Thursday, October 16, 2008

Are we heading towards Great Depression?




Among all the talks, predictions and doomsday theories propagated by the economists, people of this era are going to be more financially literate than any of the generation in the past. The way India has come on the global scene , our markets unfortunately got coupled with the global economy and the crisp reporting of issues done by newspapers, nobody can ignore global cues anymore. 


One of the current debates is “Are we heading towards Great Depression “. If we analyze both the scenarios,there are actually lot of similarities between the great depression of 1929 and Sub Prime Crisis the world is facing today. The prominent similarities include the similar crash of asset price including housing and stock markets, defaults by Banks, global nature of crisis, movement of prominent economies away from capitalism, likely increase in taxes by USA in times of crisis etc. If you see the similarities the chances of subprime turning into depression are indeed very threatening but on the brighter side the intensity of the economic downturn is much lesser this time than in 1929. If we actually see the stages of great depression, it started with black Tuesday (Oct 29, 1929) when the markets crashed heavily .The reason being high level of public debt caused by destructive WW - 1and reduction in income which was leading to defaults of loans by people . But economy recovered again in 1930, the next phase of downturn which lasted for few years was even more severe. The prime reason for it was seen as low investor confidence. People wanted to stay away from financial markets and institutions to avoid any future financial problems. Demand for goods and service dipped because of that and it lead to massive crisis. Comparing it to the present scenario where we have high inflation in half of the world countries, robust demand for products and services, the fundamentals of the economy are not that bad. There may be slight downward pressure on the demand in US but still most of the countries have good demand and people still have lot of confidence about the strength of the system. 


Certainly the lesson learnt by the great depression are helping central banker in facing the situation. They are pumping huge money in the system to bring back the liquidity and investor confidence. It will help in reviving the state of economies.


On a lighter note, one of the popular Jokes now days on internet is ‘Q - What the difference between recession and depression? , A- Recession is when your neighbor looses a job and depression is when you lose your job! ‘

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