Parrallels Between Now and The Great Depression

by Brian Johnson on November 19, 2009

great-depression-dow-jonesRecently, I came across an article on Yahoo Finance detailing the similarities between our current economic market and the market of the 1929.  The author of the article, Simon Maierhofer, did a great job of summing up the ways our current economic crisis is paralleling the historical Great Depression and how our economic forecasters ought to rely more on history to help manage their expectations of buying opportunities and economic recovery.  I felt that Maierhofer’s observations were worth some commentary here at Wallet Blog and I wanted also an opportunity to point our readers over to his article for their own edification.

One of the key points that Maierhofer made that I found particularly interesting was his point that during both time periods, the economic devastation was preceded by extreme optimism, that no one (or very few experts anyway) seemed to see the imminent collapse on the horizon.  It was also interesting to me that both economic disasters seemed to be preempted by the collapse of a real estate bubble.  I, for one, had never numbered a housing boom as one of the causes of the Great Depression.  Maierhofer also points out that one of the most striking similarities between the market then and now is that trouble seems to be across the entire economy and not simply located in a few kinds of sectors.

The article offers significant reasons for concern through its examination of the historic parallels.  After its initial collapse,  the market during the Great Depression rallied and recovered 52% of its losses before it collapsed further into its darkest hours (i.e. erased another 86% of the Dow’s value).  Maierhofer sees this as historical precedent and  reason for caution concerning the recent rallies we’ve seen in our own market.

Furthermore, just as with the Great Depression, we all seem to be waiting for “the last laugh,” that speculative moment when we think we’ve hit rock bottom so that we can start investing again.  Economic speculators would do well, as Maierhofer points out, to remember that there were many such predictions, too, during the great depression, but that when the market seemed to hit a trough, it generally ended up having still farther to fall.  Moments of transient stability often ended up costing investors their fortunes.  Finally, Maierhofter sees the P/E ratios and the inflated prices of American stocks as a sign of real danger ahead and that those who do not learn from our nation’s history may be doomed to repeat it.

Maierhofer presents the evidence for his argument in a concise and intelligent manner.  We strongly recommend that you read the full article.

Discussion

MsRealEstate
I couldn't agree more.
December 18 at 00:33 am

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