ANSWERS: 3
  • Frankly, I don't know. I really don't believe that anybody can tell you. I don't know who's telling the truth.
  • Based on the conventional wisdom, this is the worst downturn since the 1930s. The past recessions after World War II were engineered by the Federal Reserve to brake inflation. The Fed would adjust monetary policy to expand and contract the economy. This recession is a downturn in the classical boom-bust cycle mode where banks, businesses and consumers over-leveraged themselves with debt to make risky investments that fueled an artificial real estate boom. When the boom went bust, the investments were found to be worthless, creating severe capital losses. Right now, liquidation of debt and bad investments is causing a deflation, or contraction of the money supply. Interest rates are near zero but it is not spurring lending and investments. As more and more businesses go under,there will be massive unemployment. At least that's what the financial and political classes fear.
  • Since no one can see into the future, both economic and weather forecasters look at the forces that have created and shaped storms in the past — and then look at current data to help guide their predictions. When you see a sharp drop in the barometer, it’s a pretty good bet there’s a storm coming. That’s where we are now — the economic barometer has just started dropping. There are lots of economic data out there, but the broadest measure of the economy’s strength is the gross domestic product [GDP] - the total value of the stuff we all make and services we sell each other. So a good yardstick of the damage done by a recession is the drop in GDP from start to finish. By that measure, it’s too soon to say we're even in a recession: the last GDP data, for the last quarter of 2007, showed very weak growth of 0.6 percent — but growth nonetheless. Given the latest news on job losses in January and February, it’s likely we’ll see a negative number for the quarter that wraps up at the end of this month. Depending on how long it takes for banks and other lenders to get through the ongoing turmoil in the credit markets, we may have more down quarters this year and possibly even next. That could make this the worst downturn in recent memory. The last recession — in 2001 — was pretty short and shallow by historical standards. But things would have to get a whole lot worse to put the current downturn on the list of all-time worst. The worst recession since the Great Depression ran from November 1973 to March 1975 and wiped out more than 5% of GDP. For all of 1974, inflation averaged 12.3 percent. Inflation also destroyed savings and investment: From the start of 1973 to September 1974, the stock market, measured by the S&P 500 index, fell by 46%. But as bad as the 1970s were, that downturn didn’t come close to the economic contraction we call the Great Depression. The 1980-82 recession (technically two quick, back-to-back downturns) sent the unemployment rate to 10.8 percent — more than double current levels. In the second quarter of 1980 alone, GDP fell 7.8 percent. It’s possible we’re at the beginning of what may turn out to be a nasty recession, and we may see further drops in the stock market. There are plenty of ominous conditions, especially the recent rise in the inflation rate and the drop in the value of the dollar. Chairman Bernanke said recently he expects some banks will fail. On the other hand, the Fed’s aggressive interest rate cuts take time to work through the system. Many forecasters maintain that the downturn will be relatively mild and over by the second half of this year. Will there be a severe downturn? The point is that no one knows. It’s too early to know how bad it will be. It would have to get a whole lot worse to measure up to the biggest economic storms we’ve been through.

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