No doubt you've heard the Great Depression mentioned lately. I summarize my thoughts on the depression vis-a-vis our current environment.The depression was a severe global economic slowdown that was characterized by massive unemployment and decreased consumer spending, corporate profits and tax receipts. Essentially this meant that the 3 most important pillars of any economy -the consumer, the corporation and the govt- were each spending and receiving much less than before. For most people the blame for the depression rest with the stock market crash of 1929 aka Black Tuesday, for enabling panic and fear which caused a massive run on the banks (people withdrawing their savings because the no longer trusted banks) which caused numerous banks to go belly up. As you can imagine this panic begat more panic and fear and created a vicious cycle. THIS vicious cycle of fear, not the solvency or liquidity of the banks is precisely what had world and financial leaders on edge over the last ten days.
I think we’ve avoided the vicious cycle that caused the depression but we’re already about 6-8 months into a recession and while we won’t see a depression I do think we will see increased layoffs and a sharp drop off in corporate earnings in 2009 and maybe into 2010 as the world markets reset from all of the “credit dollars” that juiced our economy over the last 5 years.
There are two ways we will come out of this downturn post 2009, either rich people will slowly decide that they are ready to take on increased risk and begin investing again in everything from startups to emerging markets to established industry. Or local, state and federal governments will enact public works projects meant to inject money into the system through gainful employment.
Just think of the 3 major components -consumer, govt, business- where business = rich people. In order for the recession to cease 1 of the 3 has to take their money off the sidelines and put it into the game, which will in turn create jobs which leads to growth in business profits and increased govt tax base. Since consumers generally DON'T have the magnititude of wealth needed (trillions and trillions of dollars) it falls to either the business or the govt.
Don't worry business or govt will do it at some point and we'll all be fine but since they're just leaving the club after the most awesome night out ever they're going to bed (2009) and may sleep it off (2010) before they get ready to go out again.
