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World Economy: The Beginning of a Depression? Not Quite

Posted by Manish Agrawal on Wednesday, 3 December, 2008

 It’s funny that in the midst of a financial crisis while politicians try to calm the masses and restore confidence they also make apocalyptic statements about the economy. To a largely-uninformed public, what any government leaders say is taken as the gospel with no reflection on current facts, indicators, or history. 

President George Bush’s 24 September speech warned that, “America could slip into a financial panic and a distressing scenario would unfold,” and, “Our country could experience a long and painful recession.”

While it is right for any government to be forthcoming and straightforward with its citizens, the effect can be detrimental as many adopt knee-jerk reactions and cease all spending, further perpetuating the crisis. 

The irony is that in order to restore consumer confidence through a bailout bill, the government must set the tone for the very severity of the situation, which inevitably initiates this kind of self-fulfilling prophecy. Even with consumers and investors shaking in their boots, it was a real struggle to get any bill this large through Congress. In other words, the government was stuck between a rock and a hard place: Play up the severity of the crisis to get the bill through, or announce it more subtly and gently to prevent panic, but not garner the support to pass the package. 

And people are worried. Companies are taking pre-emptive measures by cutting budgets, workforces, and advertising. Sales in full-cost luxury markets are sinking. 

Bruce Watson, of Bloggingstocks.com, wrote, “In this context, it looks like the next year will be tough for manufacturers and importers of high-end luxury items. After all, if the people who can actually pay top dollar are cutting back, what will happen to the people for whom luxuries are a splurge?” 

An article on MarketPlace.co.uk warns that, “We are in for a protracted period of economic depression – a depression much worse than the Great Depression, a depression that would likely be remembered in history as ‘The Second Great Depression’ or ‘The Greater Depression.’” 

A CNN Money poll from 6 October reported that 60% of Americans believe an economic depression is ‘likely’ while a quarter believe there will be millions unemployed, homeless, and hungry. Obviously, the economic stimulus package had little effect in restoring consumer confidence. 

Continuing, the article quoted Anirvan Banerji the director of research for the Economic Cycle Research Institute, “We’ve been in a recession all year and it’s going to get worse. We’re going from a relatively mild recession to a more painful recession. But we’re a long, long way from a depression.” 

In 1929’s Great Depression, conditions were dire. Soup kitchens fed able-bodied, educated, eager-to-work businessmen. Unemployment reached an astronomical 32%. Today, there are no such conditions and unemployment in the US in October reached 6.5%, up from 6.1%. Not ideal, but a far cry from a third of the population being out of work. The Fed expects unemployment to max out at 7.9% in 2009. 

During the dark years of the Depression, nearly 5,000 banks shut down, and depositors lost their savings (now we have FDIC insurance to protect against this). We are a long way from that – only 19 banks have failed so far in the US, and depositors are insured up to $100,000. 

In the December 1, 2008 issue of Newsweek, Daniel Gross has written an article entitled, “Don’t Get Depressed, It’s Not 1929”. The article cites numerous examples of how conditions today are not even close to those 80 years ago. Gross cites fundamental differences including a lack of Social Security and deposit insurance, and a “feckless” Federal Reserve. He attributes many comparisons of today’s conditions to The Great Depression to a need to categorize and fit our situation into a context we can understand. 

It is beyond debate that the US and indeed much of the world have fallen on hard times, and that things will only get worse before they get better. But we are nowhere near a depression. 

Source:  EconomyWatch.com

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