bonds, or gilts, from banks. In theory, the banks then use the cash they gain to increase their lending to businesses and individuals.

By increasing the demand for gilts, QE pushes down the interest rate yields paid to holders of these and other bonds. Critics of the policy say it pushes up inflation and drives down sterling.

The National Association of Pension Funds yesterday called for urgent talks with ministers to address the negative impact of lower gilt yields on pension funds. Joanne Segars, its chief executive, said QE makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase. “All this will put additional pressure on employers at a time when they are facing a bleak economic situation,” she said.

Ros Altman, of Saga, said the latest round of QE was “a Titanic disaster” that would increase pensioner poverty. As well as fuelling inflation, she said, falling bond yields would make annuities more expensive, “giving new retirees much less pension income for their money and leaving them permanently poorer in retirement”.

The MPC also voted to keep the Bank Rate at its historic low of 0.5 per cent, another decision that hurts savers. Yesterday, protesters outside the Bank’s headquarters smashed a giant piggy bank to symbolise the situation of pensioners and others forced to raid savings to keep up with the rising cost of living.

Asked about the plight of savers, Sir Mervyn said it was more important to support the wider economy than to support them. He suggested that savers would not be helped by deliberately pushing the British economy into recession. Yesterday’s decision was the first move on QE since 2009, during the global credit crisis, when the Bank injected £200 billion into the economy.

Some analysts believe that this round of QE could be less effective than the previous one, forcing the Bank to create even more money this time.

Michael Saunders of Citigroup, forecast that there could be as much as £225 billion more QE by next year. “I think they will do lots more QE,” he said. “It’s both that the economy is weak but also that the MPC’s view is that QE is not a very powerful tool, or rather it takes a large amount of QE to have much effect on the economy.”

The Bank is supposed to keep inflation near a target of 2 per cent. Inflation now stands at 4.5 per cent, and the Bank admitted it is likely to hit 5 per cent as soon as this month. The Bank’s own research shows that as well as stimulating the economy, QE pushes up prices.

Sir Mervyn insisted that yesterday’s move was still consistent with the 2 per cent inflation target, saying that the slowing economy means inflation could actually fall below that mark “by the end of next year or in 2013”.

The Governor insisted that the MPC’s decisions had been the correct response to events. “The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed,” he said. “The world has changed and so has the right policy response.”

City traders took heart from the Bank’s move to boost growth, with the FTSE 100 rising 3.7 per cent to 5,29, its biggest two-day gain since 2008.

The Bank’s decision came after mounting political pressure from ministers worried that Sir Mervyn was not reacting urgently enough to the darkening global economic outlook.

George Osborne, the Chancellor, welcomed the Bank’s move, saying: “The evidence shows that it [QE] will help keep interest rates down and boost demand and that will be a help for British families.”

http://www.telegraph.co.uk/finance/financialcrisis/8812260/World-facing-worst-financial-crisis-in-history-Bank-of-England-Governor-says.html

What Caused the Great Depression?

Stories from the Great Depression

The Crash of 1929 & The Great Depression (PBS)

1929 Wall Street Stock Market Crash

The most devastating stock market crash in the history of the United States;
Its from my favorite documentary by PBS - New York.

This particular part about Wall Street crash of 1929 is from episode 5 of the series with title: Cosmopolis

There are lots of archive photos, footages and drawings throughout the series and in my opinion it was great work done with finding them.

1929 Stock Market Crash

IMF admits that the West is stuck in near depression

If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.


By Ambrose Evans-Pritchard
Published: 8:00PM BST 03 Oct 2010

Spain, trapped in EMU at overvalued exchange rates, had a general strike last week

The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

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IMF warns pound could be at risk from uncertainty

"Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

"A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes." Exactly.

Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".

Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.

Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF's schema, this implies a 3pc loss in growth. Since there wasn't any growth to speak off, this means contraction.

Spain had a general strike last week. Elena Salgado, the defiant finance minister, refused to blink. "Economic policy will be maintained," she said. There will be another bitter budget in 2011, cutting ministry spending by 16pc.

