How bad can the market get?

Source: http://xpartan.es

The market has the potential to make a man rich but, it also has the potential to bring the economy to its knees. How does this happen and what are the impacts?

We can never be 100% sure on when this happens but we can however see warning signs and prepare for the worst. We ignored a reticent Fed and when the Depression hit, and terrified president Hoover only made it worse. It wouldn't be until the end of World War II, 17 years later, that we finally got back on our feet. A great article to learn about The Great Depression can be found on Investopedia. No author directly claims credit for this source however, this website is the most reliable economic website there is.

To start, we need to know exactly what it was and what happened during this period of time. In this article Investopedia explains that "The Great Depression was the greatest and longest economic recession of the 20th century and, by some accounts, modern world history." Investopedia also says that "Contemporary accounts of the Great Depression date its beginning to the U.S. stock market crash of 1929." The Depression was caused by the crash of the stock market on October 24th 1929, a day known as Black Thursday. On this specific date stocks plummeted and banks failed which caused everyone to lose everything and caused the economy of the United States to have its worst crash in history. The impacts of this lasted until the end of World War II, some 17 years later. During this time unemployment was incredibly high. In 1929 (pre-crash) the unemployment rate was 3.2%, by 1933 it was 24.9%. Even after government spending and two presidents trying to reduce it by 1938 it was still at 18.9%. Without jobs the economy couldn't recover. But why did it last so long?

There are several potential factors that contributed to The Great Depression's 17 year lifespan. According to Investopedia some of these factors are "Many of President Hoover's interventions damaged the economy's ability to adjust and reallocate resources. The Smoot-Hawley Tariff Act of 1930 triggered a 66% decline in global trade between by 1934. Hoover encouraged businesses to raise wages and keep prices high at a time when they should have fallen, and effectively banned further immigration to the United States in 1930." Hoover was not the right man for the presidency during this time of need. The decline of global trade prevented the economy from getting out of the Depression and, paired with high prices and wages causing less people to be employed and less buying power to the consumer created four dark years in the United States. The final question that needs to be answered is how could this have happened after the Roaring 20's?

The answer once again lies in Investopedia in an article titled What caused the Great Depression? In this article written by Andrew Beattie who has spent most of his life writing, the causes of the Depression are explained in depth. Beattie explains "The Great Depression was the result of an unlucky combination of factors - a reticent Fed, protectionist tariffs and a Keynesian, government-centered recovery plan." This quote sounds a bit complicated but what it's basically saying is the Federal Reserve cut the money supply by almost 1/3 when the market crashed which caused all recovery hope to be lost. On top of that the reserve refused to bail out banks. So, by increasing the supply of money during the 20's the reserve created the bubble that caused the depression and refused to help when the depression hit. Also, President Hoover's tariffs only made things worse. The tariffs pretty much cut off international trade altogether. Eventually, through World War II the U.S was able to get out of the depression but the damage was done.

This leads to a final thought, how exactly does the stock market impact the economy?