Recession? Depression? What are they? Should I be afraid?

January 5, 2009 by Curt Siters

Do you know what inflation is?

Inflation is the rate at which the money supply increases relative to the amount of goods and services available on the open market.

Do you know what a recession is?

A recession is when the money supply contracts.

Do you know what a depression is?

A depression is when the money supply contracts quickly and to a large extent.

What makes the money supply contract or expand?

It expands when people and businesses take on debt and contracts when people and businesses pay off debt or do not spend. The only thing that makes the money supply expand is debt.

When the money supply is stable (basically works on the assumption that a monetary unit is based upon a fixed amount of a precious metal) there are no depressions or recessions. When the money supply is allowed to expand and contract you will have them.

Are the Great Depression and the Crash related?

When the stock market crashed in the 1920’s the average stock dropped to 11% of it’s high value. Now, in 2009, the stock market reached a high of just under 14,000. Currently it sits at around 8,000, or about 60% of its‘ high. To reach the same level as the stock market crash of 1929, the stock market would have to plunge to around 1,500.

No, they are only superficially related. What happened after the Crash caused the Depression. The stock market crash happened in 1929 and the Depression started in 1932. However, with the boom in the stock market a large portion of the population started playing the market and taking tremendous risk. They invested everything they had and lost it all in the crash. Businesses still ran and people still worked.

The Crash made people start to hang on to what they had and they didn't spend money. When money isn’t spent businesses can’t sell goods and services and can’t/don’t pay their employees or suppliers ad infinitum. This caused prices to rise so that the businesses could pay off the debt they owed. When people don’t spend money, the businesses lay off employees and/or shut their doors. People become more afraid and start to hold on to whatever they can get their hands on and the cycle gets a little more vicious and goes around and around.

So, as people hold on to what they have and prices go up people pay more for the things they need to live and so find themselves paying more than they would have if everyone didn’t panic after the crash.

Are we headed for another depression?

I can’t say really. I am not an economist - I just like to run numbers and see what the results are.

As I said above - comparatively speaking on a percentage basis the stock market would have to drop to about 1,500 to equal the magnitude of the Great Depression. We have a ways to go - number wise for this to occur. Can it happen? Sure it can. But this is just “Black Monday.”

The Great Depression was a result of people losing jobs with the unemployment rate hitting about 24%. Where are we now? We are currently at about 8%, so we would need to see three times as many people become unemployed.

Should I be afraid?

Two of my favorite books, Dune by Frank Herbert and Hitchhikers Guide to the Galaxy by Douglas Adams, have some very sage advice - not just for now but for any point in your life:

"Fear is the mind killer" - Dune

"Don't Panic" - Hitchhikers Guide to the Galaxy

My advice to you is be concerned but don't be afraid. Act on information and not on fear. People like Warren Buffet and Donald Trump aren't heading for the hills (at least not yet) because they know that the stock market goes up and down - sometimes it goes way up and sometimes it goes way down.

Don't buy on credit unless you must. Pay cash whenever possible.

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Curt Siters is an Independent Associate for Pre-Paid Legal Services, Inc. and is working to help motivate people to take an active interest in what is happening in our legal system and learn ways that they can protect themselves when it comes to the U.S. legal system. He also works to motivate people to maintain and improve their health through the use of essential oils and essential oil based products from Young Living Essential Oils on YourWebReference and at TheVeryEssence. He also does web work such as website design, website maintenance and SEO for websites.

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Curt Siters is an Independent Associate for Pre-Paid Legal Services, Inc. He is also aYoung Living Essential Oils Independent distributor and publishes articles on YourWebReference and at TheVeryEssence. He also does web work such as website design, website maintenance and SEO for websites.

Join me on any of the following sites: LinkedIn, Twitter, friendfeed, Facebook.