THE FINANCIAL WARNING YOU WERE NEVER SUPPOSED TO HEAR 15
1929 to 1940. It consisted of two technical recessions from
1929–1932 and again from 1937–1938.
The periods 1933–1936 and 1939–1940 were technically
economic expansions. Unemployment fell and stock prices
rose. But the depression continued because the U.S. did not
return to its potential growth rate until 1941. Stock and real
estate prices did not fully recover their 1929 highs until 1954,
a quarter century after the depression started.
The point is that GDP growth; rising stock prices and falling
unemployment can all occur during depressions, as they do to-
day. What makes it a depression is ongoing below trend growth
that never gets back to its potential. That is exactly what the
U.S. economy is experiencing. The New Depression is here.
Investors are also confused about depression dynamics be-
cause they are continually told the U.S. is in a “recovery.” Year
after year forecasters at the Federal Reserve, the International
Monetary Fund and on Wall Street crank out forecasts of robust
growth. And year after year they are disappointed. The recov-
ery never seems to get traction. First there are some signs of
growth, then the economy quickly slips back into low-growth
or no-growth mode.
The reason is simple. Typically, a recovery is driven by the
Federal Reserve expanding credit and rising wages. When in-
flation gets too high or labor markets get too tight, the Fed
raises rates. That results in tightening credit and increasing
unemployment.
This normal expansion-contraction dynamic has happened
repeatedly since World War II. It’s usually engineered by the
Federal Reserve in order to avoid inflation during expansions
and alleviate unemployment during contractions.
The result is a predictable wave of expansion and contrac-
tion driven by monetary conditions. Investors and the Fed have
been expecting another strong expansion since 2009, but it’s
barely materialized.