Comparing Our Current Depression to the One our Grandparents Lived Through

I’ve been mulling this post over for about a month now and have been taking notes back and forth to come up with valid info to ease people from getting too worked up about it.Yes, you should probably be “worked up” if you are 55–60 and wanting to retire in the next 2–3 years, but if you hadn’t already started taking money out when you saw the housing market tanking…

There are some MAJOR differences (and a few similarities) though between what we’re seeing and our grandparents and great grandparents saw 80 years ago.

What Are the Similarities?

There are a handful of similarities you’ll see between now and the 1930’s that people are talking about but we’ll never see thanks to government safeguards created in the 1930s to prevent a similar collapse from occurring today.

Today’s financial crisis is hardly as grim as The Great Depression, though it does share some similarities with the 1930s — both were preceded by a

housing boom, a long period of cheap credit and a falling stock market. But those same similarities may offer some reassurance to what we’ve seen over the past few weeks/months.

Today’s economy “is much more developed then we were then. We are many times richer. We have a very good safety net in place. They had none,” said Michael Bordo, a professor of economics at Rutgers University who’s an expert in financial crises.

There’s a danger in citing the Great Depression now because you don’t want to scare people, Bordo said. The current crisis is probably more comparable to what happened in Japan in the 1990s, when a huge real estate bubble burst, and it took a decade of economic stagnation for the government to address the problem.

Publicity

This is the big one that catches my eye when I think about the major differences. How “public” were the signs of The Great Depression or signs of the times before it actually happened? Sure there were newspapers, but radio was just catching on in the late 1920’s. Not everyone had one and the ones that were available, I would imagine you were getting pretty standard news and information; regulated enough.

Rural communities often times didn’t even have newspapers to relay information. They’d get it 2nd, 3rd, and 4th hand from their “neighbor who talked to the milk maid in the city last month”. Once you pass information enough times, it gets convoluted fairly easily. Have you ever played that game where one person reads a paragraph as a whisper in someone’s ear and the story is re-hashed so many times before it gets to the last person in line? The story changes, dramatically.

People key off certain words and those are the ones that’ll get handed down the line to the next person and in the end, the keywords that each individual person hears is relayed.

I’m sure the story started out with a few choice words like “jobs, banks, and crash” and those got passed along. Before you knew it, the small towns were taking all their money out and stuffing it in coffee cans and mattress cushions. Once the banks became deflated, they didn’t have a choice but to shut down.

I’m sure this caught on AGAIN as the whisper game and it turned into a domino effect. Panic can have dastardly effects on an economy.

The panic started a bit like it may have in 1929 a few weeks back with Washington Mutual customers pulling out nearly 16.5 BILLION dollars from their banks. It is hard for anyone to survive in that scenario. Imagine hearing that type of news when you lived in a rural town in Nebraska without any source of communication? Considering your family your your assumption that it really wasn’t happening, your next step would probably be to get to your bank and take your money out too!

Ease of Information

In today’s world we’ve got a whole new grasp on the way information is passed. The internet has grown information sharing with such leaps and bounds that things happening on opposite sides of the world can be transmitted in seconds.

In 1930 if you wanted to tell your brother in

sm.JPG

South Dakota about what your neighbor heard about the market, we’re talking weeks. Rumors travel much faster, even with the advent of radio.

Our information today means that we can talk with our stock broker, financial analyst, Suze Orman’s blog, etc within seconds. We know what is happening, when it is happening.

We have information about how equities typically recoup a third of what they lost in a bear market in the first 40 days of a new bull — that kind of information is only created with time, and that info is now on our side.

Not only is it on our side, but the way to produce and configure it is on our side. The days of newspapers and handwritten observations are behind us. We can search millions of databases across thousands of nations to find and cull information as it pertained to different event in time.

We no longer have to wait for the newspaper or the radio address from the President to know what is happening in the world. Turn on your computer and you can find up the the minute information on how your stock/bond/mutual fund is doing in seconds.

Seconds after that you can log on to the site of the fund itself to see what it is doing to fix the issue. Speculation is no longer the staple that you have to deal with in our economy today.

We Can Learn From Our Mistakes Of The Past

So far this year, fund investors have taken more money out of their stock funds than they’ve put in, marking only the third time in recent memory this has happened. The other two times? In 2002, just before a five-year bull market, and 1988, the start of a 12-year bull.

“If you leave the market now entirely, you probably won’t make it back in time to enjoy the recovery,” says Torrance, Calif. financial planner Phillip Cook. According to Standard & Poor’s, equities typically recoup a third of what they lost in a bear market in the first 40 days of a new bull.

Over the long term (meaning more than a decade), equities give you something fixed-income investments can’t: a share of growth. The benefit of owning a stake in a company — as the Treasury Department, no doubt, understands with the majority position it is taking in exchange for helping AIG — is that you get to share in the earnings of the firm. And because stock prices, over time, reflect corporate profit growth, you’re likely to far outpace the long-term rate of inflation.

If your faith in stocks is still wavering, consider the last time they performed so poorly: the 1930s. “What if you concluded then that stocks weren’t the best place to be?” says Alan Skrainka, chief market strategist for Edward Jones. “You’d have missed out on decades of bull markets.”

The Wealth Is More Spread Out Now

In 1929, partly due to stock speculation, the richest 1 percent of Americans owned roughly 40 percent of the nation’s wealth. The richest 0.1 percent commanded 11.5 percent of income.

In 2008 the richest 0.1 percent of Americans command 11.6 percent of income, according to the EPI.

The period from 1928 to 1929 is the only time the United States has had such uneven distribution of wealth since the government started keeping records in 1913.

The wealth is spread more now so that they effect that top 1% has on the economy isn’t so drastic. In 1930 steel and oil were big for the top 1%. In 2008, those commodities are spreading a much larger gambit with a much larger following.

Conclusion

The main points to think about here is that we aren’t living in “dustbowls” now. People have houses and 90% of the jobs AREN’T on the farms that were so prevalent in the 1930's.

The economy itself is hundreds of times larger than it was then. 40% of the people owned 1% of the wealth then. If those key cogs fall, your economy won’t be far behind. The house of cards we had in the 1930s wasn’t nearly as larger as it is today. More than a few need to fall to knock it down now.

Additionally, the government just let it go in the 1930’s, I’m not saying it is going to work, but $700 billion is a lot of money and can coincidentally grease a lot of wheels…

A couple of interesting quotes in closing:

“Comparing 1929 to 2008 is a bit like comparing a Model T to a 2008 Chevy,” said Sung Won Sohn, an economist at California State University Channel Islands. “They’re both cars, but that doesn’t mean they’re both the same.”

If your faith in stocks is still wavering, consider the last time they performed so poorly: the 1930s. “What if you concluded then that stocks weren’t the best place to be?” says Alan Skrainka, chief market strategist for Edward Jones. “You’d have missed out on decades of bull markets.”

photos by: freeparking, Terry Wha