'A Chicken in Every Pot': The Economy Will Recover

It is time to smash the myth that the U.S. financial crisis will cause any recovery from the current recession to be slow and unimpressive. In fact, history tells us the opposite.

It may surprise readers to learn that during the Great Depression, after collapsing from 1929-1933, our economy actually expanded sharply from 1934-1937 (industrial production regained its prior peak), declined during 1937- early 1938, then began another robust recovery that lasted beyond the end of World War II.

As summarized by Christina Romer, Chairperson of the Obama administration's Council of Economic Advisers, the early 1930s saw the failure of nearly half the nation's financial institutions, yet the recovery years of 1934-1936 displayed increases in real GDP of 11%, 9% and 13%, respectively and the unemployment rate fell from 25% to about 15% during that period. Clearly, that financial crisis, which was far worse than that of today, did not prevent our economy from recovering rapidly.

During 1937- early 1938, our economy fell into another decline. Most monetary economists, like Milton Friedman, Anna J. Schwartz and Allan Meltzer, placed blame for this on the Federal Reserve Board, which tightened money by raising banks' reserve requirements in late 1936. Keynesian economists, like Paul Krugman, tend to blame the federal government's cutting back on fiscal stimulus, which also occurred. Christina Romer sides with the monetarists in crediting the subsequent expansion of the money supply with pulling us out of the Depression, while stating recently that the New Deal was too small a program to have been effective. She points out that the current stimulus package's fiscal effect is about twice the size of FDR's New Deal, as a percentage of GDP, and will last twice as long.

By 1938-1939, fiscal and monetary policy had turned expansionary, again, and the economy expanded rapidly through and beyond the Second World War. Examination of economic data from the Great Depression and its aftermath shows that a financial crisis can cause an economic calamity, but there is no evidence that recovery from such a debacle is necessarily sluggish, indeed the evidence is to the contrary.

Due to the cloud of pessimism overhanging our national outlook as expressed by most observers, I look for the nascent economic recovery to surprise on the upside. In other words, a chicken in every pot, as the economy moves from cold to hot.

Comments

[Hangdog:]

From the pot into the fire seems more likely.

When America experienced robust growth post the great depression the situation was a bit diffirent. Everybody owed America money now America owes everybody money. QE will continue unabated and if the world is lucky the USA will fare no worse than Japan, chances are however greater that the only growth will be inflationary and if adjusted to real figures....negative

Jul 13 06:09 AM

[Tom Colangelo:]

The market will continue to move sideways based on the numbers and guidance given this week BECAUSE:

1) FIRMS will say nothing or say that the outlook looks better than the recent past. It would be a SELF-FULFILLING PROPHESY if companies with weak Q2 results give negative guidance for Q3. A literal death wish for any firm saying that they won’t improve their numbers even though the economy is beginning to level out and the stimulus is still gaining momentum.

2) The banks will report good numbers because they talk to Geithner EVERY DAY about how they are doing. He is protecting the $1 trillion we have given to banks and financial institutions and for his own sake, must know how the banks are faring. If they were in trouble, we would know about it already because nobody likes surprises.


3) Q2 earnings will be presented as improving month-to-month versus the less favorable Y-O-Y. You will be sold on how things are improving and to forget about t he Y-O-Y because it is not valid in this recession.


The market will meander until Q3 reports. In the mean time, get dividends while you wait for the market to move. Take advantage of this by getting into a strong position in some of the things that we CANNOT DO WITHOUT like:

OIL – BP (Yield = 7.43%), RDSB (Yield = 7.11%), etc.

UTILITIES - ATT (Yield = 7 %), VZ (Yield = 6.4%), VOD (Yield = 6.2%), NGG (Yield = 5.9%), CHL, etc.

FOOD - ADM (Yield = 2.1%), MOO (Total Return = 23.7%)

BANKS - NYB (Yield = 9.3%)

I hold positions in all of the mentioned stocks.

Good Luck.

Jul 13 06:27 AM

[Roger Knights:]

"after collapsing from 1929-1933, our economy actually expanded sharply from 1934-1937 ..."

Analogously, we have four more lean years in store.

Jul 13 07:23 AM

[lynda watson:]

After Cap and Trade is enacted we"ll all be eating chicken, as we will not be able to afford beef .

Jul 13 07:35 AM

[YoYoMama:]

Spammer. Copy/paste answers. Please report.


