Many of us have lived through financial downturns that economists call recessions. But there’s a more serious kind of downturn that the experts call a depression.
So, what’s the difference between the two?
Economists often disagree on exact definitions. But there is an old joke they like to tell: A recession is when your neighbor loses his job; a depression is when you lose your job.1
Most economists will tell you that a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.2 A depression is generally defined as a more severe recession, both in terms of economic contraction and the length of the slump.
But all economists agree that the catastrophic downturn of 1929 – 1939 is accurately named the Great Depression. Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, during the Great Recession of 2008 – 2009, worldwide GDP fell less than 1%.3
The Great Depression’s effect on regular Americans was devastating. Crop prices fell by 60%, causing many farmers to default on their loans and lose their land. Unemployment in the U.S. reached 23%, leaving many people with no way to feed their families.
Living day-after-day and year-after-year with scarcity taught our grandparents and great grandparents enduring lessons about how to live with less.
Jeff Somers, a financial writer for Lifehacker, argues that we have much to learn from their resilience. He writes, “Those who survived (the Great Depression) had to go beyond simply saving more and spending less.”4
Rather than giving in to despair, they developed the skills and were willing to take the actions necessary to ensure their financial survival. Many of which we could benefit from today.
Somers lists a few:
Watching every penny—saving a little whenever you can helps allow you to spend on the things you really need. Conversely, small expenditures quickly add up.
Fixing things instead of discarding them—much of what we buy is designed to be thrown away, but a lot of things can be repaired with a little work (and perhaps help from a few YouTube videos).
Learning to cook—preparing your own meals can drastically reduce the cost of eating.
Being willing to move—sometimes the only way to get a better job or lower your cost of living is to relocate.
As illustrated in the joke above, the economic downturn that concerns us most (and that we have most control over) is the one that happens to us. But as our grandparents and great grandparents demonstrated, a financial setback, even a severe one, is not the end of everything. You can get through it. And when you come out the other side, you will have a greater appreciation for financial stability—and all the things money can’t buy.
Your financial plan should include the steps you can take when faced with a financial setback. If you haven’t yet, talk with your trusted financial advisor about making a Plan B. Knowing ahead of time what you can do when faced with this kind of situation will do a lot to ease your anxiety.
If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.
Stonecreek Wealth Advisors, Inc.
11576 S State Street, Bldg. 1002
Draper, UT 84020
Disclosure: This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.