It's worse than the Great Depression

[J]

From here, though it won't stay on the front page for long, and there's no direct link.


This chart depicts various market declines, Day Zero being the day of the market peak before the fall.

I believe the picture says it all. Though the initial crash in 1929 was faster & sharper, the slow grind down followed by the last couple months of market action have now put the current decline ahead. At around 300 business days into the crisis, the markets are worse off than they were at the same period into the Great Kablooie in our grandparents' time.

[Admiral Valdemar]

America's markets opened down today after fears the country may enter a recession.

[Solauren]

How is this in relation to the size of the economy, and in dollars, adjusted for inflation?

[Kane Starkiller]

What is the relation between Dow and S&P 500 indexes? The 1929 is Dow while the current is S&P, what are middle two?

[Rye]

Given the fluctuations of the market, asserting that this is worse than the great depression is more than a little jumping the gun. I'd buy that it's worse than the oil and tech crashes, but a slower descent into a position 40% or so less bad than the final great depression score (even disregarding other potentially mitigating things) doesn't strike me as "worse" than the great depression in any real sense.

[Admiral Valdemar]

Given the fluctuations of the market, asserting that this is worse than the great depression is more than a little jumping the gun. I'd buy that it's worse than the oil and tech crashes, but a slower descent into a position 40% or so less bad than the final great depression score (even disregarding other potentially mitigating things) doesn't strike me as "worse" than the great depression in any real sense.

You assume this problem is anywhere near over. I assure you, it's the tip of the iceberg. Just wait for the Big 3 autos to start cutting back.

[Alan Bolte]

For those curious, the Dow is down about 46% since its high Oct 9, 2007. That would put us at day 408. Above the '29-'32 line, but not comfortably so. I suppose one might argue whether today's Dow or SP500 are a better comparison to the Dow of '29, but I don't have an opinion.

[Uraniun235]

How severely over-inflated was the market in 1929 as compared to the Dow being at 14000 when GDP growth sez the Dow should have been at or around 8000 last year?

[The Kernel]

What is the relation between Dow and S&P 500 indexes? The 1929 is Dow while the current is S&P, what are middle two?

They are very different and cannot be used interchangeably. The S&P500 is a market weighted index, while the Dow is not.

[Master of Ossus]

How severely over-inflated was the market in 1929 as compared to the Dow being at 14000 when GDP growth sez the Dow should have been at or around 8000 last year?

Not sure what you're getting at. GDP is only very loosely related to a market index, since financial assets are priced according to company financial outlooks and moreover in relation to a general market. No direct comparison seems reasonable.

Given the fluctuations of the market, asserting that this is worse than the great depression is more than a little jumping the gun. I'd buy that it's worse than the oil and tech crashes, but a slower descent into a position 40% or so less bad than the final great depression score (even disregarding other potentially mitigating things) doesn't strike me as "worse" than the great depression in any real sense.

And, moreover, even the oil and tech crashes were bad largely because the losses were highly concentrated in particular industries and so groups of people lost more-or-less everything even as other assets were untouched.

[Stargate Nerd]

It might be worse in terms of Wall St, but how bad is it in terms of Main St?

[Admiral Valdemar]

It might be worse in terms of Wall St, but how bad is it in terms of Main St?

That will start trickling through more and more in the future. In the UK, at least, the stores are getting so desperate on the high street that they're throwing one day special sales in order to just get people to consider buying stuff. Car sales are at historical lows (As they are in the US and elsewhere) and we've gone from "maybe one and a half million unemployed next year" to "over three million may be unemployed next year".

[Ekiqa]

That will start trickling through more and more in the future. In the UK, at least, the stores are getting so desperate on the high street that they're throwing one day special sales in order to just get people to consider buying stuff. Car sales are at historical lows (As they are in the US and elsewhere) and we've gone from "maybe one and a half million unemployed next year" to "over three million may be unemployed next year".

Car sales in Canada have been growing, compared to last year, as of early Novemeber. Though that will end soon.

[bobalot]

Mainstream pundits/economists keep saying basically (as I understand it) "All, we need to do is get credit flowing again and things will be great again". It seems to me, that there are more fundamental problems in the economies of the world (particularly the US) that are the causes of this crisis. Consumers were loaded up to their eyeballs in debt and something eventually had to give. Just urging everybody to borrow and spend again doesn't seem like a practicable long term solution.

I don't think the reserve banks of the world flooding the market with liquidity (and taxpayers money) is going to end this crisis anytime soon. This credit bubble has been ballooning over the last two decades.

