Ways in which U.S economic crisis is similar to the Great Depression
Although some people deny that the existing financial situation in America does not resemble economic depression, evidence has it that Americas economic climate bears disturbing similarities with those of great economic depression as explained below.
The great decline in stock market which reduced spending and wealth among people resembles the Great Economic Depression. Evidence has it that the Dow-gold ratio reduced to 42 percent towards the end of 2007 which was almost similar to stock market tumbles in 1929 which fell to almost 47 percent yet larger population depended on stock fund for their retirement saving. This was a big let down to the economy bearing in mind that in 2006, around two thirds out of entire 401(k) plans had been directed in stock market. The available data shows that financial assets are grossly overvalued and real assets undervalued. The implication is that there is greater need to correct the situation by deflation of the currency which will still see the stock market collapse but revive after some time. (Waggoner, 1)
Crippling of the banks due to bad loans in 1929 that saw many banking systems stop lending money so as to get rid of further losses and avoid collapsing is the same situation in Americas economy where banking organizations have declined to lend money in order to avoid bad losses. Similarly, the credit markets are almost heading to collapse. It is indicated that the sum amount of credit in financial organizations went to 250 percent of gross domestic product while the debt level exceed 350 percent in 2008 (Waggoner, 1).
The trends in real estate even make the current economic crisis in the U.S. look greater than the 1929 economic depression. There has been overvaluation in both real estate prices as well as its instruments that is worse than overvaluation of estates during 1920s (Petrov, 1).
The global monetary system has been that the dollar is convertible to gold while the rest of other currencies were convertible to either dollar or pound. However, the current economic situation has been totally different because the dollar which was tied to gold is almost convertible to nothing thus the dollar has failed to meet the monetary conditions imposed on it, leading to significant imbalances in todays world monetary system (Petrov, 2).
In his effort to revive the economy, the former American president George W. Bush signed a tax rebate of 150 billion. To International Monetary Fund, this strategy was not enough to bring change in the shattered economy and there was need for more additional support for both real estate and financial market. According to International Monetary Fund, the United State are sliding in mild recession (Stewart, 2).
It is still acceptable to say that the current economic crisis resembles the Great Depression of 1929 because the high rates of unemployment that were witnessed during the Depression have also affected the United States economy where many people have remained jobless and retrenchment rates have been at its peak. The current rate of unemployment stands at 6.1 percent which is even below the 1992 rate which was 7.8 percent. Similarly, those still employed are under fear of losing their jobs anytime if efforts towards recovery do not succeed (Waggoner, 3).
How U.S economic crisis is different from the Great Depression
What needs to be reflected by people first is that the 1929 occurrences were termed as a depression while the current situation in America is a recession. Scholars have said that the current economic crisis in the United States is unlikely to culminate into the 1929 Great Economic Depression. Some of the notable differences between the two include the following
During the Economic Depression the dollar was devalued relative to gold however, currently there is absence of gold standard that serves as a restriction to the amount of money supply that can be expanded since the gold standard was abolished in 1971 thereby making the restriction of the dollar being tied to gold standards a nightmare in todays world (Florida, 2).
The period dating to economic depression of American economy was not ridden by bad debts as it is currently in America today. Currently, the U.S economy has introduced credit cards that never existed in 1929. Similarly, national debt and deficits in money available for spending was significantly lower than it is today where Americas debt is largely owned by foreigners who may easily devalue the dollar through selling dollar reserves and treasury bonds - a decision that may lead to an international war.
Although the economic crisis has caused pain in American economy, for instance, causing collapse in financial market, overvaluation of real estate, fall in energy prices, collapse of industrial centers and existence of recession in many sectors of the economy, there are hopes that some cities will recover much better than before the occurrence of financial crisis since there are almost fifteen areas in the economy that are still expanding, such as oil and natural resources (Florida, 4).
Lessons for the current U.S macroeconomic policy
According to policy makers, dealing with an international financial crunch is not an easy task, it requires stronger economies like those of the United States, as it is a safer place for global savings that may enable raising billions of dollars to stimulate economic recovery. Although the effects of economic crisis may originate from limitations in global capital market other than domestic policies, the solutions to the problem must be homegrown.
There is a need to come up with expansionary fiscal policies as well as monetary policies that do not affect solvency and may help the economy with the level of output collapse. Countries that adopted flexible monetary as well as fiscal policies were able to register an output loss less than 5 percent while those that did not adopt such policies suffered an output contraction of more than 10 percent. America, in particular, learns the need for adopting effective and flexible monetary and fiscal policies so as to correct the current economic crisis in the country (Cavallo, 2).
High level of preparedness is yet another vital lesson that America learnt from the economic crisis. It is the responsibility of policy makers to formulate policies that are viable in responding to shock situations. For instance, putting in place countercyclical policies during financial crisis may help the country boost its expenditure in more sustainable way. There is also need to use international reserve during a global credit crunch, for instance supporting export credit lines that are a very effective way of using available resources rather than exchange rate market interventions. The clear lesson basing on research shows that countries which conducted countercyclical policies managed to withstand economic crisis much better in comparison to those that did not use these policies (Cavallo, 2)
Forming stronger multilateral trade agreement is yet another lesson that macroeconomic policy makers in America have learnt from the current economic crunch because they help economy to boost its foreign currency reserves hence providing the country with financing. It is vital to note that countries that seek external financial assistance as soon as possible have indicated that it is a lesser costly option for financial crisis (Cavallo, 3).