Recession, Depression, and Other Fun Stuff

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Recession, Depression, and Other Fun Stuff
GBL 250 Spring MMIX
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RECESSION versus DEPRESSION

• Recession when a nations Gross National
  Product (GNP) declines for two or more quarters
• Recession a significant decline in economic
  activity spread across the economy for a period
  of more than a few months
• Recession may be associated with either inflation
  (rapidly rising prices) or deflation (rapidly
  falling prices)
• Depression a term for a prolonged recession
• Recession when the economy affects you
• Depression when the economy affects me

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Depression on the way?

• The bursting in 2007 of the Housing Bubble is
  causing a bear market
• Severe credit squeeze as lending requirements
  become stricter
• Value of the American dollar is declining around
  the world
• Federal Reserve has been cutting prime lending
  rates, trying to jump-start the American
  economy
• Price of energy and basic foodstuffs is going up,
  up, up
• Manufacturing is going down
• Banks are not lending money
• Consumers are not spending any more than they
  have to

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Central Heat, Weimar Style
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Working toward a Final Solution
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Will Work For Food
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The GREAT Depression
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INFLATION

• Inflation a rise in the level of prices of
  goods and services in a given economy over a
  period of time.
• Usually measured as the percentage rate of change
  of a price index.
• Economists overwhelmingly agree that high rates
  of inflation are caused by rapid growth of the
  money supply, although changes in demand for
  money also provoke inflation.
• Lesser factors causing moderate and/or short-term
  inflation changes in real demand for goods and
  services or fluctuations in available supplies
  (i.e. changes in scarcity)

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Consumer Price Index 01/2008
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Consumer Price Index

• The Consumer Price Indexes (CPI) program produces
  monthly data on changes in the prices paid by
  urban consumers for a representative basket of
  goods and services.

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Uses of the Consumer Price Index

• As an economic indicator. As the most widely used
  measure of inflation, the CPI is an indicator of
  the effectiveness of government policy. In
  addition, business executives, labor leaders and
  other private citizens use the index as a guide
  in making economic decisions.
• As a deflator of other economic series. The CPI
  and its components are used to adjust other
  economic series for price change and to translate
  these series into inflation-free dollars.
• As a means for adjusting income payments. Over 2
  million workers are covered by collective
  bargaining agreements which tie wages to the CPI.
  The index affects the income of almost 80 million
  people as a result of statutory action 47.8
  million Social Security beneficiaries, about 4.1
  million military and Federal Civil Service
  retirees and survivors, and about 22.4 million
  food stamp recipients.

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US Historical Inflation Rate
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INFLATION in 1971

• 1971 US inflation rises to 4 annually
• August 1971 USA weans itself from gold
  standard, virtually devaluing the dollar
• August 1971 President Richard Milhous Nixon
  institutes temporary wage and price controls
• 1973 Yom Kippur War OPEC begins hiking oil
  prices on countries which supported Israel
• 1974-1975 Soviet grain crop fails, causing food
  prices to skyrocket
• Americans keep spending away

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INFLATION in 1979

• 1979 US inflation rises to 14 annually
• 1979 President Jimmy Carter appoints Paul
  Volcker as president of the Federal Reserve
  System. Interest rates are about 11.
• Volcker begins jacking up interest rates in an
  attempt to keep the US economy from
  overheating. By 1980, interest rates reach 20.
• Inflation settles back to about 4 but recession
  sweeps the United States. Farmers and other
  small business people are hit especially hard.

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Depression on the way?

• The bursting in 2007 of the Housing Bubble is
  causing a bear market
• Severe credit squeeze as lending requirements
  become stricter
• Value of the American dollar is declining around
  the world
• Federal Reserve has been cutting prime lending
  rates, trying to jump-start the American
  economy
• Price of energy and basic foodstuffs is going up,
  up, up
• Manufacturing is going down
• Banks are not lending money
• Consumers are not spending any more than they
  have to

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Diocletians Roman Empire
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Diocletians Edict on Prices, 301 AD
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Consumer Price Index, 301 AD

• Attempted to combat inflation by specifying
  maximum wages and prices Penalty for violations
  DEATH
• Roman minimum daily wage 25 denarii per day
• US minimum daily wage 58.00 per day (as of 24
  July 2009)
• Salaries mule driver, sewer cleaner - 7.25/hr
  carpenter, baker 14.50/hr wall painter
  21.75/hr
• Foodal 1 lb. oats 4.27 1 lb. beef 17.45
  1 lb. chicken 137.72 1 pt. "Heinz ketchup"
  34.90 1 pt. "Food Club ketchup" 27.48 1 pt.
  Gallo wine 55.09 1 pt. Mad Dog 17.45
• Clothes good hooded cloak 137.72 ( material)
  pants 41.58 working boots 275.41

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Good Times!
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Brought to you by
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The Housing Bubble Expands

• High consumer confidence in post 9/11 economy
• Consistently low unemployment rates
• Skyrocketing home values
• International financiers have lots of money to
  lend, due toward
• Banks compete for borrowers and interest rates on
  mortgages drops
• Mania for refinancing and/or taking out home
  equity loans
• Popularity of ARM (Adjustable Rate Mortgages)
• Be a patriotic American and spend, spend, spend!

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American Consumer Spending
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Americas Piggy Bank?
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Puzzling and Depressing Graphic
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The Housing Bubble Explodes

• Mortgages become TOO easy to obtain as financial
  institutions compete to lend out money -
  subprimes
• Financial institutions are more likely to sell
  mortgages than keep them to maturity
  (derivatives)
• Mortgage foreclosure rates begin to rise
  drastically in 2006
• Mortgage rates remain fairly low but credit
  requirements tighten
• Housing prices take a dive and the real estate
  market begins to stall.
• Still a great time to buy but a rotten time to
  sell

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Somethings Burning
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World Inflation Chart
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Global Wheat Prices
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Global Corn Prices Fall 2008
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Global Light Crude Oil Fall 2008
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Monthly Crude Oil Prices 1946-2008
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US White Bread Prices 1997-2007
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All Around The World
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Americas Global Legacy?