Thursday, October 9, 2008

Stop with the Depression talk

Enough. Yes, financial markets are in turmoil, and your 401(k) is losing value daily. Yes, we are likely already in a recession and growth will likely be very slow next year. Yes, the unemployment rate is going to go up.

But stop listening to people who tell you this is the next Great Depression. During the Great Depression, real GNP fell by 30% in just four years. Year by year, here is GNP growth during the start of the actual Great Depression

1930: -9.9%
1931: -7.6%
1932: -14.7%
1933: -2.1%

We are close to the end of 2008, and estimates of total growth for the year are somewhere around.....+1.6%. That is, our economy will still have grown over 2008. Most of that was early in the year, yes, but it is still almost certain that our economy will be larger on 12/31/2008 than it was on 12/31/2007.

The IMF has issued an estimate of growth in the U.S. next year of +0.6-0.8%. Very slow, very low, but growth. Let's even assume that the IMF is wrong, and the U.S. economy shrinks in the year 2009 by 1%. That is still not even remotely close to what happened in the Great Depression.

What about the Great Depression was so awful from the perspective of the common person? I'd suggest the following three items
1) Unemployment rates of up to 25% (in 1933) mean that people either couldn't find jobs, or had no leverage to get raises or improve their situation at work
2) Bank failures wiped out all of peoples savings
3) Deflation (falling prices) made the real cost of mortgages and loans much higher. (e.g. your wages are falling because prices are falling, but your mortgage payment is fixed)

So does the current situation pose any of these problems?
1) Unemployment: yes, the unemployment rate will go up, and that sucks for the lots of people who will be out of jobs, and sucks for everyone else who then has to forego raises. This will be harmful, but even if unemployment doubles from its current rate (6.1%) we will still only be halfway to the dire situation of the Depression.

2) Bank failures: yes, banks are failing, but your savings are not being wiped out. You have FDIC insurance, so your money will be returned to you if your bank goes under. Remember that in the 1930's, people didn't have 401(k)'s and IRAs and brokerage accounts - ALL of their savings was likely in their bank. When their bank went under, they lost EVERYTHING. This will not happen to you. (And yes, your 401(k) is going down, but remember that you still own the shares, so when share prices recover you'll benefit. You are also still paying into your 401(k), meaning that you are buying up shares on the cheap these days, meaning that your gains will be very large. So stop whining.)

3) Deflation: not happening. If anything, we're still worried about too much inflation. If all prices are going up (and this includes wages, remember) then over time your mortgage payment becomes a smaller and smaller part of your monthly paycheck. You are not going to have to default on your mortgage just because your paycheck is shrinking. (And by the way, I know you think that you get raises on a regular basis because you're a hard worker and a people person, but some of your raise is simply the general drift upwards in prices over time. Sorry. I'm sure you're quite good at what you do.)

So when you hear people shout "It's the next Great Depression!", please just tell them to shut up. It is not. Could it be the worst recession since 1980-82? Maybe. That is not a generation-shattering event.

1934: +9.2%
1935: +9.7%
1936: +14.2%
1937: +5.2%
1938: -5.4%
1939: +8.9%
1940: +8.6%

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