Comparisons of the Crash of 29 and Now…
Posted by WSJ.com
Editor’s Note: It was the worst thing to happen to the U.S. since Fort Sumter. October, 1929. Wall Street crashed and helped drive the country into the Great Depression—a deep economic and spiritual wound that has afflicted three generations of Americans. Eighty years later, as the country struggles through the harsh aftermath of another crash, two Sunday Journal contributors mark a grim anniversary and weigh the question that haunts everyone: “Is this the 1930s all over again?”
Brett Arends
![[Brett Arends]](http://s.wsj.net/public/resources/images/OB-ER611_sun101_AV_20091016180411.jpg)
Markets and the economy look less cataclysmic than they did earlier this year. And so they should, following a torrent of monetary easing.
But that doesn’t mean happy days are here again.
If you want a second opinion, don’t look at the Dow Jones Industrial Average. Look at three other markets: bonds, gold and the dollar. All of them are flashing amber, or red.
Take the bond market: Yields on U.S. Treasurys have collapsed to historic lows. The 30-year bond is yielding just over 4.2%, well below long-term averages. This is usually a strong signal of tougher times ahead. It’s almost impossible to reconcile this with the stock market’s sunny vision of a swift economic rebound.
Meanwhile, the dollar has been slumping on world markets. It has been the cornerstone of the global economy for nearly a century, but is quickly losing its credibility. No wonder gold, in its stead, has been surging to new highs.
These ominous signs should hardly surprise us. Despite the cheerleading in Washington and on Wall Street, we have barely begun to address the fundamental problems that led to the crisis in the first place.
Americans (along with many other Westerners) are hocked up to the eyeballs. When compared with the size of the economy, U.S. debt levels are off the charts.
That’s true for government, corporations and ordinary families. Thirty years ago, the average U.S. household had debts equivalent to about 32 weeks’ income. Today it’s 59 weeks.
That’s why comparisons with previous recessions ring so hollow. The U.S. came out of the slumps in the early 1980s and early 1990s with much stronger balance sheets. Households and corporations had much greater ability to borrow and spend.
The last time the economy tried to climb out of a deep slump while already this deeply in debt was…the 1930s.
There are further concerns. Regardless of what you make of it politically, the fact remains that middle-class incomes have barely kept up with inflation for three decades.
The economy has been hollowed out: More and more jobs have moved overseas, and over the past two generations it has taken more and more debt to keep the economy growing.
And today real unemployment is at historic levels. The headline jobless figure tells only part of the story. When you add in the millions working part time because they can’t find a full-time job, and those who have simply given up looking, the unemployed and underemployed account for one in six workers.
And that feeds into a housing crisis that is far from over. Indeed, it seems to be getting even worse. Mortgage defaults and pre-foreclosures are rising, not falling. That will bring yet more properties onto the market. And huge waves of mortgage resets are due over the next two years.
The kicker is that in this recovery we probably cannot expect much from rising asset prices either. In the mid-1990s, house prices were dirt cheap by long-term measures. In the early 1980s, that was true of stocks and bonds. The only way was up.
Today these assets are reasonably priced, or even, in the case of bonds, too expensive. So it’s hard to see a rising tide easily lifting all boats, as in the past. Once again, comparisons with previous post-war recessions look thin.
There are, in short, plenty of reasons to be very cautious about the recovery.
Dave Kansas
![[Dave Kansas]](http://s.wsj.net/public/resources/images/OB-ER612_sun101_AV_20091016180444.jpg)
During the past few months, a number of economists and even some policy makers have declared the Great Recession over. The data support that view. Leading indicators are on the rise, home sales have improved, and third-quarter growth is expected to come in positive.
And yet, the doomsayers will not relent. The stock-market rise is derisively called a “suckers’ rally.” The economy may be better, but it will soon “double dip” back into recession. The jobs picture will only worsen.
These mutterers of darkness believe that we are deep into a replay of the Great Depression, an era filled with false dawns.
Oh please.
Let’s not make any mistake: The current downturn is almost certainly the worst since the Great Depression. A high jobless rate and the loss of personal net worth from collapsing home values and declining stock markets have made this a period of pain for many people.
Ever since the downturn ripped through the financial system one year ago in the wake of the Lehman Brothers collapse, comparisons to the 1930s have come and gone. On the 80th anniversary of the great stock-market crash those comparisons are likely to intensify, though they shouldn’t.
During the Great Depression, more than 10,000 banks failed. Bank runs were so commonplace that moviegoers understood viscerally what was happening during the pivotal bank-run scene in the Christmas classic “It’s a Wonderful Life.”
Since 2008? A mere 125 banks have failed.
During the Great Depression, stock prices declined 90% in the three years after the Crash of 1929, and gross domestic product fell by 30%. By comparison, the stock market fell about 55% from its 2007 high before rebounding, and GDP declined less than 5%.
Data have recently indicated that the economy is on the mend. Forecasters have declared the recession over. The index of leading indicators has risen every month since April. The stock market is up about 50% from its lows. Corporate-profit forecasts are rising. Jobless claims have dropped 13% since March. Thrifty consumers are saving money.
Morgan Stanley recently reported: “Employment and capital spending are improving…. Corporate restraint seems to be reducing excesses and laying the foundation for sustainable economic growth.”
There’s really only one fly in the ointment: the jobs picture.
The unemployment rate, at 9.8%, is the highest in 20 years. More than seven million people have lost their jobs, and most economists expect the jobs situation to worsen into 2010 even as economic growth picks up. These figures are bad. But they aren’t nearly as bad as the 20% rates seen in the 1930s, even though the way unemployment measures have changed over the decades makes comparisons difficult.
The plain fact is we haven’t come anywhere close to the heartbreak and destruction associated with the 1930s. The Joads aren’t about to make a return, and Oklahoma remains a going concern — heck, they even have an NBA team. The only folks who benefit from overwrought comparisons to the 1930s are bond investors, gold bugs and makers of canned goods.
Don’t be fooled.
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