Tuesday, September 23, 2008

A bit of perspective

There's something of a financial crisis playing out in the US at the moment. Forecasts of doom and gloom are pretty common right, with phrases such that this is the "worst since the Great Depression" floating around.

At the moment, we're hearing about the horrific crashes on Wall Street, with record breaking losses.

Taken completely out of context.

The absolute value of losses are indeed record levels. This is because the Dow Jones is worth one heck of a lot more than it used to be. At the moment, the Dow Jones Industrial Average is around 11,000, which is around what it was back in 2000. In 1990, it was less than 3,000.

The market has been sliding for the past year. As of the moment I'm writing this, the Dow Jones Industrial Average is down just under 17% for the year to date, and somewhere around 21-22% for the past year. Obviously, this is not a good thing.

On the other hand, on October 19th, 1987, the Dow Jones lost approximately 22.7%. On one day. It took 2 years to recover. Do you think that might be more recent than the Great Depression?

Keep in mind that percentage changes are a lot more meaningful than absolute value changes.


Anonymous said...

Do you bother to do any actual research before you post, or do you just assume you are an expert on anything you choose to post about? Seriously, it is really amazing how conceited and arrogant you generally sound on this blog, no matter how ill-informed your comments might be. Are you like this in real life? Do you go around making pronouncements as though you are better and smarter than everyone else?

Changes in the value of the Dow are not the basis for the concern about the current financial crisis being so bad. The worries about the crisis being potentially the worst since the Depression concern the integrity of the banking system and the availability of credit. The Dow reflects the behavior of investors in the buying and selling of stock in companies that are part of the Dow, and that behavior is informed by the broader economic situation. The stock markets have lost a good bit of value recently, but there hasn't been a crash because investors haven't yet lost complete hope in the possibility of stabilization and avoidance of the collapse of the credit market and parts of the banking (i.e. there hasn't been a panic). You can't really draw any parallels between what is going on right now and the 1987 crash as a consequence. That crash seems largely to have been a matter of factors internal to the stock markets, with few if any factors coming from weaknesses in the fundamentals of the economy as a whole. The current crisis is arising from problems in the economy itself, and that is far more dangerous than the stock market taking a sudden and massive plunge apropos of seemingly nothing (there is still a lot of debate as to what caused the 1987 plunge, because there was little that obviously drove it).

Anonymous said...

Things bad enough for you to understand why people are worried yet? Or are you still convinced you understand economics so much better than everyone else (despite obviously not understanding economics at all)? Pompous idiot.