Friday, June 05, 2009

Calm Before the Storm

Bill Bonner has written an excellent article reminding us of the parallels our current economic situation has with the Great Depression. He argues that though things seem to be picking up and the "green shoots" being reported are similar to what happened in 1930 before the markets tanked even further.

He writes:

"In 1930, six months after the initial storm front passed, world output was down about 15%. Today, it is down about 15%, too. Stock markets were only down about 20% in mid-1930. Today, they’re down about 35%. And world trade slipped about 15% in the six months following the onset of the Great Crash of ’29. Today, it is down 25%.

The other thing you notice is that this adjustment takes time…and takes the losses much further…much deeper…than anyone expects. The actual bottom in the ’30s didn’t come until 2 to 3 years after the crash. And it took stocks all over the planet down to about 65% below their peaks. World output eventually fell to only about 2/3rds of what it had been in the late ’20s.
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Do not be lulled into thinking the worst is over--at best, we've bought ourselves a few years before the bigger, more catastrophic collapse hits. Interest rates are going to have to go up, and when that happens there will be another round of foreclosures over the next four years that will be much worse than what has already occurred. Combine that with a commercial real estate collapse, loose money policies from the Fed, huge federal and state budget deficits, and the prospect of social security insolvency within less than a decade. The trouble is far from over. Prepare for the worst, and hope for the best. It is going to be ugly.

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