Comparing the Great Recession and the Great Depression, Essay Example

The most recent significant recession, dubbed “The Great Recession”, occurred between 2008 and 2009. Many have compared this recession to the Great Depression that occurred between 1929 and 1933. However, there have been some fundamental differences that set these two economic events apart. This can be summarized by the table below

(Mankiw, 2014)

The United States’ Recovery from the Depression

The United States experienced a culmination of two major events that enabled it to pull out of the great depression. The first and most significant event was the Second World War. World War II was an industry-intensive war. Numerous facets of industry, especially mining of metals and the production of weaponry, boosted the U.S. economy by creating employment opportunities for the young and unemployed. The second was the expansion of public works and federal bureaucracy by the Roosevelt administration. This considerably increased employment opportunities.

Monetary Policy Mistakes during the Depression

In a bid to mitigate the downward trend the dollar’s value had taken, the Federal Reserve held on to dollars instead of sweeping up the Federal reserve to inject finances into investments so as to stimulate the economy.

The quantity theory has not effectively worked in the situation of the great recession. This is because the theory assumes that when money is injected into the economy, this would trigger the full employment of resources that would increase expenditure and output. However, the funds used to bail out banks in the great recession was not completely directed to boosting investment and expenditure. Most of the bailed out banks paid out huge bonuses to employees.

While the Fed has opted to sweep the Federal Reserve so as to bail out banks, lending has considerably decreased as most investors have opted out of trading the riskier financial instruments that led to the eventual great recession. The multiplier is currently not working as it should owing to the fact that all resources have not been fully employed.

The recent money supply growth raises concerns as to the effect it has on the currency itself. Other international currencies are gaining strength of the US Dollar, making the U.S, Market less competitive as investors and traders look to trade with Asia. This is largely due to the fixed value of most Asian currencies such as China’s.

The Fed’s eventual exit strategy would be the gradual restoration of interest rates that the commercial banks loan from the Fed. This would gradually and steadily ease the economy back to the market-determined position. This can be seen in the end of the “Bush Tax Cuts” that would restore tax and interest rates to a market-determined position. The eventual risks associated with this exit strategy include a sharp increase in taxes and a devaluation of the U.S. Dollar as it faces competition from alternative markets.

Works Cited

Mankiw, G. N. (2014). Princples of Macoreconomics (6th ed.). Mason, Ohio: South-Western Cengage Learning. Retrieved 1 May, from https://financeasim.files.wordpress.com/2014/01/principles-of-macroeconomics-n-gregory-mankiw.pdf