Are We Looking at Another Great Depression on the Horizon or Is This Just a Burp in Our Economic Cycle?

It seems as if not a day is going by when the American consumer is not faced with yet another cry of doom and gloom from the economic factors that control our economy. How much of this is due to the poor leadership in Washington and how much to the natural ebb of flow of economics still appears to be uncertain. It cannot be denied, however, that in the last seven years of the Bush Administration’s war on Iraq, or as they choose to call it Terror, the trillions of dollars that have been spent has not benefited the average American consumer.

In the last several months we as Americans have been subjected to fear from all economic angles from job layoffs, high gas prices, mortgage failures, and a falling stock market. This fear is being ingrained in the consumer and could easily lead to a great depression, worse even than the 1930s if consumers continue to hoard what little they have. Our economy is dependent on consumer spending so when we don’t spend more jobs are cut and the cycle of desperation begins.

In the 1930’s 25 percent of the population was without jobs. Currently our unemployment rate, while the highest in many years, is still under 6 percent. That means that we are not in a depression at this time even though there is little doubt that we are suffering an inflationary recession. Of course, if you listen to the current president he will tell you inflation isn’t too bad. Did you know, however, that the consumer index does not figure in fuel and food costs stating that they are to volatile to be included?

To show you what is now happening consider the following:

• By the end of 2007, 36 percent of consumer’s disposable income went to food, energy and medical care. This is the largest amount since record keeping began back in the 1960s.
• Economists are telling us that people are treating themselves much less often showing up in restaurant forecasts that state that 54 percent of all restaurants are reporting declining business and the government states that eating at home has increased in the last year for the first time since 2001.
• The economy has also forced grown children to return to their childhood homes after losing a job and/or being unable to make it on what they are earning. This has forced Mom and Dad to try and figure out how to make it on less as well.
• With the surging mortgage foreclosure rates waste management, thrift stores, and salvage companies are seeing less reusable items such as furniture and/or appliances as consumers are holding onto what they have.

This is just the tip of the iceberg though as one saw when Bear Stearns came down causing investors to fear a run on the bank. The problems are  multi-faceted, however, and include the housing crash, the credit crunch, and a loss of confidence among investors and consumers alike.

For those in the job market the fear of losing your job is causing you to squeeze your wallet a little tighter but for investors it means the credit crunch is keeping corporations from borrowing as easily they could a year ago. That is forcing them to delay big projects, which cuts into the job market putting more people out of work.

On a positive note, however, the economy has always had its ups and downs. However, this is the first time since 2001 that our future jiggled on the end of recession. That year though investors bore the brunt of the downturn as the stock market adjusted to balance the excessiveness of the 90s technology boom. In this instance, all survived because consumers were fortified with tax rebates and encouragement from their government instead of the doom and gloom that is being broadcast on all news stories today.

So, even while we are not in a declared recession, this time around (mainly because it takes two consecutive quarters of shrinking economic activity to be declared) the pain is no less real. Richard Sylia, of Stern School of Business, believes that this current financial crisis looks like the worst one since the great depression. However, he adds that this doesn’t mean that this current crisis will be anywhere as bad “since Federal Reserve Chairman Ben Bernanke is a student of the Depression and appears to be steering the Fed toward avoiding the mistakes of back then.” Additionally, being part of a global economy should help to insulate us to a certain extent. This is something that was not the case in the 1930s when the depression was America’s problem alone.

On the other hand, Former Fed Chairman Alan Greenspan stated in the Financial Times that “the financial crisis would be the most wrenching since World War II and would only end when housing prices stabilized.”

To help the economy to this point the Fed’s have slashed interest rates. A good thing for people needing to borrow money but not so good for those who are relying on the interest they earn on their savings. Then too we can look forward to the upcoming tax rebates and tax breaks for businesses, even though this money must be  borrowed since our national debt is in the trillions of dollars already. Overall, though economists believe that something has to be done soon to slow down the number of foreclosures which are the cornerstone of the economy’s woes.

Basically, it comes down to the fact that if we wish to avoid a recession and its effects financial institutions are going to have to provide the needed credit to keep the economy moving forward. If they don’t we all lose.

Tags: great depression, economic downturn, credit crisis, foreclosure, recession, national debt, economic cycle, alan greenspan, federal reserve, tax rebates, interest rates, ben bernanke, richard sylia, stern school of business, stock market, bear stearns, mortgage crisis, unemployment