COVID-19 Downturn is Not Another Great DepressionSubmitted by Reed Financial Group on May 19th, 2020
Five reasons why this comparison is designed “to sell newspapers”
In mid-February, Google reported that the number of searches for the term “Great Depression” was on the rise. For the rest of the month and through the middle of March, the search term trended higher, peaking at the end of March before slowly retreating. Consider that:
- Google searches for the term “how long did it take to recover from the “Great Depression” were up 2,600%
- Google searches for the term “coronavirus great depression” is considered to be in “Breakout” mode, which means that search was up at least 5,000%
Maybe those Google searches were partly the result of recent media headlines like these:
- “The New Great Depression is Coming. Will There Be a New Deal?” New York Times
- “Coronavirus Slump Is Worst Since Great Depression. Will It Be as Painful?” Wall Street Journal
- “How Bad Might It Get? Think The Great Depression” Bloomberg
That last one was published on April 22nd and contained a more frightening, second-headline that read:
- “The coronavirus collapse has the ingredients to surpass the disaster of the 1930s.”
While most everyone would agree that sensational headlines are designed “to sell newspapers,” let’s examine why we are neither in – nor heading towards – another Great Depression.
The Great Depression
The Great Depression is considered the worst economic downturn in the history of the U.S. and it lasted for 10 years – from 1929 to 1939. Most associate the beginnings of the Great Depression with the stock market crash of October 1929; the bottom to be around 1933 and the end to be brought about by World War II.
The Great Depression brought an enormous amount of pain to an entire generation of Americans. Here are a few staggering statistics from the Great Depression:
- The stock market lost almost 90% of its value between 1929 and 1933
- Around 11,000 banks failed during the Great Depression
- Between 1929 and 1932, federal revenue dropped by 50% and industrial production fell 52%
- In 1933, unemployment was 25% and more than 40% of mortgages were in default
- The average family income dropped by 40% during the Great Depression
- More than $1 billion in bank deposits were lost due to bank closings
- 750,000 farms were lost between 1930 and 1935, due to bankruptcy and foreclosure
- Around 300,000 companies went out of business
This Time It’s Different
This is probably one of the most dangerous phrases in all of investing: “this time it’s different.” In fact, if you are discussing investments, the markets, or anything financial related and someone says this, you should usually walk away.
Nonetheless, there are massive differences between today’s COVID-19-induced economic downturn versus the Great Depression. Again, there is no question that the macroeconomic impact of COVID-19 has been severe. Unprecedented, really.
But here are five indisputable reasons why we’re not headed for another Great Depression.
Reason #1 – We Took Our Economic Train Off the Tracks
Warren Buffett might have said it best when he compared today’s COVID-19 environment with the Great Recession of 2008 and 2009. And while he was comparing the current environment to a difficult economic time that he lived through, his words are easily applied and compared to the Great Depression too:
“In 2008 and 2009 our economic train went off the tracks, and there were some reasons why the roadbed was weak in terms of the banks,” Buffett said. “This time we just pulled the train off the tracks and put it on a siding. And I don’t really know of any parallel — in terms of a very, very well the most important country in the world, most productive, huge population — in effect sidelining its economy and its workforce.”
The Great Depression was caused by a fundamental downturn in the economy whereas in 2020, right before we “pulled the train off the tracks,” the American economy was fundamentally solid, including:
- Solid gross domestic product numbers
- Historically low unemployment (50-year lows)
- Historically low interest rates
- Stable inflation
- Healthy consumer spending
- Solid corporate earnings
- Rising stock and bond markets
- No hoarding of toilet paper
Reason #2 – The Federal Government’s Action is Different
In 1929, the response from the Federal government was almost the polar opposite to the response in 2020. During the Great Depression, President Hoover essentially refused to offer help from the federal government, arguing that self-reliance was enough. Making it worse, the federal government tightened monetary policy and tightened fiscal policy.
In 2020, as has been well documented, the federal government has taken bold and drastic actions to combat COVID-19. In all, the federal government has provided more than $6 trillion worth of liquidity to our financial system because they adopted:
- An emergency 50 basis-point rate cut on March 3rd and another 100 basis-point rate cut on Sunday, March 15th;
- Quantitative easing originally capped at $700 billion of asset-purchases, but now unlimited; and
- Over $2 trillion in a new lending program.
In addition, the Coronavirus Aid, Relief, and Economic Security act – the CARES Act – is the largest economic bill in U.S. history and was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”
Spanning close to 900 pages, the comprehensive aid package covers a lot, including direct payments to Americans, expanded unemployment insurance , changes to retirement rules and billions of dollars in aid to businesses.
