Many people equate the great Depression in the 1930s to the present global economic turmoil.Many people too are pondering whether we are heading towards a similar kind of depression- 1929 vs 2008?
What really happend behind the 1929 Wall St. crash that kickstarted the Great Depression?And this is what I learned from the wisdom of investment adviser:-
1.According to Ben Bernake, the US Fed chairman, the main reason behind the 1929 Great Crash was due to the tight monetary policies adopted during that period. He said the high interest rate back then caused the US economy to fall into a recession that led to the market crash in October 1929.
For your information the great depression in the US started in August 1929 and ended only in March 1933. The stock market started to recover eight months before the US economy ended its depression.
2. As the US dollar was backed by gold, the acute selling of dollars for gold resulted in a run on the dollar. The Fed continued to increase the interest rates in an effort to preserve the US dollar. As a result, the high interest rates caused bankruptcies for many companies.
3. To add in all, the massive withdrawals of cash by pancky depositors brought about a total collapse of financial institutions. In that period, bank deposits were uninsured and the collapse of banks caused depositors to lose their savings. And due to the economic uncertainties, surviving banks were reluctant to give out new loans.
4. Another culprit was the margin financing which caused excessive speculation in the stock market. Investors needed only to put up 10% capital and borrow the rest from bank to invest in the stock market. The collpase of stock prices led to margin calls and further selldowns.
5.At the peak of the Great depression, the US uneployment rate hit 25%.
And this is what actually happened to the 2008 crash:-
1.The banking and credit-market crisis was mainly due to property boom and subprime bust. The collapse of the subprime loans sparked the credit crunch which in turn dragged some financial institutions into trouble.
2. As a result of the securitisation and the creation of innovative financial products like collateralised-debts obligations and credit-default swaps, the collpase of one financial institution has a domino effect, leading to the collapse of other financial institutions.
Are we heading for a similar depression?
1.It is believed that given the fast , concerted actions taken by central banks around the world, the global economy will not fall into a depression.
2. It is believed too that the reduction of interest rates and the increase in money supply will help cushion the impact of the credit crunch. Besides , deposits placed with most financial institutions are guaranteed by central banks.
3. Thus it is greatly believed that the economic turmoil will recover faster and the magnitude of the fall will be far less than the one in 1929. The rescue packages being implemented throughout the world will help stabilise the financial system.
So in a layman term, to be prudent at this point of time is the way out of this storm. And the good news is that Malaysians have a high propensity to save. It is only their current savings behaviour that is lacking proper planning.
And my advice to all my listerners far and near--LEARN TO LIVE IN MODERATION AND BE MORE PRUDENT TO WEATHER THIS CRISIS. Rest assure my MALAYSIAN LISTERNERS, we are not heading towards a recession- more probably, an inevitable economic slowdown.
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