When the stock market crashed in October 1929, it was only the beginning of a long period of economic decline and uncertainty that would last more than a decade. The Dow Jones Industrial Average hit bottom in July 1932 and would take another 25 years to regain what it lost in just 34 months.

TUTORIAL: Economic Indicators: Gross Domestic Product (GDP)

The last three years have often been described as the worst economic crisis since the Great Depression. While the technical definition of a recession is two successive quarters of GDP decline, it would be hard to convince anyone that recent GDP growth indicates the recession is over. There's lots of debate over whether or not the economy is slipping back into a double-dip recession. There's also considerable evidence that what we're experiencing is actually worse than the 1930s and should be labeled a depression.

Here's a comparison between then and now.

National Debt
In June 1929, the cumulative national debt was $17 billion. Up until that point in time, the U.S. only went into debt during wartime. Moreover, once those wars ended, the government's first priority was to pay off the debt. When the depression started several months later, the government was not saddled with servicing a huge debt burden, as the debt was only about 16% of the Gross National Product. (For related reading, see How To Use Gross National Product As An Indicator.)

Contrast that with the current debt approaching $15,000 billion, with an estimated annual interest cost of over $434 billion for 2011, even with the benefit of extremely low interest rates. That interest burden is a huge drag on the economy that didn't exist during the depression. As of 2010, the U.S. GNP was around $15,000 billion as well, leaving the country with a 100% debt to GNP ratio.

$4,500 billion of the current debt is owned by foreign governments, with almost one-half held by China and Japan. This gives these countries influence over U.S. foreign policy that may not be overt, but is there nonetheless. They could also cause financial chaos if they simultaneously sold their treasury holdings. This was not an issue in 1929.

Entitlement Programs
Beyond the current debt are the unfunded liabilities for entitlement programs that come due in the future. These are promises already made without funding to back them up, and are not included in the $15,000 billion debt. A USA Today analysis published in June 2011 estimated that these liabilities amount to about $62,000 billion, or $528,000 per household. This includes an additional $5,300 billion in liabilities added in 2010 alone, primarily for Social Security and Medicare. The difference in total revenues and spending obligations for the year amounted to more than one-third of GDP.

The current unfunded liabilities are more than five times the personal debt of the average household, including mortgages, loans and credit cards. That debt will experience exponential growth as the baby boomer generation adds 10,000 retirees per day to the entitlement program roles. Skyrocketing health care costs only add to the problem.

These programs resemble a Ponzi scheme in that today's working generation is paying the taxes to fund the payments to those currently collecting benefits. These programs didn't exist in 1929, so there was no burden on the taxpayers to come up with the money to pay for them. (For related reading, see What Is A Pyramid Scheme.)

Unemployment
It's difficult to compare unemployment statistics because the methodology used to estimate the data has changed over time. At the peak of the depression in 1933, it's estimated that unemployment reached 25% nationwide. That compares to the 9.1% rate for August 2011 published by the U.S. Bureau of Labor Statistics which identifies the labor pool as follows:

  • Employed - People with jobs
  • Unemployed - People who are jobless, looking for jobs and available for work
  • Not in the labor force - People who are neither employed nor unemployed

It's important to note that people in the last category are not counted in the unemployment rate calculation. If they were, the rate would be 7 to 10% higher. In addition, the federal deficit of $1,600 billion is paying for about 9 million jobs that wouldn't exist if the budget were balanced. Eliminate those jobs and the unemployment rate jumps again. Adding in these missing elements brings today's adjusted rate to at least 22 to 25%, higher than the average 18% rate from 1930 to 1940.

On top of that, the savings rate for those with jobs plummeted from about 10% in the 70s and 80s to -1% in 2007. That portends a bleak future for consumer spending.

Home Prices
By the first quarter of 2011, home prices had dropped 33% below the 2006 peak reached in most areas of the U.S. This compares to the 31% drop experienced during the depression. It took nearly two decades to recover the lost equity. Whether or not housing has reached bottom yet is an open question, despite historically-low interest rates and generous government incentives.

Gross Domestic Product (GDP)
Government spending is included in GDP, which totaled $14,700 billion for fiscal year 2010. Part of that amount was $1,600 billion of deficit spending, which artificially inflated GDP by 12%. If the deficit is deducted from the total GDP, there has been no GDP growth in the U.S. in the past four years. This means that the government can create the illusion of recovery and prosperity by simply going into more debt.

The debt/GDP ratio hasn't been above 100% since World War II, and we are on a path to exceed that very soon if we don't significantly reduce spending. If the unfunded liabilities are added in, the ratio is already an astonishing 500%. (For related reading, see High GDP Means Economic Prosperity, Or Does It?)

The Bottom Line
In 1929, the U.S. dollar was backed by gold. Now it's backed by nothing more than your faith. In 1929, credit cards and home equity loans didn't exist, and people of that era avoided debt like the plague. Today personal debt levels are near all-time highs. Iconic companies like General Motors and Lehman Brothers survived the depression without government help or bankruptcy relief, but that didn't happen this time around.

In 1929 we didn't face terrorist threats and weren't worried about a porous border allowing an influx of millions of illegal aliens. The high price of oil, oppressive regulatory environment, $40 billion monthly trade imbalance, bloated federal bureaucracy, ballooning state deficits, severely underfunded pensions, crippling tax burden and crumbling infrastructure weren't issues then either. They are now.

It's clear that the trillions of dollars borrowed and printed by the government are masking an extremely weak financial condition that has been in a downward spiral for many years. Calling it a recession instead of a depression doesn't change the stark reality. (For related reading, see Recession And Depression: They Aren't So Bad.)

Related Articles
  1. Stock Analysis

    GE Vs. Honeywell International: Which is Better for My Portfolio in 2016? (GE, HON)

    Learn which stock is the best investment, General Electric or Honeywell. Discover which of the two stocks is preferred by asset managers.
  2. Investing News

    Is the White House too Optimistic on the Economy?

    Are the White House's economic growth projections for 2016 and 2017 realistic or too optimistic?
  3. Chart Advisor

    ChartAdvisor for February 12 2016 (SPY, DIA)

    A weekly technical summary of the major U.S. indexes.
  4. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
  5. Economics

    The Truth about Productivity

    Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there.
  6. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  7. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  8. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  9. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  10. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
RELATED FAQS
  1. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. Is Russia a developed country?

    Though it once reigned alongside the United States as a world superpower, Russia is not classified as a developed country ... Read Full Answer >>
  3. Is North Korea a developed country?

    North Korea is one of the poorest and least developed countries in the world. It is far from a developed country. Because ... Read Full Answer >>
  4. Is Mexico a developed country?

    As of 2015, Mexico is not a developed country. However, it beats the majority of its peers in the developing world on most ... Read Full Answer >>
  5. Is China a developed country?

    Despite having the world's second-largest economy and third-largest military, China is still, as of 2015, not classified ... Read Full Answer >>
  6. Is Greece a developed country?

    Greece is a developed country by most meaningful metrics. However, its financial struggles have been well documented in the ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center