Mrs Salgado has ruled out any risk of a double-dip. But the Bank of Spain fears the economy may contract in the third quarter.

The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.

We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.

The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011.

Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.

The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal "carry trade" for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.

One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU's €440bn rescue fund. That is courting fate.

Who believes that the EMU Alpinistas roped together on the North Face of the Eiger are strong enough to hold the rope if one after another loses its freezing grip on the ice?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8039789/IMF-admits-that-the-West-is-stuck-in-near-depression.html

The 1929 & 2007 Bear Market Race to The Bottom

19 February 2010






We can always learn something from studying the past, but past performance is no guarantee of what is to come.

Well during Bull Market, there are bad weeks, and in Bear Markets there are good weeks.

http://www.gold-speculator.com/mark-lundeen/22558-bear-market-race-week-123-djia-market-volume-dividend-payout-yield-considerations.html

A tale of two depressions

To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

http://economistsview.typepad.com/economistsview/2009/04/a-tale-of-two-depressions.html

Three Bears: The past century's worst market slumps

DJIA 1937 - 1942: Lessons from the Great Depression

An important lesson from the October 1987 crash

A comparison of the DJIA from 1922 - 1929 and 1980 - 1987 showed an uncanny similarity between these two bull markets. On October 19, 1987, we witnesse d the greatest 1-day drop in the stock market history, exceeding the great crash of October 29, 1929. In fact, the market in 1987 continued to trade like 1929 for the remainder of the year. Many forecasters, citing the similarities between the two periods, were certain that disaster loomed and advised their clients to sell everything.

However, the similarity between 1929 and 1987 ended at year's end. The stock market recovered from its October 1987 crash and by August of 1989, hit new high ground. In contrast, 2 years after the October 1929 crash, the Dow, in the throes of the greatest bear market in U.S. history, had lost more than two-thirds of its value and was about to lose two-thirds more.

What was different? Why did the eerie similarities between these two events finally diverge so dramatically?

The simple answer is that in 1987 the central bank had the power to control the ultimate source of liquidity in the economy - the supply of money - and, in contrast to 1929, did not hesitate to use it. Heeding the painful lessons of the early 1930s, the Federal Reserve temporarily flooded the economy with money and pledged to stand by all bank deposits to ensure that all aspects of the financial system would function properly.

The public was reassured. There were no runs on banks, no contraction of the money supply, and no deflation in commodity and asset values. Indeed, the economy itself moved upwards despite the market collapse. The October 1987 stock market crash taught investors an important lesson - that a crisis can be an opportunity for profit, not a time to panic.

Reap the benefits of market volatility

Reap the benefits of market volatility

When stocks are collapsing, worst-case scenarios loom large in investors' minds. On May 6, 1932, after stocks had plummeted 85% from their 1929 high, Dean Witter issued the following memo to its clients:

"There are only two premises which are tenable as to the future. Either we are going to have chaos or else recovery. The former theory is foolish. If chaos ensues, nothing will maintain value; neither bonds nor stocks nor bank deposits nor gold will remain valuable. Real estate will be a worthless asset because titles will be insecure. No policy can be based upon this impossible contingency. Policy must therfore be predicated upon the theory of recovery. The present is not the first depression; it may be the worst, but just as surely as conditions have righted themselves in the past and have gradually readjusted to normal, so this will again occur. The only uncertainty is WHEN it will occur.... I wish to say emphatically that in a few years present prices will appear as ridiculously low as 1929 values appear fantastically high."

Two months later the stock market hit its all time low and rallied strongly. In retrospect, these words reflected great wisdom and sound judgment about the temporary dislocations of stock prices. Yet, at the time they were uttered, investors were so disenchanted with stocks and so filled with doom and gloom that the message fell on deaf ears. Investors often overreact to short-term events and fail to take the long view of the market.

