Martin Mickus

Oppenhiemer Capital

There is a lot of chatter about whether we are currently in the next Great Depression (1929-1940). Certainly, similarities exist: a housing bubble, an equity correction, and bank dislocations are a few examples. Perhaps today’s most striking resemblance to a Depression-era environment is that both consumers and businesses are deleveraging their balance sheets.

However, an analogy to the Great Depression is not entirely accurate because the government’s response to the current economic crisis has been vastly different from the period that followed the stock market crash of 1929.

From 1929 to 1933, the government did everything wrong and actually contributed to economic contraction. The government raised interest rates, raised taxes and cut government spending, that is, they delevered alongside consumers and businesses. The economy and the market only improved when government eased both fiscal and monetary policy.

After the crash in October of 1929 and a loss of confidence in the banking system the following occurred:

• The Federal Reserve increased interest rates to prevent a run on the dollar and ensure confidence in our ability to maintain the gold standard, decreasing money supply as measured by M2 by 33%.
• Herbert Hoover believed falsely that bank failures and a run on the currency was caused by a federal budget deficit and tried to balance the budget.
• Hoover passed the Revenue Act of 1932 which increased personal income taxes from 25% to 63%, raised corporate taxes 15%, doubled the estate tax, and implemented a 2 cent check tax on all checks (30 cents in current dollars).

THEREFORE, THE GOVERNMENT OBSTRUCTED A RECOVERY. THEY DID NOT ASSIST ONE, SO...

• GDP declined approximately 30% from 1929-1933 versus Import Substitution Industrialization (ISI) expected peak to trough GDP during this recession to be down 3.5%. In 1974 peak to trough GDP was -3%.
• GDP declined 8.6% in 1930, -6.4% in 1931, -13.0% in 1932, -1.3% in 1933.
• The stock market lost 80% of its value from 1929-1932.
• The Dow Jones Index returned -17%, -34%, -52%, and -23% in 1929, 1930, 1931, and 1932, respectively.

SO, WHAT HAPPENED NEXT?

• In 1932, the Federal Reserve lowered rates and FDR was elected president and in 1933 passed the New Deal.
• The New Deal spending peaked as a percentage of GDP at 5.4% ($3.6b) in 1934 and peaked in dollar terms at $5.1b (4.3% of GDP) in 1936.
• The Dow was up 63%, 6%, 38%, and 25% in 1933, 1934, 1935, and 1936, respectively.
• GDP grew 10.8%, 8.9%, 13.0%, and 5.1% from 1934-1937.

SO, WHAT’S DIFFERENT THIS TIME?

• So far the Treasury, Federal Reserve, and Congress have allocated $9.7 trillion or 70% of GDP – spread over 2 years.
• So apples to apples, we are spending approximately 45% of GDP a year for the next two years versus a peak in the New Deal of 5.4%.
• Money supply as measured by M2 is growing at a 22% annualized pace.

If you must make a comparison to the Great Depression – which I believe is misguided for the above reasons – think of 2009 being more like 1933 than 1929. That’s when the government began leveraging its balance sheet to MORE than offset the deleveraging from the consumer and business sectors.