How on-spot are all these comparisons between the Great Depression and the current recession?
Let's start with how you define a depression. Interestingly, there's no formal definition, Calculated Risk points out today, but many experts agree that it's a prolonged slump with a 10 percent or more decline in real GDP. However, there's disagreement over the definition of a "prolonged slump." CR concludes that while this recession is exceptionally nasty, it's only about one-third of the way to a depression (see charts that back his analysis.)
More analysis of what makes a depression comes from Mark Hulbert via Barron's. He dispels three myths:
1. "It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929." Hulbert (referencing Jeremy Siegel): When you take inflation and dividends into account, it took less than eight years. Another big factor that explains the gap: IBM was removed from the Dow.
2. "If we're playing out a 1930s script, now would be a bad time for long-term investors to get into the market." Hulbert (again citing Siegel data): "if the stock market were to exactly adhere to a 1930s-like script, equities would provide a handsome return over the next five years."
3. "The stock market's recent extraordinary volatility provides a clue to the wild ride that lies ahead if we're playing out a 1930s-like script." Hulbert: Recent volatility doesn't hold a candle to Great Depression-era volatility (here's why.)
Want to hear more? Here's why Morgan Stanley's economics team firmly believes the Great Depression comparisons are misplaced.
Reader Comments Read all comments (3)
Peter of NY 7:52AM March 13, 2009
Peter of NY 7:00AM March 13, 2009
Muser of NM 5:14PM March 11, 2009