1987 Crash v.s. 1929 Crash

Despite the drama of the October 1987 market collapse, which often has been compared with 1929, there was amazingly little lasting effect on the world economy or even the financial markets. Because this stock market crash did not augur either a further collapse in stock prices or a decline in economic activity, it probably will never attain the notoriety of the crash of 1929. Yet its lesson is perhaps more important: Economic safeguards, such as prompt Federal Reserve action to provide liquidity to the economy and ensure the financial markets, can prevent an economic debacle of the kind that beset our economy during the Great Depression.

This does not mean that the markets are exempt from violent fluctuations. Since the future will always be uncertain, psychology and sentiment often dominate economic fundamentals. As Keynes perceptively stated 60 years ago in The General Theory, "The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made." Precarious estimates are subject to sudden change, and prices in free markets will always be volatile. But history has show that investors who are willing to step into the market when others are panicking to leave reap the benefits of market volatility.

World industrial production, trade and stock markets are diving faster now than during 1929-30.

Tuesday, April 7, 2009

World Economy Falling Faster Than in 1929-1930


Barry Eichengreen, an expert on the Great Depression, and Kevin O'Rourke, take issue with the notion that the current downturn is less severe than the Great Depression. While the slump in the US is not as bad, that mis-states the global picture.

Note that many economists expect the US to suffer less than the big exporters, namely China, Germany, Japan. The reason is that the economic adjustment required of surplus nations is greater than that of debtors. Similarly, in the Great Depression, the US, then a major exporter, was harder hit than the overconsuming importers such as Britain, who defaulted on their debts.

The one bit of cheer is that this time around, government action is more aggressive, but it remains to be seen whether it is sufficient.

From VoxEU:

Often cited comparisons – which look only at the US – find that today’s crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting as it did in the Great Depression; indeed, world industrial production, trade and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then
Source: Eichengreen and O’Rourke (2009).

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then
Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then
Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then
Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.


Conclusion

To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.


Topics: Economic fundamentals, Globalization, Macroeconomic policy
Posted by Yves Smith at 1:26 AM



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How a Modern Depression Might Look -- if the U.S. Gets There

How a Modern Depression Might Look -- if the U.S. Gets There
by Justin Lahart
Monday, March 30, 2009


In the wake of the biggest financial shock since 1929, economists say the odds of a depression are less than 50-50 -- though still uncomfortably high. But even if a depression comes to pass, a 21st-century version would look very different from the one 80 years ago.

There is no consensus definition for "depression." Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%. Many economic historians say the line between recession and depression is crossed when unemployment rises above 10% and stays there for several years.

The current recession, though severe, is not at depression levels now. Unemployment in February was at 8.1%, not as bad as in the early 1980s -- the last time the idea of a depression was being kicked around seriously, when it remained over 10% for 10 months. In the Great Depression it reached 25%

"When you get an unemployment rate of 25%, it's everywhere," recalls economist Anna Schwartz, who is 94 years old and best known for her analysis of the causes of the Great Depression with the late Milton Friedman. "Everyone is conscious of that and fearful. We're not talking in that league at all."

Using the Barro definition, economists in a Journal poll conducted in early March put the odds of a depression at 15%, on average. But there was wide disagreement. John Lonski, chief economist at Moody's Investors Service, put the depression odds at 30% in early March, but better-than-expected news recently has led him to put it closer to 20%. In contrast, Paul Kasriel of Northern Trust put the odds of a depression at just 1% because of the aggressive lending by the Federal Reserve and the fiscal stimulus just beginning to hit the economy. "There are just too many powerful countercyclical policies in place that will prevent the worst-case scenario," he says.

Today's government response is a far cry from the early 1930s, when the Fed raised interest rates, the infamous Smoot-Hawley Tariff Act crushed trade and Treasury Secretary Andrew Mellon's prescription for the economy was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

"The Great Depression was a mass of policy errors that made it worse," says historian and investment consultant Peter Bernstein, 90. "This time we have our fill of policy errors, but at least they're not making it worse."

Mr. Bernstein lived on Manhattan's Upper West Side during the Depression. "You were conscious of it all the time when you were out in the street," he says. "People looked so threadbare."

