Historical Data May Give Guidance
This economic recession is considered to be the worst financial hit to the US since the Great Depression. How can we plan ahead and make good business and investment decisions? One of the questions I am frequently asked is: how long will it last? My answer is that (a) I don’t know and (b) that it would be irresponsible for me or anyone to say. I’m not as dumb as the-smartest-guys-in-the-room who thought they knew and got us into this mess. But I know anything I say would be a guess. It all depends what our government will do. And, I suspect that would have a negative effect on recovery.
That aside, a new paper published by Carmen Reinhart and Kenneth Rogoff examines reliable historic data and compares past cycles around the world. (“The Aftermath of Financial Crises,” January, 2009). They examined the before and after of banking crises in rich countries and in emerging markets and found a number of similarities among them. The results for the average of major banking recessions are fascinating:
Housing prices declined an average of 35% over six years;
Equity prices declined an average of 55% over 3.5 years;
Unemployment rises to an average of 7% over four years;
GDP declines an average of 9% for over two years;
Government debt increases an average of 86%.
The charts below show where the current crisis is in relation to the historical average. You can draw your own conclusions.
One of their interesting conclusions is that, compared to earlier downturns, this one has a global impact which will make it more difficult for countries to export their way out of it. Also, it may make it more difficult to continue foreign borrowing (i.e., the US).
Does this mean our recession will be “average?” I personally don’t believe so: I think it will be worse. We’ve had the greatest credit bubble the world has ever seen. The proposed solutions offered by our government have been shown historically to lengthen the down cycle.
I find the charts, below to be fascinating. Notice the numbers for the US during the Great Depression and Japan in the ’90s and early 2000s.
To make chart larger, click on chart.