On Jul 13 06:27 AM Tom Colangelo wrote:

> The market will continue to move sideways based on the numbers and
> guidance given this week BECAUSE:
>
> 1) FIRMS will say nothing or say that the outlook looks better than
> the recent past. It would be a SELF-FULFILLING PROPHESY if companies
> with weak Q2 results give negative guidance for Q3. A literal death
> wish for any firm saying that they won’t improve their numbers even
> though the economy is beginning to level out and the stimulus is
> still gaining momentum.
>
> 2) The banks will report good numbers because they talk to Geithner
> EVERY DAY about how they are doing. He is protecting the $1 trillion
> we have given to banks and financial institutions and for his own
> sake, must know how the banks are faring. If they were in trouble,
> we would know about it already because nobody likes surprises. <br/>
>
>
> 3) Q2 earnings will be presented as improving month-to-month versus
> the less favorable Y-O-Y. You will be sold on how things are improving
> and to forget about t he Y-O-Y because it is not valid in this recession.
>
>
>
> The market will meander until Q3 reports. In the mean time, get dividends
> while you wait for the market to move. Take advantage of this by
> getting into a strong position in some of the things that we CANNOT
> DO WITHOUT like:
>
> OIL – BP (Yield = 7.43%), RDSB (Yield = 7.11%), etc.
>
> UTILITIES - ATT (Yield = 7 %), VZ (Yield = 6.4%), VOD (Yield = 6.2%),
> NGG (Yield = 5.9%), CHL, etc.
>
> FOOD - ADM (Yield = 2.1%), MOO (Total Return = 23.7%)
>
> BANKS - NYB (Yield = 9.3%)
>
> I hold positions in all of the mentioned stocks.
>
> Good Luck.
>

Jul 13 09:40 AM

[denko:]

Arnold

It is sometimes too easy to get lost in the fog of the national equilibrium equation - as bedeviled by the monetary impact of the reserve requirements.

The 1930's parallel the period of the massive advances in the auto industry - and at a time when oil was for all intents infinite and unlimited.

As example and of particular significance is the tractor sector of the US auto industry. In the late 1920's their were just under 700 000 functional tractors in the US, that figure more than doubled by the start of the WWII.

That increase in numbers alone more than doubled US agricultural output, but the vast enhancement of the tractor as a machine and as a farming implement caused output to further nearly quadruple farming output or yield - chasing horses, mules and farm labor forever from the US countryside.

That farming impact was not restricted, the trucking industry too incurred a revolution as well. Furthermore the US family car just started to become accepted as a functional way of life in millions of US households.

Yes, economic levers had/have an impact - but those levers where dwarfed by the auto revolution unfolding on the US at that time.

Regrettably we have no similar machine at todays foreseeable horizon, which is likely to feed/lubricate on a virtually unlimited supply of energy, and that will potentially quadruple the output of a vast sector of the current US economy within a decade as starting in 2009!

Thus the economy will not recover - by dint of what some economist, or banker or government agency does or refrains from doing, if the US is to replicate any recovery that happened in the 1930's.

Some pretty awesome science needs to come to earth. A prayer? Perhaps...but don't hold your breath.

Contrary hope pinned on economic policy and theory at this time is simply inane.

Your point - tries to imply this. It is wrong for doing so...

Jul 13 09:43 AM

[TeresaE:]

The difference between the 30s and today is simple.

We had jobs for the masses back then. Family and consumption supporting jobs.

Oh yeah,. the national debt thing too. As in we were the bank, not the beggar.

I see major differences in the two, thus I cannot intelligently predict a "recovery" as my company's customers are continuously being bankrupted daily. Oh, and no government bail outs for my customers, small businesses are apparently evil, at least that is what the banks and regulatory agencies are alluding to.

Finally, if "recovery" was so robust, why did property values and stocks NOT return to pre-recession levels until AFTER the second world war.

The "recovery" took nearly 20 years.

There won't be anything left to salvage if it take 20 years this time.

Jul 13 10:28 AM

[ThatGuyInTh...:]

This is nonsense.

1) In the 1930's we were a creditor nation, not a debtor.

2) Overseas wage arbitrage had not yet happened. Wages could increase and thus revive the consumer economy.

3) US banks did not hold derivatives with a value of 200 trillion in notional value and about 15 trillion in market value. The sheer volume of these instruments will amplify economic downturns for the foreseeable future.

4) As Denko pointed out, we had plenty of oil. That cheap oil is now gone and we have no equivalent substitute that can be brought on-line in a 10-year timeframe. We're starting the inevitable worldwide decline in production which will culminate in the hoarding of petroleum by producer nations causing *sudden* price spikes in international oil markets. These price increases are likely to happen before the financial crisis caused by the aforementioned factors is resolved.

Sorry. Wish you were right. You're not.

Jul 13 02:07 PM