America Economy the Global Economic Crisis That Research Paper

  • Length: 5 pages
  • Sources: 5
  • Subject: Economics
  • Type: Research Paper
  • Paper: #44354005

Excerpt from Research Paper :

America Economy

The global economic crisis that the United States finds itself in today is in many ways similar to the basic characteristics and consequences that followed the Great Depression that lasted from 1929 to 1933. In this paper, the Great Depression and its aftermath will be examined at length with the purpose of comparing its similarities and differences with the current economic turmoil. Specifically, this paper will highlight government bond rates, interest rates, the U.S. gross domestic product (GDP) and the trends of primary stock prices. In addition, the response of the federal government will be compared with an eye toward examining its impact and lessons learned for future crises.

One of the major indicators of a county's wealth is its GDP. This is comprised of the cumulative value of all services and goods produced within a given time period. GDP is most frequently compared from one fiscal quarter to the same quarter during the previous year. Massive changes in GDP from one year to the next typically affect the stock market, with lower GDP values corresponding to lower stock prices. Significant economic growth from one quarter to the next is typically represented by an increase of roughly 2 per cent. In the year prior to the onset of the Great Depression, the GDP in the U.S. was cut in half. This is primarily due to deflation in the domestic and world market. The resulting effect on the stock market and interest rates was catastrophic for many Americans. Unemployment rose exponentially and it took more than a decade for the economy to recover. The shockwaves were felt all over the world, though not to the extent that they were felt following the economic crisis of 2008.

In comparison, GDP dipped merely slightly during 2008. Instead, the stock market and interest rates showed the most profound response to the economic crisis. Instead, the GDP number represented a downturn from the standard 2 per cent that economists like to see. The American GDP fell by .5 per cent in the third quarter of 2008 and was roughly stagnant during the other three quarters of the year. The sectors most responsible for the downturn in GDP included the construction, real estate and service industries.

Government bonds were the solitary high performer during the Great Depression. Unlike stock prices and interest rates, government bonds continued to show progress for those Americans able to invest in them. Both government bonds and interest rates demonstrate the ability of the federal government to provide liquid assets in the marketplace. They also allow Americans to exchange assets for cash or vice versa. Bonds continued to yield growth throughout the 1930s, with a general growth of roughly 5 per cent in the ten years following the market crash that led to the Great Depression. On the other hand, governments bonds were severely weakened by the crash of the real estate bubble and the overextension of the sub-prime mortgage industry. Bonds continued to show some growth but they have been an widely considered a risky investment since the economic downturn. This distinction between the Great Depression and the current financial crisis is a reflection of the current reliance on interest rates and the speculative market, as opposed to the high level of investment in the stock market that existed in the past.

Other differences between the two depressions include the unemployment rates and the level of home ownership. The unemployment rate fell from roughly 6 per cent prior to the Great Depression to nearly 25 per cent in the early 1930s. Nothing like this has happened to our economy in the last three years. Unemployment rose to just more than 6 per cent in 2008, its highest level since 2003. Additionally, fewer than half of Americans owned their own home, both before and after the onset of the Great Depression. Meanwhile, more than 65 per cent of all Americans owned their own home at the end of 2008. However, this number has suffered in recent years, having been affected by higher foreclosures and sub-prime mortgage loans to owners who cannot afford to repay them.

In both cases, the stock market was the primary victim of the economic crashes. In 1929, the stock market collapsed, falling as much as 75 per cent from its previous high prior to the crash. Throughout the 1920s, there had been a steady rise in the stock market average, mostly boosted by an array of technological and industrial innovations. Following a brief stock market in panic in 1921, the Dow Jones rose roughly 60 per cent before the crash in 1929. A similar pattern led to the economic collapse of 2008. The stock market rose steadily throughout the 2000s, with few prognosticators noticing the similarities to the trends of the past. Much of the increases were in the technological, telecommunications, real estate and financial sectors. In the month following the beginning of the downturn at the end of 2007, the Dow average fell nearly 40 per cent, in a plummet not seen since 1929. Economic watchdogs noticed the remarkable similarities between the two eras only after the crash. A primary difference, however, was the number of Americans who directly had investments tied to the stock market. Much of this investment was in the form of retirement funds, such as 401(k) plans. The losses were therefore felt more immediately in this case, than during the Great Depression. For many Americans following the crash of 1929, years passed before the damage was felt. This is largely because of the fast pace of information and the global nature of our current economy.

The primary reason for the stock market crash in 1929 was the overvaluation of stock prices. In response, the government raised interest rates with the purpose of stabilizing the market. Instead, their increase represented an overcorrection, and contributed mightily to the profound effects of the Great Depression. The biggest reason for the economic crisis in 2008 was the proliferation of the sub-prime mortgage industry and the real estate bubble that resulted. Real estate prices soared during the decade of the 2000s, with many Americans purchasing homes they were unable to afford. Additionally, market niches based on speculation in relation to interest rates and mortgage validity developed, and financial institutions crumbled in response to the crash. Many banks failed or were bailed out by the federal government, most notably, Lehman Brothers, Merrill Lynch, Bear Stearns and Wachovia. The financial sector was remarkably different in 1929. More banks became insolvent, but this was in response to the insolvency of their customers and the evaporation of funds, rather than overextension. In addition, most banks were local, and so the failure of one bank usually had little impact beyond the boundaries of its local customers.

The rapid influx of money in both cases contributed to subsequent financial struggles. The Federal Reserve had increased the printing of money throughout the 1920s, leading to the devaluation of the dollar. Similarly, the proliferation of consumer credit during the 2000s precipitated the economic crisis of 2008. The influx of funds permitted many Americans the opportunity to purchase goods and services they had not been able to in the past, such as houses, cars and electronic goods. The overproduction of consumer credit gave the impression that the economy was booming, and led to lower unemployment figures and increasing investment in the stock market. This is similar to the overvaluation of the dollar in the 1920s and the rapid increase in the stock market prior to the crash of 1929.

Government response to the two crises has been vastly different. The federal government was largely passive following the Great Depression, with little change in interest rates and little or no money being allocated to bail out financial institutions. A federal surplus slowly became a deficit, largely…

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