The Precipitous Downward Spiral

I hate being the bearer of bad news, I really do.  But the tough reality is, that there is virtually no good news.  This “recession” is being compared by some to the steep recession of the early 1980s.   Time has a way of fogging our memories and coming up with the wrong comparisons.  George Santayana penned an often used quotation in his book, The Life of Reason (1905), that,  “Those who cannot remember the past are condemned to repeat it.”

The recession of 1981-82 is about as similar to what we are going through as the personalities and looks of a dog and a cat.  During the early 80s interest rates soared over 20% as the Federal Reserve made one bonehead move after another to combat inflation.  That recession ranked as the worst post-World War II recession – until now.

That recession lasted 16 months as unemployment peaked at 9.7% with 10.7 million Americans unemployed in 1982.  Through February of this year, while unemployment has risen to 8.1%, the number of unemployed stands at 12.5 million.  There is some dispute as to when the current recession actually started, but the most common designation is December, 2007.  Assuming it started then, then we are entering the 15th month of the downturn with no bottom in sight.  All financial and economic indicators point to many more months of a tumultuous spiral downward.

During the 1980s recession the DOW actually rose around 20%.  In 1982, at the height of the recession, the CPI (Consumer Price Index) or inflation index, averaged a positive 3.8%.  Since the current recession started, the DOW has plummeted over 50%.  In 2008 alone over $50 trillion in global personal wealth was lost.  In 2007, prior to the start of the recession the CPI averaged 4.1% for the year.  In 2008, it contracted drastically to just 0.1%.  In 2009, it is forecasted that the global economy will shrink for the first time since World War II.

During the 1981-82 recession, GDP (Gross Domestic Product) of the nation increased 8.6% from $3.05 trillion to $3.314 trillion.  During the current recession, GDP peaked at a little over $14.4 trillion and then dropped to $14.2 trillion in the last quarter of 2008.  The optimistic forecast for 2009 is that the GDP will inch back to $14.4 trillion by October of this year.  However, this was based on some other optimistic forecasts that have already been blown out of the water.  GDP growth has already shrunk 6.4% and unemployment is expected to continue to rise to perhaps double digits.  The Federal Reserve has lowered bank-to-bank lending rates to 0% with no where else to go.

All this and with the investor and American pysche dropping off a cliff to all-time lows will continue to drive the markets downward.  As more people bail out, despite the best efforts of financial advisors and Washington to convince them not to, the markets will be driven down further.  As mutual fund managers scramble to liquidate stocks and bonds in their portfolios to pay off cashing out investors, the sell pressure will accelerate.  With no good news in sight and no bottom to the market predicted by Wall Street, the financial rout will continue.


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