The economy: near death, or cuts and scrapes?

Last night somebody told me that the stock market has lost trillions of dollars (he said how many trillion, but I don't remember) in a few days. Okay. My immediate response was, "What's that as a percentage?" I mean, yeah, trillions of dollars sounds like a lot, but the US economy is bigger than most people realize. It can afford to lose a few dollars here or there, from time to time.

As it turns out, the overall percentage of loss, since the last major peak (in 2007) is around 30%, depending on which index you look at. That sounds like a lot, and for a short-term drop it is a pretty good-sized chunk, but it's hardly the end of the world as we know it. There are peaks and bubbles (the fruits of periodic irrational exuberance), and then there are corrections back down to a more sane, gradual, and sustainable growth rate. 30% is a pretty large correction, but it's not out of line with what we've seen in the past.

So I went to a website that does stock charts. There are a number of sites out there that do basically the same thing, but in this instance I happened to select MSN Money, because it came up first in the search results. I went to the financial site, and I asked for charts of the Dow Jones Industrial Average, because that's a well-known index. It's not the only index we could look at, but it's a common choice, and, I believe, an instructive one.

I'm going to show two different charts here. The first represents the short-term view, on a linear scale.


Okay, yeah, that looks pretty bad. Actually, it looks worse than it should, because they've left off the bottom portion of the chart, starting the linear scale with eight thousand at the x axis. When you have to leave off more than half the numbers at the bottom of the scale in order to show the interesting part without making the chart too big, it usually means you should have used a logarithmic scale.

Now, let's step back and look at the larger picture. This second chart is on a logarithmic picture. (Otherwise the first three quarters of it would sort of resemble a flat line across the bottom.) Take a look:



What a difference! The black lines are original. I've taken the liberty of putting a red circle around the current economic crisis. On the one hand, yes, that's one of the biggest drops on the chart. On the other hand, it's clearly nothing very far out of the ordinary. If anything, that weird bulge around the (most recent) turn of the century is more unusual. The big dip at the left, of course, corresponds with the Great Depression.

I said I was going to show two charts, but here's an extra bonus image of the second chart, this time with a trend line drawn in, in green:


On the one hand, we're not seeing the steep growth of the eighties and nineties, but on the other hand this crisis has got to go some to look anything like the sharp drop of the early thirties.

That flat section across the seventies is called "stagflation", and in some ways that was worse than the current crisis, because it just went on and on and on, and then it went on and on and on some more, some twelve or thirteen years before things really started to pick up in the early eighties.

Of course, I don't know the future, and it's conceivable that things could keep going down until the current crisis turns into a second Great Depression. But there's no reason to assume that's what's going to happen. What we've seen so far is part of the normal up and down motion that happens all the time.

I don't want to be accused of being an unbridled optimist, so I'll say now that just because the economy hasn't completely collapsed doesn't mean our society isn't headed for a peck of trouble in other ways. All I'm saying is, some people are blowing the current economic crisis out of proportion. It's not really our gravest concern. There are, indeed, much more worrisome things to be upset about. (The condition of the public education system, just for instance, is outright terrifying. But that's a topic for another day.)