Verified Document

America Economy The Global Economic Crisis That 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...

Parts of this document are hidden

View Full Document
svg-one

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 due to excessive spending and the drain of money…

Sources used in this document:
Works Cited

Blanchard, Oliver. The Crisis: Basic Mechanisms and Appropriate Policies. IMF

Working Paper. 2009. Web.

Eichengreen, Barry & O'Rourke, Kevin. A Tale of Two Depressions. Advisor Perspectives. April, 2009. Web.

Foster, John & Magdoff, Fred. The Great Financial Crisis: Causes and Consequences.
Cite this Document:
Copy Bibliography Citation

Related Documents

America's Medical System Is Broken: Can It
Words: 1883 Length: 6 Document Type: Research Paper

America's Medical System is Broken: Can it Be Saved and at What Cost? It is not an undisclosed reality that the health care system of the United States of America is the most expensive in the world. The American government spends almost two times as much per individual as compared to other advanced nation-states for achieving better health outcomes. However, they are neither better nor satisfactory and are much poorer in

Americas Interests & Involvement in
Words: 4606 Length: 13 Document Type: Term Paper

..) the subsequent U.S. occupation of the island tied its economy ever closed to the United States as U.S. military governors promulgated laws giving U.S. firms concessionary access to the Cuban market. By the late 1920s U.S. firms controlled 75% of the sugar industry and most of the mines, railroads, and public utilities." (Leogrande and Thomas, 2002, 325-6) The economic dependence on the United States and in particular the high degree

America's Cuban Conundrum the Helms-Burton Act and
Words: 1169 Length: 4 Document Type: Essay

America's Cuban Conundrum The Helms-Burton Act and the Cuban-American Trade Relations The United States and Cuba have had increased amounts of hostility toward each other present in their relations ever since the Cuban revolution. Not only did Cuba nationalize property held by U.S. interests during the revolution, but also Cuba became an ally to Russia during the Cold War; which was critical to the Soviet strategy since Cuba is in close proximity

America and Diversity Impacts of Immigration on
Words: 2044 Length: 6 Document Type: Essay

America and Diversity Impacts of Immigration on U.S. America has indeed a true diverse population and challenges of having such a diversified group of people range from the most serious issues such as terrorism to minor issues of hygiene. In a nutshell the most important challenge is inculcating the American way of life in people from different races, believing in a same cause of freedom and future that is flourishing for both

America's Cuban Conundrum Issue That Prompted the
Words: 736 Length: 2 Document Type: Essay

America's Cuban Conundrum Issue that prompted the EU to take the Helm-Burton dispute to the WTO The stances of the U.S. government in the suctions issued upon Cuba were heavy and non-beneficial to many countries and subsidiary organizations. The benefits of the sanctions were felt with no role in bringing consistency of access to the exciting opportunities for business activities in Cuba. Many organizations, countries, and independent business people were willing to

America's Road to Becoming a
Words: 902 Length: 3 Document Type: Term Paper

Argument against colonization While the American government pursued this expansionist policy, many citizens expressed concerns and dissent, for many disparate reasons. Ironically, while expansionism was based on ideas of racial superiority, so did the counter-arguments. For example, labor leader Samuel Gompers argued against the acquisition of colonies, for fear of being swarmed by "the Negritos, the Chinese, the Malays" and the other "semi-savage races" from coming to the United States? Similar

Sign Up for Unlimited Study Help

Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.

Get Started Now