Now that the stock market has fallen below 7,000, there's lots of talk about "another Great Depression." But to fall as far as stocks did in the 1930s, it would have to plunge to 4,000 or even to 2,000. In "the great crash," the market lost 89 percent of its value.
But the stock market directly impacts only "the investor class," about 50 percent of Americans. It is not the only barometer of economic health. I'm still unpersuaded that this recession is worse than what the U.S. endured for five years, 1979-83. Double-digit inflation, robbing from everyone, peaked at 13.5 percent in 1980, hovered over 10 percent in 1981, then (thanks to the policies of FED Chairman Paul Volcker and some say, President Reagan) fell to 6.2 percent in 1982, then dropped to 3.2 percent in 1984.
Unemployment rose from 7.2 percent in 1980 to 9.7 percent in 1982 and stayed at 9.6 percent through 1983 (Source). The "misery index" -- inflation plus unemployment -- was 20 percent. Americans experienced a shock in oil prices and an energy shortage, the Soviets invaded Afghanistan, a revolution took place in Iran, hostile forces there stormed the American embassy and took 52 diplomats hostage for 444 days.
In comparison, this recession started in 2008, and some economists predict recovery will begin by early 2010. We've not seen a former ally like Iran turn into a hostile enemy, and there is not currently such international instability.
True, the stock market has fallen further -- 7,000 points -- and hasn't found a bottom yet. Investors who depend on the stock market for their retirement appear hard hit, if the market doesn't come back, and dividends are slashed, or eliminated.
In the short term, we don't need to worry too much about the kind of inflation that ravaged households in the 1970s and early 1980s. Indeed, with rising unemployment and stagnant wages (if not REDUCED compensation), a more immediate worry is DEFLATION -- falling prices and falling salaries, caused by reductions in the supply of money or credit, personal spending or investment spending.
Today, there appear to be deep structural problems in many industries -- auto, banking, education (the high cost of college tuition, the low high school graduation rate), financial services, health care, housing, media, and manufacturing -- but there are still quite a few growth industries.
And there were certainly structural and regulatory problems back in
the early 80s. The Savings and Loan industry collapsed (from too little regulation) and had to be
bailed out, Chrysler collapsed and had to be bailed out, the steel
industry went through wrenching shrinkage, the economy moved painfully from the industrial era to the information age.
To pull the economy out of the contraction of the early 1980s, Ronald Reagan and the Democratic Congresses of the 1980s increased spending (largely on defense) and ran up huge deficits that probably caused the recession of the early 1990s. It took the bipartisan fiscal discipline of President Clinton and a Republican Congress, along with rapid economic growth in the mid-1990s, to reduce the deficit to manageable levels, only to see it explode again in the first decade of the 21st century, with President Bush's multi-trillion dollar "off-budget" war in Iraq.
It may well be that just as we had to pay through the nose with the tight credit and high inflation of the 1970s and early 1980s for Lyndon Johnson's / Richard Nixon's domestic spending sprees and "off-budget" Vietnam War 1964-1974, we'll have to pay for the Iraq and Afghanistan Wars, the stimulus package(s), bank and auto company bailouts with high deficits/tight credit and/or inflation through 2018. Certainly it appears that the days of too easy credit, too rapidly expanding house prices and a bull stock market are over. Mark Zandi, a middle-of-the-road economic forecaster for Moody's Economy.com, predicts that "it may be a decade for before the Dow reaches 12,000 points again, the economy will grow much more slowly than the Obama administration envisions and larger, more controversial bailouts are likely to be coming soon.
"If I'm an individual thinking about the size of my nest egg and what I would need for retirement, I think the appropriate assumption is that I am going to get a 5 percent annualized return on my assets: house, stocks, fixed income, the whole shooting match."
But that is a far cry from the "Great Depression" of the 1930s. More like the 1970s.
My point is that economically, we've been through worse times here in the United States, even in the lifetimes of many of us.
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