Wednesday, October 29, 2008

Depression All Talk...So Far

The media consistently over exaggerate the news. It's no different when it comes to the financial news. One can hardly blame the media though: the more attention they can draw from the public, the more they get paid. Last year, we were headed for "runaway inflation". A few months ago, it was "stagflation". Currently, we are on the verge of a "massive depression not seen since the 1930s". But if a depression is on the way, we're not quite in the same ballpark yet. To give an idea of where we currently stand in relation to the 30s, here's a chart showing the US unemployment rate from 1929 to today:

Throughout history, we see periods of economic contraction and expansion. Unemployment actually touched 25% at its worst during The Great Depression, whereas right now we sit at 6.1%.

How bad will it get this time? Anyone who claims to know is either lying or delusional. However, we can gather some clues from previous recessions in order to make a guesstimate. Economists consider the 2001 recession to be a relatively mild one (and we can see from the chart that the unemployment peak was fairly low by historical standards), and so most economists expect this to be a worse recession than that of 2001. During the early 80s, however, inflation had gotten out of control, forcing the Fed to fight it despite stagnant growth. This time around, inflation is at reasonable levels, allowing the Fed to do what it can to increase liquidity and promote growth, suggesting this recession won't be as bad as it was in the early 80s.

Professor George Athanassakos of the Richard Ivey School of Business has written an article titled Panic of 2008 which offers his opinion on how bad things will get. While nobody can predict the future, we are not even close to the dire circumstances of a depression. Don't let the media sway you in your investment decisions. Buy when others are fearful, and sell when they are greedy.

1 comment:

Anonymous said...

I think we might see a small uptick in the UE data over the next few months above 7% in Canada and certainly in the US as the full effect of layoffs and job losses weigh on the markets. What I don't think you we'll see is massive unemployment in the 15% range or higher as with depression eras. The NA workforce is too productive to see levels such as that without further government intervention. Governments will begin to spend their way out of this period with infrastructure spending if we ever got back to those points.