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Depression versus Recession Debate



September 10, 2009 – Comments (8)

For some odd reason I find the semantic debate about whether we are currently in a bad recession or a depression interesting, despite the fact that it really doesn't matter much in the grand scheme of things.  Barry Ritholtz posted some interesting facts, not made up generalizations, today about why the current downturn is not nearly as bad as the Great Depression was.  They included:

"• From its 1929 peak to the ultimate low in 1932, the Dow Jones Industrial Average fell 89% versus 43% for the 2008 collapse — literally, the Depression was 2X worse;

• In the 1920s and ’30s, Mortgages were interest only, 3 (or 5) year financings, with a balloon payment at the end. No balloon payment, or rollover of credit, you lost the house.

•  Credit disappeared after the crash — and defaults skyrocketed. Foreclosures may be high today at a rate of 1 per 81 homes with a mortgage, but they are nowhere near the 1 in 4 homes with a mortgage that defaulted or could not roll over their loans;

• I haven’t come across reliable data as to how much home sales dropped and prices fell, but with a 25% foreclosure rate and credit nonexistent, it is probable that, like the stock market, it was far worse than the current housing collapse;

• Manufacturing output took production in the  1930s back to the lowest levels since 1901, almost a third of a century earlier;

Consider the steel industry:  Production dropped 75% drop from its pre-crash peak (1929), cascading from more than 63 million net tons of ingot iron in 1929 to barely 15 million tons produced in 1932.

• Bethlehem Steel, which had been at 90% capacity in ‘29, was operating at 13% of capacity by 1932. Other than securitizing mortgages, underwriting derivatives and/or credit default swaps, can you name any major company or industry that saw this sort of collapse today?

• Any measure of unemployment — U3 at ~10% or U6 ~17% — is far below the 1930’s one in four adult males unable to fund work. (See chart below)

• Producer prices (PPI index) didn’t fall single digits — it utterly collapsed in the 1930s, far worse than today.

Even the worst of the complex difficulties of the 2008–2009 credit crunch and housing recession were mere sun showers compared to the financial hurricane of the Depression era: Banks have f ailed, but the FDIC’s guarantees have prevented widespread panic. Unemployment has risen, but f ar below the worst levels of the 1930s. And the two million or so foreclosures over recent years are f ar less, on a percentage basis, than the nearly 20 percent foreclosure rate in the 1930s.

In short, while the broad economy circa early 2009 is ugly, it remains far healthier than during the Great Depression — by just about every measure, and in many cases, by orders of magnitudes."

I agree with Ritholtz.  Anyone who thinks that things are worse right now than they were back in the 1930s has absolutely no idea what they are talking about.  And things seem to be stabilizing.  Weekly jobless claims need to drop to the 400,000 level in order for the jobs market to start improving.  We have fallen from a high of around 670,000 to the 550,000 that we are at today.  That's a drop of nearly 18% from their peak, while the unemployment rate has risen by less than 5% during the same period.

I'm not saying that the recovery is going to be robust.  It won't be.  Things are still tough and they will continue to be for a long time, but we will eventually recover from this mess.  the process has already begun, though it will be much slower than the "V" people believe.


8 Comments – Post Your Own

#1) On September 10, 2009 at 12:40 PM, JWValue (68.02) wrote:

I don't think that anyone is arguing that our present condition is as bad as the Great Depression.  The argument is that present circumstance will eventually lead to a similar outcome.  1930 was very comparable to today.  Steel mills are operating at under 50% now, even with massive gov. spending propping up industries such as the auto industry. Without gov. spending present conditions would be dramatically worse and would not be showing any of the "green shoots" everyone is so excited about. The current level of gov. spending is unsustainable.  When it is withdrawn we very well may experience the same continued decline that was experienced after the initial upturn in 1930.   It is at that time when any real comparison can be made.

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#2) On September 10, 2009 at 12:42 PM, dudemonkey (52.99) wrote:

I guess the thing I'm looking to see are how things develop over the next two years or so.  My understanding of the Depression is that a year after the big stock market crash that woke everyone up the economy was sputtering but nowhere near the bottom.

My fear is that we'll undergo another shock that will push our economy back to the edge and may precipitate another economic crash.

We'll see.  I'm hopeful that the worst is behind us, but I'm preparing as if the worst is still to come by carefully selecting securities with strong balance sheets, an ability to weather a couple years of recessions, and/or an asset that should rise with inflation such as oil, copper, or some other hard asset.  

Thanks for the excellent research and critical thinking here!

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#3) On September 10, 2009 at 2:14 PM, gembree (99.78) wrote:

From its 1929 peak to the ultimate low in 1932, the Dow Jones Industrial Average fell 89% versus 43% for the 2008 collapse — literally, the Depression was 2X worse.

I think even that is a gross understatement.  It's more accurate to say that the crash of the Great Depression was 4x as bad.  After all, it took a 810% gain to put the DJIA back where it should have been, and it would take just a 75% gain to put us back where we were before.  (Ritzholtz should, however, not be using the 2008 number but the more comparable peak-to-trough number of 54% for the current decline, which implies a 116% gain is needed.  So maybe 3x as bad?  Ah, depression math.)

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#4) On September 10, 2009 at 8:54 PM, RonChapmanJr (30.08) wrote:

Deej, you are missing the point.  JwValue is right.  Besides your buddy Alstry, very few of us are saying that right now we are worse than we were during the worst of the GD, but rather we are potentially setting ourselves up for it to be worse.  I think people should be prepared for things to GET worse than it was during that time period.  We are not there yet.  Hopefully we won't get there, but it is better to be prepared for the possibility than to not plan and hope it does not happen.

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#5) On September 10, 2009 at 9:16 PM, AvianFlu (< 20) wrote:


Good analysis and stats. thanks for locating the figures.
I agree that we are nowhere close to the 1930's depression. However, the devastation from the upcoming inflation will be brutal. It is best to prepare to save as much purchasing power of your investments as you can as the dollar devalues. Have you checked the dollar index chart lately? If we get much more of a drop we'll be hearing about it in the mainstream news. For those without investments to worry about there will still be the shock of not being able to afford the basic necessities of life.

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#6) On September 11, 2009 at 9:43 AM, dwot (29.02) wrote:

I'd like to revisit this summary in 2-3 years...  It is way too early to make some of those claims.

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#7) On September 11, 2009 at 11:12 AM, Mark910 (< 20) wrote:

"• From its 1929 peak to the ultimate low in 1932, the Dow Jones Industrial Average fell 89% versus 43% for the 2008 collapse — literally, the Depression was 2X worse;

Actually the 2008 collapse is about the same...We are 20 months into the 2008 collapse so  Twenty month into the 1929 collapse the Dow had only fallen a little less than half.  Where do we go from here I don't know but it is an unfair argument to compare the way you did as you are making the assumption which you are trying to prove.

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#8) On September 23, 2009 at 5:58 PM, rosemanjhk (28.37) wrote:

One of the problems I found was that there is no real accepted definition of a "depression" - everyone has their own take on it.  Granted what we experienced was no "Great Depression", but I heard it referred to as "The Not so Great Depression", I term I kind of liked.  Could we "technically" be in a minor depression?  Without a good set of parameters, there is no real way to know.

So now I read more and more people referring to it as "The Great Recession", which is probably quite accurate in its own way of describing events.  At least we have a good definition of what a recession is....



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