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No Depression in Sight
| Article
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15836 |
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CURRENT ISSUES
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| Issue
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1 / 1989 |
4,013 Words |
| Author
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William C. Freund
William C. Freund is professor of economics and director of
the Center for the Study of Equity Markets at Pace University. |
There were a lot of "I told you so's" after the stock market crash on October 19, 1987. One of the gloaters was Ravi Batra, the author of the best-selling book The Great Depression of 1990. Another pessimistic pundit was Paul Erdman, who had published a novel under the title The Panic of '89. Both had predicted that a mood of apprehension would grip the financial markets and that an economic crash would be an inevitable consequence.
In a subsequent article, printed a year after the crash, Erdman conceded that despite the stock market crash, no panic had developed in the broad economy. Indeed, 1988 turned out to be a year of strong growth and widespread prosperity. The crash had left few traces, and the financial markets were more worried about excessive expansion and inflation than an imminent collapse in spending, incomes, or employment. So Erdman did the only reasonable thing under the circumstances: He postponed his prediction of panic from 1989 to 1990.
Among the broad public, there is a nagging, undefined fear that another Great Depression must ultimately occur. Only its timing is in dispute. In the popular view, the nation has been on a spending-and-borrowing binge for which a day of reckoning must surely come. The trauma of a cataclysmic collapse will arrive when the public least expects it, probably in the 1990s. The piper must be paid.
But those who have cried wolf have done so many times before. Is it really possible that there will be no day of reckoning, that expansion can continue without our country paying the penalty for its profligate ways? Indeed, it is possible. And this article will argue that the United States and the rest of the industrial world are unlikely to suffer the agonies of another Great Depression ever again. We will have recessions from time to time, relatively mild short-term adjustments to economic dislocations, but no major, general worldwide economic collapse.
The Market Crash
There is little doubt now that the stock market can crash at any time, without notice, much as it did in 1987. Stock prices can become overvalued and can become vulnerable to all kinds of fears, including fears of inflation and higher interests rates. But this is not 1929, and sliding stock prices do not spell a collapsing economy.
Economic historians now know that the Great Depression of the 1930s was not
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