Recessions and depressions of the past

The week of October 6 to 10, 2008 saw financial markets around the world fall in dramatic fashion. One country, Iceland, even stands on the brink of bankruptcy. Over the last ten years, Icelandic banks borrowed over $100 billion, compared to a gross domestic product of $5 billion. With the recent crisis, the banks have been unable to pay their debts. This is forcing their government to look to the International Monetary Fund and even Russia to help bail them out. The IMF has bailed out countries like Argentina and Thailand, but watching a European nation like Iceland brought to the brink of non-existence drives home the severity of the 2008 Global Crisis. 

 Stock markets in what are called the Group of 7, or G7 countries (the United States of America, Japan, the United Kingdom, Italy, France, Germany, and Canada) have been suffering since the end of 2007. In the United States alone, during the period from October 6 to 10, the Dow Jones Industrial Average fell 1,847.19 points (18% of its value) to 8,451.29 points. This represented the biggest weekly fall in the history of the Dow Jones Index. In all, since the beginning of October, US markets have fallen 25%; this is equitable to the collapses of 1987 and 1929. The Standard and Poor’s 500, another major stock index in the United States, is on pace to have its worst yearly performance since 1937 and its performance last week was its worst in 75 years. On the year, Russia has lost 67% of the value of its stock market. As we have said, the problem is not just isolated to the United States or Japan or Russia, but is a global issue.

There is a tool used for measuring global stock performance called the MCSI World Index. The MCSI World Index tracks select stocks from 23 developed countries (including the United States, Germany, United Kingdom, Hong Kong, Japan and more) and has been calculated since 1969. For background, since 1969 there have been five global recessions; including the 1974 Oil Crisis, the post-9/11 collapse and the 1997 Asian Financial Crisis. Last week the MCSI Index lost 20% of its value, the worst in history. 

By almost any measure, the time since the beginning of October has marked some of the most turbulent and volatile in history; as a result, there have been comparisons to the Great Depression and the 1929 Stock Market Crash. That stock crash was actually spread out over a three-day period, as compared to the ten-day period we are experiencing. The first fall took place on Black Thursday (October 24, 1929), the second on Black Monday (October 28, 1929) and Black Tuesday (October 29, 1929). Over those three days, the stock market lost 42% of its value; equivalent to $30 billion dollars or ten times the annual budget of the US government during that year. The stock market reached its lowest point on July 8, 1932 when it closed to 41.22 points, or 89% off of its peak on September 3, 1929. The Wall Street Crash of 1929 is commonly considered the precursor to the Great Depression. In the USA, the Great Depression did not end until 1939, with the start of World War II.

There are many similarities between the Stock Crash of 1929 and the current economic crisis, but there is one important difference as well: The world today though is better equipped to handle such an event. There are more tools at the disposal of governments than before. On October 8, 2008, five central banks, the Federal Reserve of the United States, European Central Bank, Bank of England, the Bank of Canada and the People’s Bank of China took the unprecedented step of coordinating cuts in their interest rates. South Korea, Taiwan, Korea and Australia soon followed suit. The finance heads from the G7 countries met on October 10 to discuss plans to prevent another Great Depression. We are hoping that the Age of Globalization and Information will have another benefit: helping countries work together to prevent another Great Depression.