THE DEPRESSION: Then and Now

Despite the emotional rollercoaster that is CNBC, which may have you believing that the country is in a depression, or has slipped into one over the last 12-18 months, fact is, the US is not in a depression, at least not like the Great Depression that engulfed the 1930s.

Although lacking one technical definition, a depression is understood as a 10% decline in real GDP year-over-year. Here are a few clear distinctions between then and now:

First, the stock market lost 89% of its value at its peak during the Great Depression. By contrast, the DJIA is down more than one-third from its high a year ago.

Second, although we saw small bank runs on Washington Mutual in late September, during the Great Depression there was no deposit insurance, which caused the precipitous failure of banks; some 7,000-8,000 fell between 1929 and 1932 due to runs on the bank. Today less than two dozen banks have collapsed, with 171 on the government’s watch list. Two larger banks, Washington Mutual and Wachovia, failed, but were taken over. As of October, the FDIC now has insurance on bank deposit of $250,000.

Third, unemployment hit 25% for most of the decade from 1931 to 1941. October’s unemployment number stands at 6.5%.

Gary Becker, a Nobel prize-winning professor of economics at the University of Chicago notes: “Although we are in the most severe financial crisis since the Great Depression of the 1930s, this is a far smaller crisis, especially in terms of the effects on output and employment.”

The market may be down over 5% today. There is pain, but we’re not in a Depression.

Matthew Hedrick
Analyst