9.23.2008

Panic


Is anybody else annoyed with the comparisons of our current financial health to the great depression? There is still rush hour traffic from all the people on their way to work, there aren’t any shanty towns along route 66, and I can’t remember the last time I took a week day flight where I had an open seat next to me. In the 20s and 30s our country was on the cusp of becoming a dynamic economy (during that period farmers represented about 25% of the labor force), but it wasn’t quite there. I don’t doubt that there are a lot of people who have been impacted by the downturn. Each time I watch the value of my investments dramatically drop I feel the desire to sell my stock, and bury my cash in the back yard. But to compare the current economic state to the depression of the 1930s is offensive. My grandfather, during his life, refused to talk about his experiences growing up in the late 20s and 30s in agricultural communities of Kansas and Arizona. Despite his refusal to talk about it I have heard stories of his hunger and the trials faced by his family – their situation wasn’t unique.

During the depression one quarter of the work force was unemployed. Today unemployment is around 6% - high for current day America. But consider that frictional unemployment (normal unemployment due to people changing jobs) is about 4% - so our real unemployment is only 2% which from a macro view is not that bad. Also note that 0% unemployment would be a disaster for an economy as firms would be unable to fill needs and expand. Consider other developed economies around the world. Most of western Europe has unemployment between 7-12%.

The current Dow Jones Industrial Average (DJIA), while off of its peak in Oct of 2007, is still no where near the depths it had fallen to during the depression. If you remove the run-up of the DJIA during late 2006 and 2007 we are not that far from an acceptable variance from mid 2006 to today. After the 1929 crash, the DJIA rebounded in early 1930, only to reverse, bottoming out in 1932. “The DJIA did not return to pre-1929 levels until late 1954, and was lower at its July 8, 1932 level than it had been since the 1800s. Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.”

While the current market conditions are turbulent enough to make even the most ill-informed long-term investor sit up straight, the market is nowhere near the dire straights that it was in the 1930s. Much has changed since the 1930s. In the 30s there was not much globalization, we were still heavily dependent on agriculture, poor farming techniques were used, and a massive drought occurred (both of which lead to the dust bowl). Our economy today is dynamic and resistant to a few industries’ failure (I would argue that these industries haven’t failed, but been forced, quite dramatically, to refine themselves to better compete in the future – oh the invisible hand).

During the 30s, in addition to economic upheaval, there was political upheaval across the world. The world economy scared the masses into the hands of demagogues. Political systems moved, to supposedly fight economic downturns, either far to the left – socialist leaning, mostly in Europe or far right – fascism, mostly in Latin America which stunted the growth of those economies for decades. America, while employing redistribution and protectionist policies, didn’t go anywhere near the same policies of nationalization that much of the world underwent during the depression. The point being that asking the government to step in with drastic actions, while it may momentarily ease economic angst, may be far worse and harder to overcome than the initial problem left to the invisible hand.

We enjoy the greatest luxuries the world has to offer and yet we are told time and time again that when we aren’t immediately gratified with whatever our hearts’ desire the system must be broken. It must be the fault of the banks, the mortgage lenders, the rich, the politicians…and THANKFULLY they have promised us salvation, like FDR in the US and Hitler in Germany in the 30’s.

Part of me is thankful this "correction" happened to put the spending habits of consumers in check, to call out the unscrupulous practices of the mortgage industry, and trim the fat off the financial sector. I don’t know exactly where I stand on the current turmoil and “bailouts.” I do find it kind of comforting, even though it goes against my inclinations, to know that the government will “save the day,” at least in the short run.

We need to remember that every period in American history has had massive periods of expansion and contraction, recession and recovery. I don’t want to dismiss the impact felt by individuals. But as a whole, we are a long ways from the levels felt during the great depression.

7 comments:

Christina said...

Thank you for this post!!! I thought that was hilarious when they were comparing us to the Great Depression as well. Sure doesn't feel like it...

jendoop said...

Great post! I thought the comparison was rather extreme also, thanks for sharing the facts to back up my feeling.

The same occurs to me when we freak out about the war. It's not fun but holy cow we don't have anything to complain about compared to the World Wars.

Anonymous said...

Great post Dave! I must admit that I was impressed with the vernacular (i.e. demagogues), historical references, economic principles, and use of quotes to illustrate your point. At times during my read of the post I found myself searching for my dictionary…where were you during my freshman writing class? All excellent points!

To borrow a few phrases from “The Oracle of Omaha”, “…be fearful when others are greedy and be greedy only when others are fearful.”
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
And my favorite of all… “Only when the tide goes out do you discover who's been swimming naked.”

BTW...this is your cousin Steve, I don't have a Blogger ID

carrie said...

you are so smart.

xoxo

Anonymous said...

And for all the readers out there who are calling this a "bail out of wall street," you are smoking crack. That is like suing McDonalds b/c you engorged your fat a$$ with Big Macs 3x a week and had a heart attack. The real culprit of this mess is average joe U.S. consumer who leveraged himself up too much to buy things he couldn't afford (but thought he could). Wall Street may have fanned the flames, but as Billy Joel said, "We (Wall Street) didn't start the fire..."

Andrea said...

hmmmm....good post
one good thing about the reality check of the economy is that it shuts down "keep up with the joneses" philosophy. when you realize how they've been doing it...ie...personal debt, home leverages...

dave said...

I guess I should have liquidated all my assets and buried them. I would have been far better off after the last two weeks.