[Sea Skimmer]

Wait now this is comparing the Dow to the S&P500? That cannot ever be accurate because those two indexes use different measures of weighting the averages. A Dow to Dow comparison would be more accurate since it covers more of the economy and give a truer picture of just how bad things are. At this point its better that the markets keep going down, until we find a bottom we can’t even think about the long struggle to recover, and the day to day shifts in value only benefit traders themselves.

[Gerald Tarrant]

How severely over-inflated was the market in 1929 as compared to the Dow being at 14000 when GDP growth sez the Dow should have been at or around 8000 last year?

Not sure what you're getting at. GDP is only very loosely related to a market index, since financial assets are priced according to company financial outlooks and moreover in relation to a general market. No direct comparison seems reasonable.

The comparison Unariun is talking about sounds analogous to an economy wide Price/Earning ratio. There are a few caveats, for instance what date do you choose as your baseline, and do the DJIA's corporations have a larger or smaller percentage of GDP than they did at the baseline. But on the whole I think it's a valid comparison.

There's a slightly more refined version of it that I ran into on Mankiw's website




Historical data on average P/E ratios. from Link

Weird, I could have sworn I saved the thing as a JPEG.

[Kanastrous]

Mainstream pundits/economists keep saying basically (as I understand it) "All, we need to do is get credit flowing again and things will be great again".

Lacking training in economics, this sounds to me like all we need to do to keep the junkies happy, is provide them with more smack.

[Admiral Valdemar]

Lacking training in economics, this sounds to me like all we need to do to keep the junkies happy, is provide them with more smack.

Nail. Head. Hit.

Business as usual is not going to get us out of this mess when it was business as usual that got us into it.

I also used that nice chart elsewhere for a post. Amazing how everyone cares about the economic numbers now.

[General Zod]

Our unemployment rate hasn't even hit 25% yet. How can we be worse off than during the Great Depression?

[Gerald Tarrant]

Mainstream pundits/economists keep saying basically (as I understand it) "All, we need to do is get credit flowing again and things will be great again".

Lacking training in economics, this sounds to me like all we need to do to keep the junkies happy, is provide them with more smack.

Not quite, there are legitimate regular uses for credit that are going to be squeezed by this thing. Businesses with highly variable cash flows for instance, really don't have any other choice but to use credit-lines. Also there are huge capital purchases which are often financed with debt, less capital formation=less investment which will lead to falling or stagnating productivity. Properly moving debt and equity markets make everything else run smoothly. That said it's important to make sure the bailout money doesn't get used in strange financial hedges.

[Admiral Valdemar]

Our unemployment rate hasn't even hit 25% yet. How can we be worse off than during the Great Depression?

Funny, I don't recall unemployment being 25% straight after Wall Street crashed in '29 either.

We're not talking 25% unemployment a week after the Dow hit 8,000 or something, you have to look at the longer term.

[J]

That said it's important to make sure the bailout money doesn't get used in strange financial hedges.

And luxury resort spas. Can't forget those.

[J]

For those curious, the Dow is down about 46% since its high Oct 9, 2007. That would put us at day 408. Above the '29-'32 line, but not comfortably so. I suppose one might argue whether today's Dow or SP500 are a better comparison to the Dow of '29, but I don't have an opinion.

The charts are counted in business days, so would place us a bit before Day 300. Which would still put us below the Great Depression trendline.

Wait now this is comparing the Dow to the S&P500? That cannot ever be accurate because those two indexes use different measures of weighting the averages. A Dow to Dow comparison would be more accurate since it covers more of the economy and give a truer picture of just how bad things are.

See above.

Our unemployment rate hasn't even hit 25% yet. How can we be worse off than during the Great Depression?

I'd say we're matching this chart quite nicely so far. It's still early and the layoffs have yet to begin in earnest.

[Surlethe]

How is a one-time dip of the stock market to underneath the Great Depression trend somehow indicative that it will stay that way, and that somehow the current crisis is "worse than the Great Depression"? It's bad enough to jump from Wall Street trends to overall economic performance, let alone comparing the Dow and the S&P or using a single dip underneath the GD trend as evidence that our economic situation is worse than it was in the 1930s. For all we know, this is a short-term market dip, caused by irrational panic that will blow over in a few months and the line will rise back up to the red or green.

[Admiral Valdemar]

How is a one-time dip of the stock market to underneath the Great Depression trend somehow indicative that it will stay that way, and that somehow the current crisis is "worse than the Great Depression"? It's bad enough to jump from Wall Street trends to overall economic performance, let alone comparing the Dow and the S&P or using a single dip underneath the GD trend as evidence that our economic situation is worse than it was in the 1930s. For all we know, this is a short-term market dip, caused by irrational panic that will blow over in a few months and the line will rise back up to the red or green.