The different structure of today's economy means that a modern depression would differ from the Great Depression of the 1930s. Fewer than 2% of Americans working today have agricultural jobs, compared with one in five in 1930. Three-quarters of today's workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.

And then there are the social-safety-net programs that emerged after the Great Depression to blunt the blows. "There were no unemployment insurance, no food stamps, none of the automatic things that maintain some income for people who are out of work," says former Massachusetts Institute of Technology economist Robert Solow, a Nobel laureate. Mr. Solow, 84, grew up in Brooklyn, N.Y., and remembers his parents' constant worry about the next month's money.

With spending on food accounting for a little less than a tenth of a typical family's disposable income today, compared with a little less than a quarter in 1930, a modern depression wouldn't hit people in the stomach as the Great Depression did. Growing up on a Wisconsin farm, Catherine Jotka, 89, remembers taking dried corn meant for animal feed out of the granary and sifting dirt out of it to make corn bread.

Today's cutbacks would be for more discretionary purchases -- cable television, iTunes songs and restaurant meals. And there's plenty of room for trimming, says Victor Goetz, 81, a retired engineer who lives outside Seattle. "This has a whole different feel than anything we had in the 1930s," he says.

Even if the downturn isn't deep enough to be called a depression, the restructuring that it needs to go through means that even after the economy bottoms out, there could be a "lost" four or five years of sluggish growth, says Nobel laureate Paul Samuelson, 93.

As a University of Chicago student during the Depression, Mr. Samuelson remembers attending economic lectures that seemed completely out of step with the times, based on laissez-faire principles that stopped making sense after the 1929 crash. "I was perplexed because I could not reconcile the assignments I got from these great economists with what I heard out the windows and I heard from the street," he says.

Starting in the 1980s, the U.S. saw an extraordinary period of economic quiescence, where growth was steady and policy makers dealt with financial crises handily. Economists began to doubt the possibility of a financial crisis so severe it would upend the economy. And that left them as blindsided as their counterparts when the crisis came 80 years ago.

http://finance.yahoo.com/banking-budgeting/article/106822/How-a-Modern-Depression-Might-Look-if-the-U.S.-Gets-There?sec=topStories&pos=3&asset=TBD&ccode=TBD

Depression? Or just a recession?

From The TimesFebruary 9, 2009

Depression? Or just a recession? Experts also find it hard to tell
This week: After Gordon Brown talked of a new Depression, we explain the phenomenon.

How is an economic depression different from a recession?

First of all, it is important to understand that there is no precise or agreed definition of a depression. Even now, 70 years after the last experience of the 1930s economic slump that became know as the Great Depression, the world's leading economists are still wrangling over what caused it and what it meant. Defining the term is made more difficult since the last experience of anything like a depression was in this period, more than seven decades ago, which is well beyond many people's living memory.

In general, it is accepted by most commentators and experts that a depression is a very severe form of recession: one involving a deeper decline in GDP and most other measures of economic welfare, including employment, and which probably lasts for significantly longer than the typical recessions experienced in modern times.

How different is the scale of a depression from a recession?

Very different. In modern times, the typical experience of recession in big Western economies has been a period of declining GDP that has lasted perhaps three to six quarters, and the typical fall in GDP over the period of recession has been in the order of 1 to 3 per cent. Some recessions have been even briefer and less deep, but all of these have still been bad enough to cause considerable hardship and to alter the business landscape significantly.

By contrast, the Great Depression in the United States stretched from 1929 to 1933, and involved a collapse in the economy that saw national output and income shrink by 29.6per cent. GDP dropped by 8.6per cent in 1930 alone, by 6.4 per cent in 1931 and by 13 per cent in 1932. Recovery in 1934 to 1937 was followed by a relapse into recession. It was only the huge rise in industrial production in the US war economy of the early Forties that ended this profound period of economic woes in America.

What was the toll from this slump?

