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1929 Depression VS 2007 Recession/Depression

By Andy Shaw | January 26, 2010

Originally posted 26th June 2009

Depression vs Recession

The jury is going to be out on this for some time yet although as I have stated if they don’t make significant changes and in the right direction then that’ll be where we end up. For those that don’t know the difference between a depression and a recession – it’s in the length and depth of it.

There have been some economists who have collectively put together a lot of comparison charts of the 1929 Great Depression and the 2007 Great Recession based on what happened over a period of 0 to 50 months, following the start of the troubles. I thought it made interesting reading and a good pictorial example of where my instincts are telling me we are at in the cycle

The charts clearly show that for now anyway, we are headed almost identically into a depression that will mirror 1929. However, the stimulus from the governments and the lowering of interest rates are significantly stronger now than they were in 1929 (it is hoped that we can at least learn something from history) but still these figures are surprisingly similar or worse than 1929.

Now I must say that I am not a big fan of charts, as a chart can be used to disprove gravity if it is put together the right way, so I am not 100% convinced of the accuracy. Add to this, there are another 50 – 500 other indicators that could be looked at as well as the ones they have chosen to focus on – so who is to say they have not ommited a critical factor that disproves this?

However, my instincts have been saying to me for quite sometime that in most ways this will be as bad as the Great Depression but that we may well be able to avoid a lot of the hardship that was endured then.

Here’s the conclusion reached by the researchers:

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news is, of course, that the policy response is very different. The question now is whether that policy response will work.

I quite agree with their last statement and we are actually, as I have mentioned before, in a Great Experiment with a completely unknown outcome that has yet to be determined.

In my personal opinion there are too many countries – Germany, Italy, Spain (basically all of Europe amongst others) – not even facing up to the de-leveraging problems that have occurred so far, let alone the problems that are coming over the next two years, that I just do not see how we can possibly avoid the lines of the graphs from mirroring something very similar to the trend of the Great Depression.

That is without even mentioning the most critical and absolute guarantee of a Great Depression…Protectionism. You need to look at Protectionism as cyanide for the economy. If we really want the economy to die and go into a depression then it is simple – just take the cyanide pill called Protectionism. Unfortunately, the war that should be had on protectionism is not being very well fought as they are fighting on too many fronts…but that’s another story.

Anyway, make up your own mind, here’s the link – http://www.voxeu.org/index.php?q=node/3421

Again this is merely a tool that can forewarn you about the situation that will be coming, so don’t be tempted to take deals that are not in high rental demand areas. You want to be looking for areas that have high rental demand and do not be tempted to take a deal if the maths doesn’t work for you.

That doesn’t mean you have to get all of the cash back out, it just means that you have to be comfortable with the cash you have tied in. Obviously all cash out is the goal but if you are comfortable with a percentage left in then don’t let this stop you. Just be sure that you buy in an area with high rental demand and hopefully upward price pressure on the rents as well.

At some point in the next 18 months I think they will call this a depression. Stay ahead of the curve and sell that to your vendors and the fact that if it does turn into a depression, then they would look back at your current offer of £70k now and wish they had taken it. Then, whether it becomes a depression or not, you’ll have made an extra profit from it.

Best wishes

Andy

PS They are intending to keep up with these charts and plot any further progress, so I will come back to this from time to time as appropriate.

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Topics: Free Content, Government, The Economy | Comments Off

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