Nobel Prize-winning economist Paul Krugman said that world prevented the second great depression. That’s a relief for now. “We have managed to avoid a second Great Depression … but full recovery is at least two years and probably more,” Krugman said.
More on this here. The way the stock market reacts now, it appears that the worst is over. But, never rely on the stock market to forecast economy!
Will the worst recession morph into another great depression? What are the odds of our economy slipping into depression? Harvard professor Robert Barro puts the probability of current recession slipping into depression at 20%.
If you are a “glass half-full” kind of optimistic person, you will be happy that there is a 80% probability we won’t face the depression. If you are worried about 20% probability, you may not be alone!
More on this story is in Wall Street Journal.
Are we in another great depression in terms of unemployment? If unemployment rate is calculated in the way it was done in 1930s, the current unemployment rate is closer to 16.5% rather than 10% forecasted by economists. During the great depression of 1930s, the unemployment rate was hovering around 25%.
Reuters article says that comparing today’s situation with that of 1930s is not far fetched. There is another twist to the calculation of unemployment rate. Unemployment stats don’t take discouraged workers, the workers that lost the hope of getting job and stopped looking for a job, into account while calculating unemployment rate. Thus, the real unemployment rate may be more than 16.5%.
How would you feel if someone tells you “America’s credit rating may soon be downgraded below AAA”? Paul B. Farrell of MarketWatch.com claims just that.
John Whitehead, Former Chairman of Goldman Sachs says “I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” That would be nasty and can bring down the Dow to 5,000.
Related Links: 30 reasons for Great Depression 2 by 2011 | American Economy Crisis
No doubt the economic times are as bad as almost anyone alive has ever seen them right now. Pessimism is growing among Americans as well as citizens across about the state of the American and the Global economies. In recent weeks there has been much more talk of turning back toward the Great Depression norm of stashing cash under the mattress because it is the safest place for it. The reality is, even though the economic picture looks terrible putting your hard earned cash under the mattress isn’t the great idea it may seem to you at first.
During the Great Depression many people put cash under their mattress because there were no guarantees in our financial system. There was no FDIC guarantee of up to $250,000 per institution as there is now. In the depressionary period of the early 1930′s if your bank went under, you were out of luck, which left a whole lot of people hurting severely. You can’t blame folks during that time period for putting their cash under the mattress, but today’s period isn’t the same. In fact, most experts believe putting cash underneath the mattress has now become one of the least safe places for your cash since many robbers target this area right away.
Today if you are putting cash under the mattress you are losing out on an opportunity cost basis based on the fact that you could be getting some kind of return for your money from simple very safe things such as Certificates of Deposit, Treasury Bonds, or Money Market Accounts. While the interest earned may not seem terribly impressive at first, it adds up over time, and in a tough economic environment every little bit that you can save up is extremely important over the long run. Keeping your money safe is tantamount, which is exactly why now is not the time to just stash the cash under the mattress.
Related Link: Lock in those CD rates
