I think the jury is out, and the question isn't if we're heading into a recession, but the real question is how long will this recession affect markets, and how harsh will it become. This morning I read an alarming article about the impending recession, Impending Financial Hurricane, Now I know that you don't want to be overly negative because of some bad news you read on the Internet. But neither should you stick your fingers in your ears and close your eyes when the train is heading towards you. I guess the question is the media over blowing the risks to our economy, or can we learn something from our past history. So I checked google and searched the "chronology of the Great Depression", and soon found a great time line that we all should look at closely. Time Line
((Interesting exert from that article))
- Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. The boom is largely artificial.
- Herbert Hoover becomes President.
- Annual per-capita income is $750. More than half of all Americans are living below a minimum subsistence level.
- Backlog of business inventories grows three times larger than the year before.
- Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.
- Stock market crash begins October 24. Investors call October 29 Black Tuesday. Losses for the month will total $16 billion, an astronomical sum in those days.
- By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: 'Liquidate labor, liquidate real estate... values will be adjusted, and enterprising people will pick up the wreck from less-competent people'.
- The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen. Even this is compensated for by the fact that American businesses are no longer investing in Europe, but keeping their money stateside. The consensus of modern economists is that the tariff made only a minor contribution to the Great Depression in the U.S., but a major one in Europe.
- Supreme Court rules that the monopoly U.S. Steel does not violate anti-trust laws as long as competition exists, no matter how negligible.
- The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.
So the question is, are we headed for the same fate. It looks like Banks are going down in record numbers, the Federal Reserve has promised to reduce rates and do what is necessary to keep the credit market alive, which sounds allot like 1929. Are we going to now raise taxes on the richest American's? Are we going to have 24.9% unemployment rates? Or are we going to spend ourselves out of depression through Keynesian Economic theories of government spending? Are we going to make decisions that will make the crisis worse?
So what can the little guy do? Are you going to prepare now, there still is time if History has any say in our current crisis. Or is this just a bad dream and everything will get back to normal in 2009 like some people are saying?
I think it may be a little of both. I'm not that our economy today can actually be compared directly to that of the 1930's. I think the sophistication of our markets maybe one reason we rebound sooner, and furthermore I think the baby boom generation is still not in the draw down stage of their lives. Once the baby boomer's stop making major purchases, then we may actually see a true depression. But this one could be a sharp and harsh recession before the last Boom cycle.
Anyway, time enough to speculate over the next few months, but as my father always taught me, never ignore the past, because it can come up in bite you in the butt if you don't pay attention to it's lessons.