The 2020 federal government response to COVID-19 has been the complete opposite of what the federal government did during the Great Depression.
Of course, well-intentioned people can politely discuss whether the government has done too little or too much, but no one can argue that the speed has been fast and the scope has been broad. And there could be more government relief on the way.
Reason #3 – This is Temporary Unemployment
During the Great Depression, unemployment peaked at about 25% and remained in double-digits for 10 years.
Yes, we have currently hit double-digits, but recent data from the Department of Labor has trended downward in the first two weeks in May, although that could always change.
More importantly, there is a huge difference to this “temporary” unemployment today versus the more permanent unemployment of the Great Depression. In fact, estimates suggest that fully 80 – 90% of those current unemployed expect to go back to work once the virus is under control (which is not a metric that is easy to determine).
Said another way: when the virus is under control, Americans will decide to go back to work.
That wasn’t an option during the Great Depression.
Reason #4 – Unemployment Insurance
Did you know that when the Great Depression started, the U.S. was the only industrialized country in the world without any unemployment insurance or social security? It was not until 1935, that Congress passed the Social Security Act, which provided help for those of retirement age.
Fast forward 30 years later when on July 30, 1965, President Johnson signed into law the legislation that established the Medicare and Medicaid programs.
Today, the three largest domestic programs in the federal budget are Social Security, Medicare and Medicaid, accounting for almost 10% of federal spending. Further,
The combined Social Security fund had a 2019 annual surplus of $2.5 billion reserves of to $2.9 trillion at the end 2019. This amount is equal to 261% of the estimated annual expenditures for 2020.
The most recent numbers from the Centers for Medicare and Medicaid Services reported that National Health Expenditures were $11,172 per person and accounted for 17.7% of Gross Domestic Product.
Of course don’t forget the changes that the federal government just made to unemployment assistance through the CARES Act that now includes an additional $600 per week payment to each recipient for up to four months plus extended benefits to self-employed workers, independent contractors, and those with limited work history.
To say that the response from the government is different today is an understatement. By the time this is all said and done, we will have pumped trillions of dollars into the economy.
Reason #5 – The Banking System
Within about 6 months of the Crash of October 1929, close to 1,000 banks failed. In 1933, it was estimated that close to 4,000 failed. In the decade of the Great Depression, approximately 11,000 banks failed.
For perspective, in 2018 there were no bank failures; there were four in 2019 and there have been two so far in 2020 – and neither can fault the coronavirus as a reason.
On April 3rd, West Virginia state regulators closed The First State Bank, and while this was the first bank to close during the pandemic, the bank’s problems were well documented before the virus struck.
Will there be more bank failures? Likely. Bank failures due to the coronavirus? Likely again, especially since the coronavirus crisis will undoubtedly cause an increase in loan defaults that might stress banks. But the FDIC, the Federal reserve and other regulators are there to help depositors. Consider this from the FDIC’s website:
“Since 1933, no depositor has ever lost a penny of FDIC-insured funds. Today, the FDIC insures up to $250,000 per depositor per FDIC-insured bank. An FDIC-insured account is the safest place for consumers to keep their money.”
What You Can Learn
Yes, things are very scary right now and the COVID-19-induced economic downturn is frightening. And none of the aforementioned thoughts are an attempt to minimize the pain that you, your family or your neighbors might be experiencing.
But when others start screaming that we’re headed for another Great Depression, it’s helpful to know the reasons why we’re not (which might be gleaned from knowing why they’re making such bold comparisons, but that’s another story altogether).
Here is what we can all do:
- Be critical of those drawing direct comparisons to historical events – especially historical events from almost 100 years ago.
- Be critical of narrow data-sets and the conclusions that some might jump to. Especially since it is easy to cite a single statistic to write an explosive headline.
These two thoughts are especially important because the American economy of today is vastly different from the one in 1929. In 1929, the economy was essentially driven by manufacturing and agriculture, as those two sectors accounted for more than 40% of our GDP at the time. Today, those two sectors make up less than 10% of our GDP.
The reality is that surveys and statistics try to neatly wrap-up what’s happening economically in a cute little package with a tiny bow. Remember the phrase popularized by Mark Twain: “"There are three kinds of lies: lies, damned lies, and statistics”. A good copywriter can take any set of numbers and write an inflammatory headline – or craft an inspirational message from the same data set.
Finally, heed the words from Warren Buffett, arguably the greatest investor of our time when he said:
"Never bet against America. That is as true today as it was in 1789, during the Civil War, and in the depths of the Depression."
Never Bet Against America.