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.
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.
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.)
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.
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.)