Indeed, there are multiple substantial reasons to believe this is worse than the Great Depression of '29 according Krassimir Petrov and others like Soros.

The one major similarity that is exacerbated by modern credit driven debt is the real estate issue. Consider the inflated property figures from the past economic problems with those of today.



It is abundantly clear that we have far surpassed the bubble of '29 with our reckless inflating of the property bubble and misuse of discretionary spending and credit instruments. Case-Shiller has been showing some alarming trends in the last few years that will lead, inevitably, to a correction that will dwarf all previous occurrences combined. Further, this is a global property bubble (one of the major differences between '29 and today is that this is not a primarily US based problem; one need only look at Europe, for instance, especially the Eastern bloc) while '29 was just the US' own endeavour.

Causing this bubble, as we all know, was the cheap credit that afforded those on otherwise meagre salaries to start mortgages that far exceeded the traditional earnings to value ratio used normally, in some cases, with people nearing 10:1 on the property they want.



This chart is outdated. The present credit percentage is 350%. A correction is needed in order to return values to what the fundamentals support, and this means the last three and more decades of credit expansion need to be brought in line. This, also, will be significantly more than that of '29.

I think we've already established that derivatives, although present in the '20s, are far more widely used today which has led to the problems in finding out who has bad debts on their books by virtue of the whole system being needlessly complex: the world's ultimate shell game. Currently, the global derivatives market is over one quadrillion dollars in the latest analyses of the problem. This is far and beyond the US' GDP and that of the world's, something that has only really taken off without any controls since the early nineties.





Other factors include the stock bubbles, like the property one; global money reserve increases; Bretton Woods II leading to a reserve currency with no basis within physical limits and emerging economies and populations for ever dwindling resources (Chindia, Brazil and Russia).

On top of that, the world has passed the peak of cheap oil globally and is in desperate need of further investment (on the order of $26 trillion or more) in order to maintain basic oil supply and a buffer for some economic growth. The IEA's WEO 2008 outlook casts serious doubt on the ability of non-OPEC nations to do anything about this, and OPEC has overinflated reserves of oil, with what additional capacity they can bring online being of a lower EROEI, high monetary and time input and offering lower output rates. This situation alone would cause severe economic problems even without the Credit Crunch, though it has been argued the financial problem now, despite eventually leading to a bust, was brought forward because of our energy problems manifesting since 2005.

The United States has also many other differences between now and '29. It is the largest debtor nation in history, with liabilities that can never be repaid. It has practically no manufacturing industry compared to the past, and imports a vast amount of materials and energy in exchange for a currency that has a questionable future at best. We also will see the first waves of "baby boomers" entering retirement in the next few years, paving the way for a larger, older non-workforce population being supported by a far smaller, younger workforce. The influx of immigrants from Mexico, which is also in the process of imploding given 40% of the government's revenue comes from PEMEX oil exports (with the added side-effect of the US losing 10% of its oil supply by 2012-13), will cause economic and social strains for the states bordering the nation. This while China and India relentlessly grow in order to standstill, a sort of economic red queen effect, thanks to the promises of a Western lifestyle and a population that even with lower birth rates, has grown too far already to not further strain the resource limits already been bumped against.

Keep in mind, in order for the economy to grow, cheap energy is mandatory. The idea that building nuclear or renewables will replace the loss of cheap oil is wishful thinking at best, dangerous at worst. With the economies still requiring the current system of energy to maintain any semblance of order, the ever dwindling availability of that energy will be required to also replace what infrastructure we have today, that is, every barrel of oil needs to be used twice: once to keep us with business as usual, and again to instigate the movement to a non-fossil fuel based future. With returns falling, and natural decline rates approaching 9% globally, and surpassing 30% in giant fields which produce the bulk of global oil output, it is doubtful current GDP can be maintained, much less grown to continue the Keynesian economic model we've been used to for so long. In an age of frozen credit lines, it is questionable the how future mega-projects for replacing ageing infrastructure etc. can be funded. The price of oil and other energy products, will indeed rise in the future, if only to fulfil the prophecy of energy price volatility as the higher prices further retard economic recovery (the law of receding horizons). The UK, especially, has problems due to the natural gas situation with more gas required to be pumped through the Interconnector from the continent and nations who have already clearly acknowledged that the UK is not a priority. A similar problem with Canada's natural gas supply can be seen thanks to the Athabasca project.

In summation, there are key differences and similarities between the present economic turmoil and that of the past. With much of what was done in the roaring '20s being taken to an unprecedented high and various natural and geo-political obstacles coming into being today that weren't around even a decade ago, it would be foolish to consider this past 18 months or so to be the sum total punishment for so many years of living beyond our means.