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Jan 21, 2009

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phil_style

What interests me about much of this crisis is that it appears that the actual productive capacity of our nations has not decreased. The raw materials, infastructure and extractive/refining technology is still all in place. It's not as though all the machines have gne rusty. . . . Perhaps I'm too naieve, but we haven't actually "lost" any real things. . . have we?

Michael W. Kruse

Good point.

The 1980s recession was multifaceted. This one has been concentrated mostly in one sector: financial markets. Unfortunately, financial markets are like the oil in our car. Oil doesn't do a lot but it keeps the parts lubricated so they can do their jobs. Once the financial markets get healthy again I think things will improve but I expect that is months away.

That is my best stab at analogy but I think you are right. All the other stuff is in pretty good shape ... at least for now.

darren

it is amazing to me how high interest rates were back then. i look at my 6% 30 year mortgage and am shocked by the amount paid in interest! why were rates so high back then?

Michael W. Kruse

Some economists have have built their entire career on answering that one. :-)

Stagflation is the short answer. Historically, as inflation goes up unemployment is supposed to go down and vica versa. In the 1970s, both were rising together.

Multiple OPEC oil embargos sent oil prices sharply higher at points throughout the 1970s. That made the cost of everything higher while reducing demand and thus employment. Meanwhile, Nixon and Carter piled on wage and price controls, as well as heavy regulation. That created distorted markets. Furthermore, the Fed kept pumping money into the system in an attempt to stimulate the economy but generally only stimulated inflation.

The opening to the wikipedia article gives a good summary. Keep in mind that while your mortgage rate was at 15-20%, your salary was also increasing at a rate of 10% or more in some years. Everything was out of whack.

vanskaamper

I miss Reagan.

RonMck

Unemployment and infation were worse in 1982, but the banking system was not on the verge of collapse. The auto industry was not as big a mess in 1982.

You have lost some things. Investments made in car manufacturing and other related activities are now worthless. Many of your assets are now owned by the Gulf States or Asian governments. Who knows what the Chinese will end up owning when they cash in their treasury bills? So you have lost some stuff or you still have it, but it is owned by someone else or is worthless.

Michael W. Kruse

In some ways it is not radically different. The government bailed out Chrysler in 1979. Just like China today, many then were anxious about how much Arab states and Japan owned in the U.S. But each recession has its own signature.

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