The Next Depression
We are currently in a business recession. Consumers, who account for two thirds of the economy, have held up rather well. Until now. Over the past two months, consumers have shown signs of weakening. This was at least part of the cause for the dismal performance of the stock markets in August.
What the markets had realized was that the economy was entering the next phase of the downturn. The layoffs of the previous year, combined with the reverse-wealth-effect of the plunging market, made consumers nervous. Do you blame them? They're not spending like they used to. This isn't rocket science.
With the weakened consumer, we had pending another year of recession on our hands. But now we have a war and shaken confidence in the safety of America. The dollar will weaken. Consumers will only get more nervous. Which means that they will spend even less.
Some people believe that the economy moves in large cycles. After the last great bubble of stock market excess, the roaring 1920s, came the great depression. Some already thought that the US economy was following the cycle again and entering another depression. And now we have a war against an unknown enemy to add to the uncertainty. This will only increase the chance of a depression.
It's not all doom and gloom. There are many differences between now and the great depression. The Fed has moved quickly to lower rates, and will continue to do so. The decline in the current market, while gut wrenching, happened over a period of many months, compared to the single day plunges at the start of the great depression. People are much more informed about investing these days. Numerous reforms were enacted after the great depression.
But at the least, we are in for a long recession.
Posted by markf at September 14, 2001 10:19 AM