Wednesday, October 15, 2008

Why Are People Acting Like We've Never Been in a Recession Before???

The stock market experts, the TV talking heads, the bloggers...they all like to run around like headless chickens in panic over how we cannot stand a recession, and that the world is somehow going to end within the next few months.

The last thing we need is panic. We will get through this.

Since the end of the Great Depression, we've had 6 major recessions, a little history for you...

The recession of 1953-54
- Caused by a post-Korean War inflationary period, where the Federal Reserve put more restrictive fiscal policies to curb inflation growth. However, consumer demand dropped due to the expectation of a recession, so the recession occurred anyway...just on the side of consumer demand. This lasted from 2nd quarter of '53 to the 1st quarter of '54.

The recession of 1957-58
- You'd think that the 1950's would be remember for recessions, and not the boom period we all believe. This goes to show you that there are hiccups and bumps on the road to prosperity. This was caused by the loosening of monetary policy in late '57. Along with this came a decline in the investment of fixed capital both in Europe and in the United States. In America, auto sales declined sharply, and unemployment rose. What stemmed the recession from further harming the economy was the lack of change in personal income amongst employed Americans, which gave monetary stability to those who had jobs.

Most notably, this was a worldwide recession...and it led to Democratic Party gains in Congress in the 1958 elections.

The recession of 1973-74
- Caused by the OPEC oil price increase and huge US Government spending (a combination of the Great Society programs, as well as the Vietnam War...Nixon inherited a looming mess from LBJ), leading to stagflation, and probably a good mirror of what we should expect to see as the current economic problems play themselves out.

When the U.S. was faced with an oil embargo placed up on it by OPEC in 1973, due to it's support of Israel in the Yom Kippur War, the government placed price controls...which led to gas rationing.

During this same time, the Bretton Woods System fell apart (due to the dollar being very strong against other currencies because of the increase in Gold prices), and the unilateral devaluation of the dollar (the Smithsonian Agreement) caused the Dow Jones Industrial Average to drop 45% from early 1973 to late 1974. Also, inflation increased from 3.4% in 1972 to over 25% by 1975. The United States did not see the Stock Market return to a comparable level (in real terms, adjusted for economic growth) until 1993.

The London Stock Exchange dropped 73% during this same timeframe. Interestingly, the London Stock crash is also attributed to a housing crisis...which was followed by a boom period of over 150% from late 1974 to early 1975, a sign of things to eventually come?

The recession of 1980-82
- Caused by the 1979 Energy Crisis that came with the overthrow of the Shah of Iran by Muslim fundamentalists led by Ayatollah Khomeini. Exacerbated by rampant stagflation of the American economy under Jimmy Carter. The recession was more severe than it should have been because it was unexpected. Also, the impact was intensified by the Fed Chairman Paul Volcker keeping interest rates very high to force inflation out of the economy, which did eventually work and lead to series of boom periods economically in the United States.

The recession of 1990-91
- Caused by a decrease in industrial production, the short-lived oil price spike of 1990 due to the Iraqi invasion of Kuwait, and made worse when the Bush 41 reneged on his "No New Taxes" pledge.

The recession of 2001-03
- Caused by a recession that began in the European Union, felt in parts at the end of Clinton's term and the beginning of Bush 43's, and exacerbated by 9/11, the Enron/WorldCom accounting scandals, and the dot-com bubble burst. However, from late September, 2001 to early 2003, the market crashed twice, with a recovery period in mid 2002 that helped average out the crashes a bit.

Right now, we're not in a recession, but we're heading for one. It has been seen in the past that higher taxation (on anyone, not just individuals) and looser monetary policies (like what the Democrats have advocated) tend to worsen these conditions.

Just some food for thought.

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