The impact was brutal. The proportion of the workforce without jobs surged from 2 per cent to a quarter of those of working age. Output from US factories was halved, consumer prices fell by a quarter as the economy slid into deflation, four-fifths of the value of the US stock market was wiped out, from the Wall Street crash onwards, and house prices fell by nearly a third.

What about Britain in the Depression?

Britain's experience of the Thirties was grim and painful, but far from as searing as that of the US. British GDP plunged by about 5 per cent, compared with the 2.9 per cent drop suffered in the worst modern recession in the early Eighties. During the early Thirties, British unemployment doubled from 7 to 15per cent of the workforce. However, this experience was much less severe than the slump that the UK suffered in the early Twenties. Although that is not part of what we know as “the Great Depression”, it clearly was a depression on the same scale. In the wake of the First World War, UK GDP plummeted by 23 per cent, mirroring the experience of America a decade later.

www.timesonline.co.uk/economics
www.timesonline.co.uk/targettwopointzero
www.bankofengland.co.uk/education/targettwopointzero

http://business.timesonline.co.uk/tol/business/economics/target_2_0/article5689193.ece

Recession, but we are nowhere near a depression

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What is Recession? What is Depression?

Tuesday, 11 Nov 2008
Recession or Depression? Finding the Trigger ...
Posted By:Daryl Guppy

The key question facing markets these days is the difference between recession and depression. A recession is an economic slowdown that may last for 6 to 18 months. A depression is an economic pullback that may last from two to four years. We'd rather not have a recession at all but if we have to choose one or the other, I'd rather be recessed than depressed!

In either case, the market moves in anticipation of the event. The market decline develops before the fundamental signs of a recession or depression become evident. The market leads the confirmation of conditions.

The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.

In a depression the market will develop a long-term consolidation pattern. This is an investment period that lays the foundations for generational fortunes. Trend-trading opportunities do not develop for several years. This consolidation and accumulation phase concentrates on creating income flow from dividends. The fundamental end of a depression is not recognized until many months after the market has already reacted.

Right now, market is hovering near significant support levels. The closest of these we call recession support targets. The lowest of these we call depression targets. Many analysts have compared the current market situation to the market collapse in 1929. This week we look at charts from the 1929 period. In particular we look at the similarity of behavior.

The above chart is the weekly Dow for 1929 to 1930. The significant features are these:
The rapid fall is followed by a rebound and rebound failure.
The primary rebound failure occurs rapidly with another market collapse.
The pile driver low is retested within 12 months
Support, defined by the pile driver low, is not successful.

The pink circle shows the comparable position of today’s market. This is a period of high volatility, but volatility lessens and the market moves into a more clearly defined trending behavior. This pattern of behavior suggests that a rebound from the current support levels may persist for around 20 weeks.

The important feature is the rapid failure of the trend line followed by a rapid failure of the pile driver low support-level. The failure of pile driver support brings the really bad news. This failure is acute because the pile driver low support does not equal any previous historical support level.

The low of the market develops in 1932, about three years after the 1929 crash. The key trigger is the failure of support set by the pile driver low. The disaster is that it takes 25 years for the market to exceed the high of 380 set in July 1929. This is why the Depression is referred to as a generational event. The current situation has the potential to have the same generational impact.

SEE CHART ABOVE

The key trigger that separates a recession from a depression is the behavior of the rebound from the pile driver low. After the 1987 crash the rebound quickly developed strong trending behavior. The move above the midway point in the market fall signaled a continuation of the uptrend. This is recession behavior. Depression behavior is when the market fails to move above the midpoint of the extreme fall area.

On the current Dow chart, the area near 12,000 is the key level to watch. Failure to move above this level suggests a depression scenario may develop.

A sustained move above 12,000 signals a recession. There is one caution in this analysis. The Dow has not yet developed a confirmed pile driver bottom pattern on the weekly chart. The low of this pattern will determine the mid-point resistance level that is used to signal a recession recovery.

Markets will not behave the same way as in 1930, but they will develop in a similar fashion. There is a high probability that these behaviors will develop in shorter time frames.

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