Why The Economy will Bounce Back Quickly

"We're having another great depression!"  "The stock market is going to collapse!"  "The entire country will fall into poverty!"  

These are just a few of the things that we have heard in the past few months coming from everyone from the homeless man on the side of the road to expert economists.  Sure it's a scary thing to hear especially for those of you who are close to retirement, or have a large sum of money tucked away into the stock market.  However, none of these things are true.  The economy won't fall into another great depression, the stock market will not collapse, and the entire country is far from falling below the poverty line.

The DOW is in the $6700 range right now.  That's lower then it has been since 1997.  This means that if you put money into a mutual fund that covered the entire DOW in 1997 you would actually have not made any money.  In fact you would have less value today when factoring inflation.  

Job cuts have been extraordinary.  It seems like every day there is another handful of corporations announcing layoffs in the thousands.  The unemployment rate in some areas of the country are in double digits.  There are banks requiring major bailouts from Washington.  These surely are frightning.  However, this is not the end of the world.

If any of you have taken Economics 101, you would have learned about something called the business cycle.  The business cycle explains that the economy consistantly moves up and down.  There are times when it is very productive.  Gross Domestic Product is high, unemployment is low, and the stock market is soaring.  On the contrary, there are times of recession when the stock market is extremely bearish, there is a decrease in new home sales, and it seems like everyone is being layed off.  This is a recession that we are in currently.  It's just larger then any recession we have seen in a long time.  It was created by the unresponsibility of lenders, and borrowers as well as the lack of regulation from our government.  This recession isn't all that different then any other recession when looking at the large picture.  It's just magnified a bit more.  Just like in any other recession, the economy always recovers according to history.

Let's look at what would happen if the government were not to bail out the banks, and the federal reserve could not adjust the interest rates to their liking.  Please note that during the great depression, the fed had no ability to control the interest rate.

The first thing that would happen would be that there would be foreclosures similar to what we are seeing now.  However banks would not be able to cover their losses without help from Washington.  A large amount of financial institutions would fail.  Anyone with less than $250,000 in their bank accounts would get their money returned to them because of the FDIC.  Anyone with over $250,000 in a bank account would lose the money they had over that amount.  With the loss of money by the rich, the amount invested into the stock market would fall considerably causing the market to drop even more.  Unemployment would increase rapidly because large companies would see their revenues decrease.  The economy would be in worse shape then it is now, but something would evenutually happen.  There would be a recovery. 

Without government intervention, and not the ability for the fed to decrease interest rates, the recovery time would take several years, if not a whole decade.  However there would be a recovery.  Entrepreneurs would start up their own businesses.  Many would fail because the interest rates on loans would be extremely high (since there would be no federal reserve intervention).  However many would be successful, and these successful companies would need to hire workers.  This would cause the unemployment rate to slowly decrease, and the stocks of these companies would gain value as more and more people would be able to earn an income to spend.  With the increase in income, and spending, the stock market would become bullish, banks would be more willing to lend, and people would begin buying homes again.  The interest rate would drop as banks become more confident in borrowers and the economy.  Everything would slowly recover.

With all of this said, the recovery would not come without a whole bunch of pain and agony.  This is where the bailout plan and significant decrease in the fed rate comes into hand.  The increase in government spending, bailout of banks, and lowering of the interest rate will quickly stimulate the economy.  Once the recovery begins it should happen quickly because of the enormous amount of money being added to the market.  Those who buy stocks when the market is low are the ones who make the most gains.  The bottom can not be too far off and when it is hit, I expect a quick recovery.  

You can find a lot of information pertaining to the economy at Talkgold.com's Investing Forum

Let's hear your comments and opinions.