Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Why a Second Depression is Possible but Not Likely

Economics / Economic Depression Mar 20, 2020 - 10:35 AM GMT

By: Submissions

Economics

Almost everyone who deals in stocks and shares possesses at least a cursory knowledge of the 1929 stock market crash and subsequent Great Depression that crippled the US and sent economic shock waves across the entire globe. With markets tanking on fears of an extraordinarily serious coronavirus event, some are asking if the late 1920s and early 30s could repeat themselves in short order.

The short answer is this: while a second depression is entirely possible, it is not very likely. There are several systemic differences in the financial systems of 1929 and 2020. Moreover, the Great Depression cannot be blamed entirely on the stark market crash. The crash was but a symptom of a much bigger problem. It was also just one factor that went into creating what was arguably the largest financial crisis in modern history.


It is true that world markets have been dealt a substantial blow by fears of what coronavirus has in store. But they come in the midst of an otherwise strong global economy. That wasn't the case in 1929. But even a strong economy does not fully explain where we are at. So, let us look at the reasons why a second depression is possible but not likely.

Why It's Possible

Stock market volatility is always an economic risk. For an individual trader with a small share dealing account that handles only a dozen or so trades yearly, volatility doesn't go much beyond how it affects his portfolio. Volatility is a much bigger problem for institutional investors. As such, any time you have big swings in the market you have the potential for trouble.

There is no doubt that world stock markets are now closely dangerous to bear territory. This could be enough to spook institutional investors and cause massive sell-offs that would put a lot of big corporations in serious financial trouble. Yet stock market volatility is not the only thing to be concerned about. There are other factors that could contribute to a second depression:

  • Reduced Economic Output – The best antidote to a large-scale economic downturn is increased economic output. Right now, we have been forced into reduced output due to industries shutting down and social distancing being recommended. If economic output falls far enough, there could be problems.
  • Government Interference – Central banks tend to rely on quantitative easing programmes to keep markets liquid during times of economic distress. However, the government can only borrow and print money for so long before damaging inflation kicks in. Just ask Venezuela.
  • Artificial Deflation – Deflation is normally considered a good thing for consumers. However, when it is the result of artificial influences, deflation damages the economy by making it harder for businesses to raise prices and pay their workers more.

These are just four of the reasons it is reasonable to say that a second depression is possible. Now let's look at the other side of the coin.

Why It's Not Likely

For all of the devastation the 1929 crash and subsequent Great Depression caused, at least we learned from the mistakes of the past. So first and foremost, markets now have built-in controls that prevent them from losing too much value over a given amount of time. These controls should prevent an all-out market collapse.

Here are some other reasons a second depression is not likely:

  • Monetary Policy Changes – Central-bank monetary policies prior to the 1929 crash were largely contractionary. Today, it's just the opposite. As long as everyone plays by the same rule book, expansionary monetary policies are designed to limit the damage of economic downturns.
  • Strong Housing – At the end of the day, real property is the stuff that personal wealth is built on. The current housing market is as strong as it's been since the last financial crisis began in 2008. Provided the coronavirus scare is over within a couple of months, there's no reason to believe that housing will crash.
  • Strong Employment – The world went into the coronavirus outbreak with very strong employment numbers. Likewise, there is still work to do and people to do it. The amount of work that will need to be done after all of this is over will be significant as well. In essence, productivity is just chomping at the bit to get going again.

At the heart of all of this are the nervous investors with the most twitchy of fingers. This entire discussion would not even be necessary if investors would just sit tight and do nothing during events like the coronavirus outbreak. There is simply no reason to panic. There is no reason to pull every last pound out of the markets and put it into bonds and treasury bills instead.

Unfortunately, that is not what happens. Nervous investors pull out at the very first sign of discomfort. Strangely enough, all it takes is a few sentences uttered by a politician and the same investors will get right back into the markets the following day. Hence the volatility. It is foolish and completely unnecessary.

Thankfully, we are not likely to fall victim to nervous investors as happened in 1929. A second depression, while possible, is not likely.

By Russell Fenton

© 2020 Copyright Russell Fenton - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules