Wall Street Journal: Chances of a depression at 20%

The stock market has been in a slow motion crash since before election day, falling from a high of 14,000 last year to its current lowly status of 6700.

The Wall Street Journal's Robert Barro has assembled an impressive array of statistics not just from the US but from many other nations as well, and has some disturbing insights:

The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

Our research classifies just two such U.S. events since 1870: the Great Depression from 1929 to 1933, with a macroeconomic decline by 25%, and the post-World War I years from 1917 to 1921, with a fall by 16%. We also assembled long-term data on GDP, consumption and stock-market returns for 33 other countries, sometimes going back as far as 1870. Our conjecture was that depressions would be closely connected to stock-market crashes (at least in the sense that a crash would signal a substantially increased chance of a depression).

This idea seems to conflict with the oft-repeated 1966 quip from Paul Samuelson that "The stock market has predicted nine of the last five recessions." The line is clever, but it unfairly denigrates the predictive power of stock markets. In fact, knowing that a stock-market crash has occurred sharply raises the odds of depression. And, in reverse, knowing that there is no stock-market crash makes a depression less likely.

In other words, Obama better start figuring out a way to reinvigorate the markets or he will be taking on more economic trouble than anyone can handle.

But, of course, his agenda is not set up to create wealth but to redistribute it. He is taking monies from the productive sectors of the economy and giving it to the non-productive. Wall Street is reacting accordingly and our business-ignorant president doesn't see the danger signs.

It was almost exactly a month ago that President Obama stood before the press and refused to discuss details of his bank bailout plan because he didn't want to "steal the thunder" from his Treasuring Secretary who was supposedly ready to announce the plan the next day.

It turns out Geithner had no plan - and one month later still hasn't worked out the details. If there is one thing that will push the economy over the cliff it would be massive numbers of bank failures due to insolvency brought about by their holding toxic assets. Instead of concentrating on this potentially catastrophic problem, the Obama administration chose to pass a stimulus bill that every one agrees won't solve the basic problems that are causing the economy to slide toward hell.

It is this kind of uncertainty that is driving the market ever lower. And the president seems oblivious to the consequences.



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