Comparison of the Dow Jones Industrial Average During the Depression Versus Today - Part II

Today, as the Dow falls over 300 points and is down over 1,000 points in the past ten days, I thought it would be useful to revisit my Dow Jones Industrial's crash analysis I did in 2008. The analysis compared how the Dow was faring during the global financial crisis versus how it did in the 1930s in the throes of the Great Depression.

Below is the a chart which extends the analysis to 2011 and the historical graph through 1950. The years 1930 and 2008 are time 0 on the x axis of the graph. I then looked at the 21 years before 1930 and 2008 to see how the markets performed before the 1930 and 2008 crashes. I also charted the 20 years after the crash in 1930, represented by the positive numbers on the X axis. The left Y axis shows the Dow's price during the early part of the 20th century and the right Y axis shows the Dow's price in more modern times.

As the chart shows, the current Dow did not drop nearly as far as the market did during the Great Depression and it recovered much faster. I attribute this to the intervention of the Federal Reserve and the large $700 billion stimulus package passed in 2009. It wasn't until 1933 that the Depression market bottomed out and then began to rebound due to government stimulus and the New Deal. Most economists believe that global spending spurred by World War II was ultimately responsible for ending the Depression for good.

It's the rebound that interests me the most now. In 1937 the Roosevelt administration cut spending and increased taxation and the result can clearly be seen on the chart. The economic downturn lasted 13 months, industrial production dropped 30%, and unemployment jumped from 13% to 19% by 2008.

We now face a similar situation. As I wrote before the drop in the stock market, it seems clear that cuts in government spending across the globe will lead to slower economic growth and even a double dip recession. The Depression only ended when the government spent massive amounts of money and took on huge debt (bigger than even today's numbers) to mobilize for war. So the question is, how are we going to grow our way out of this problem today? Can we cut our way to prosperity as the Tea Party seems to believe. Or do we need a massive project to mobilize our resources, renew optimism, and get the economy humming again?

And how far will that blue line (today's Dow) go down if we do indeed see another double dip recession. The Dow in the 1930s rebouned to almost 200 in 1936 and then dropped back to near 125. The equivalent for us would be the Dow dropping to near 10,000.