How Does The Current Global Economic Recession Compare To The Great Depression?
The Global Economic Recession and the Great Depression are the fallout of the exact same economic phenomenon and are only different in a few respects. Each period is marked by a massive run up in asset prices followed by a tremendous deflationary pressure that has sent both debt and equity markets into turmoil . The Great Depression saw the Federal Reserve do little to ‘save’ the economy because their policy actions were limited by a currency backed by precious metal. In the face of deflation, the 1930s Fed knew it needed to expand the money supply by lowering reserve requirements at banks. In fact, the board of governors did actually reduce the reserve requirement, but not enough to have a sizable impact. And so, the country was stricken to a decade of deflation, high unemployment, and slow growth. The Economic Recession is very similar in origin, but the policy response was different. Most modern day central banks have fiat currencies as opposed to currencies backed by precious metals (Gold, silver, animal pelt, etc.). And so, in times of crisis they can ‘create’ money by artificially increasing member banks’ deposits at the Federal Reserve, funds from which those banks can lend to the public. I believe the difference in monetary regime is the cause for the difference in ‘perceived’ outcome of the two crises. I still think the two crises are very similar. Here’s why: Lots of folks compare unemployment rates. They say, unemployment was 25% in the Depression and only 10% in the GR. First of all, the definition of employment has changed in the survey literature over time with the 1930s definition being far broader. Second, It is more prudent to look at underemployment to really grasp the scale of the GR. This underemployment figure counts folks who are not satisfied with the level of work they have been able to achieve given their skill sets. We are approaching 20% underemployment. Moreover, the labor force participation rate, which is a measure of the percentage of people working in the entire population, is falling precipitously. Note that each percentage point decrease in labor force participation rate is equivalent to 3 million people leaving the labor force. And so, given the declining participation rate, the 20% underemployment figures may actually understate the true level of unemployment in the economy. “People had to resort to waiting in bread lines, living day to day.” Again, if the underemployment situation isn’t sad enough, 1 in 6 Americans is living off of government assistance. More than 50 Million are on Medicaid. And another 10 million are in unemployment assistance. The median duration moved from just 5 weeks in the 1960s to over 25 weeks today. 25 weeks is half of a year. Tell me people are not living day to day. “There was a debt deflation death spiral that halted credit liquidity.” There is definitely still a deflationary spiral. It is massive. See my answer here What arethe sources of deflationary pressuresoon after the Great Recession?. I think it is pretty clear that we are in a very precarious economic situation that is highly similar to the Great Depression. Getting out of this economic situation is going to be very hard. It will take a lot of national pain as our economy transitions from a consumption based, high-debt, low-growth debtor nation into a manufacturing and exporting nation once again. We will see how that all plays out in the next 10-20 years.
What is a Great Depression?
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in 1930 and lasted until the late 1930s or middle 1940s. It was the longest, most widespread, and deepest depression of the 20th century. In the 21st century, the Great Depression is commonly used as an example of how far the...
Please join StudyMode to read the full document