Hi Everyone,
Doing my usual morning procrastination web surf, I found this analysis of the stock market by Doug Short. The comparisons in the graphic are interesting. As you can see (click on it to enlarge it), the current stock market collapse was steep and deep. The biggest fall was in Sept-Oct of 2008. The current recovery started around February/March. Guess what happened on March 17? The stimulus package. I'm not suggesting that the stimulus money immediately went out into the economy with big effect. What I am suggesting is that the prospect of that money coming out, encouraged optimism among investors and 1) stopped the precipitous drop in stock prices and 2) sparked what looks like the start of a recovery - or at least the expectation of one by investors.
I'm bringing this up because the Republican spokes people are trying to go after Obama because Rahm Emanuel (Obama's chief of staff) said "We rescued the economy." Certainly unemployment is higher than predicted and still high (all of 5 months after the stimulus package passed). But the trend in the stocks looks promising. If the economy as a whole starts to grow, then we'll know they were right.
Now, consider this graphic of the Great Depression. Notice that the recovery did not begin until 1933 (the year FDR took office) after a 4 year free fall during the Hoover administration. Conservative ideologues like to say that the market fixes everything and that government can't do anything but make it worse. But the graphic of GDP growth in the 30s and the graphic comparing the different stock market down turns above, certainly seem to show at least a coincidence between when there is massive, emergency government intervention and when recovery begins. It also makes me shudder at what we'd be facing right now if McCain had won the election. He'd be vetoing stimulus packages and doing exactly what Hoover did - faith based charity drives, bailing out individual banks as they fail on an ad hoc basis, etc. That didn't work during the Hoover administration and I can't think of any reason it would have worked now.
4 comments:
I have heard Republicans lament that only 10% of the stimulus money has even been spent yet. What a waste, they say. But every time they say that, investors must cheer a little. You mean we get more? I think the economy is turning around the corner now, and the influx of cash that is anticipated from the stimulus in 2010 is a major reason why. We start the engine going, and it will be a sustained push on the gas for 2-3 years. The psychology of recovery requires the anticipation of more good things to come. Health care reform is another. We know it will cost more in the short term, and that will mean more spending in the short term too. Plus businesses can see that their health care costs will stop skyrocketing, making it safer to invest long-term.
Personal spending has plummeted and that's a big part of the down turn... Americans aren't buying stuff. This stimulus is putting money into the economy at a time when Americans are saving more and spending less. I hope the plan is that this will tide us over until savings rates build up some genuine private capital reserves in the banks again.
Actually, Americans are buying stuff. New production is being spurred by inventories that have (finally) emptied. I think the figures show that there was a purchasing pause followed by a slow but noticeable uptick as confidence returns.
The stock market is interesting to watch. The Dow has recovered substantially from its lows, putting capital back onto the books of companies and making it possible for them to borrow again. Those who invested in March have seen a nearly 40% return on the Dow average. These all help.
Of course the unemployment rate will lag the recovery of the stock market. My dad pointed out that the reason the stocks are doing well is that corporate earnings are up. And that is largely due to massive lay offs reducing production costs. So the stock market will recover first and long before employment recovers.
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