Are We in for Another Great Depression?

Has the recent economic downturn in the economy got you worried? Maybe it should. Some people have said this recession has the potential to be the greatest threat to the American economy since the Great Depression. But what makes this recession worse than the previous few that we have had? Let’s take a look at the similarities and the differences between our current economic situation and the Great Depression.

The Great Depression was the most significant downturn the U.S. economy experienced in the history of the United States. One of the most significant factors that caused the Great Depression was the staggeringly unequal distribution of wealth among the rich and the middle class. In the late 1920’s, the top .1% of all Americans had a combined income equal to the bottom 42% while today, the top 5%  richest Americans have a combined income equal to the bottom 53%. While this unequal distribution of income is not quite equal to that of the 1920’s and 30’s, it is nearing a dangerous point.

Another significant cause of the Great Depression was the extensive stock market speculation that occurred in the late 1920’s. This speculation caused the market to get to artificially high prices. These prices attracted investors who were looking for quick ways to make money. However, the market eventually reached a point where investors were investing regardless of the company’s earnings. This type of unselective investing caused artificial highs in the prices of stocks, which then crashed significantly on Black Tuesday.

Comparatively, our recent economic recession has been characterized by a significant plunge in the housing market, which has caused drops in other markets that had investments in property. This has been the main reason behind the current recession. Fortunately, this is a good sign for the economy. In contrast to the great depression where speculation caused artificially high prices, the current recession does not have artificially high stock prices. If anything, stock prices have fallen to a point where they are selling at less then their actual value due to speculation of a large crash.

During the 1920’s, the automotive industry was one of the driving forces behind the booming economy, even during the Great Depression, the automotive industry was never in any significant trouble. Today, because the automotive industries have high operating leverage at a time when fixed assets are loosing value, they are in trouble. Should one of the automotive makers go under, we could see a significant downturn in our current economy, with the possibility to turn into a depression.

While the Great Depression was a horrible time in our economic system, our current recession is unlikely to descend into the same build. The causes are completely different, and not as dire. Even if one of the big three automotive makers fails in the coming months, and although the stock market will likely be turbulent for the next few months or years. We will not see a prolonged depression like that of the 1930’s.