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September 16, 2020

A Life Insurance Deep Dive

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The Stock Market Crash of 1929

July 15, 2020

The Stock Market Crash of 1929

What comes to mind when you think of The Great Depression?

Maybe images of long unemployment lines and dusty farmers.

But it all started with a massive stock market crash. Here’s a quick history of the Stock Market Crash of 1929.

The Roaring Twenties
The decade leading up to the Great Depression is referred to as the Roaring Twenties. The First World War had just ended and Europe was in shambles. But the United States was poised to become an economic powerhouse. The U.S. economy was exploding in the years before the war and, unlike Europe, had escaped the conflict relatively unscathed. It didn’t take long for the U.S. economy and culture to kick into overdrive.

During the 1920s was the birth of consumer and mass culture. Women now had access to white collar jobs. That meant more money for the family and more freedom to live and dress how they wanted. Affordable cars, courtesy of Henry Ford, meant families could travel and vacation in places that were never before possible. Radios and phonographs meant that popular music (a.k.a., jazz) could reach a wider audience and make big money for artists.

The Big Bubble
But people weren’t content to just spend their money on Model-Ts and the latest Louis Armstrong record. They were buying stocks. And when they ran out of money to invest, they borrowed more. Banks were eager to lend out money to a new generation of investors with stable incomes. One of those things that seemed like a good idea at the time.

By the end of the decade, the American economy was booming. But underneath the surface was a tangle of high debt and wild speculation that the economy would keep on expanding. In reality, the only direction things could go was down.

The Stock Market Crash of 1929
The stock market set a record high in August 1929. Then it began to moderately decline in September. But by the middle of October, a modest slump became a total free fall. Spooked by the cooling market, investors started selling their shares in the millions. The technology of the time was overwhelmed trying to calculate how much was being sold. The massive bubble that had expanded during the roaring twenties was collapsing.

But the catastrophe didn’t end in the stock market. The public panicked. Droves of people started withdrawing money from banks as quickly as they could. But those banks had used that capital to invest in the market. Huge amounts of wealth were wiped out.

Aftermath
This upheaval caused the U.S. economy to take a nosedive. By 1932, stocks were worth only 20% of their 1929 peak.(1) Half of America’s banks were belly up, and nearly 30% of the population was unemployed.(2) Economies around the world were deeply shaken by the collapse of the U.S. market, making the Great Depression a global phenomenon. It would take the massive economic mobilization of World War II to resurrect the U.S. economy.

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When Wall Street Bailed Out Washington

May 11, 2020

When Wall Street Bailed Out Washington

We all know about government bailouts.

They’ve been around for a while. But did you know that the government was once bailed out by Wall Street?

Gold Runs
Dollars used to represent actual gold in the treasury—what we call the “gold standard”. Dollars had value because they could be traded in for gold. But here’s the catch; the US didn’t have gold to match every dollar floating around the economy. If everyone suddenly decided to trade in their dollars for gold, the government would eventually run out and have to start turning people away. Faith in the US economy would collapse.

This nightmare situation was called a gold run, and it was pretty common in the 19th century. But the Panic of 1893 was especially bad. European investors, startled by collapsing investments in South America, started what became a huge gold run on the U.S. Treasury, pulling out millions of dollars. People quickly started pulling their money out of banks, trying to secure as much of their cash as possible. The economy was in total meltdown.

J.P. Morgan Enters the Scene
Business mogul J.P. Morgan had enough powerful connections to realize that the U.S. Treasury was in deep trouble. Morgan wasn’t the wealthiest man in the world; his fortune of $120 million ($1.39 billion in 2020) was pocket change compared to the net worth of John D. Rockefeller, who would be worth about $340 billion today (1 & 2). But Morgan had influence and connections, and he was committed to bailing out the government.

However, there was a problem. Morgan and the gold standard were both unpopular. Grover Cleveland, president at the time, wasn’t excited about aligning himself with either to save the economy. Fortunately, Morgan had a trump card; he knew from inside sources that the government was almost literally within hours of defaulting. And he had done his research. An obscure statute from the Civil War allowed for the government to sell Morgan bonds while he gave them enough gold to avoid going broke. Cleveland knew he was picking his poison. He would either look like a Wall Street pawn or let his country go broke. But he eventually gave Morgan the bonds and accepted the gold.

The aftermath
It worked. The economy restabilized and the country was solvent. Cleveland lost his next election. Morgan continued to prosper. But the days of Wall Street bailouts were numbered. Business owners decided after a panic in 1913 that the government should be the one to fix economic downturns. And the Fed has been bailing out Wall Street ever since!

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What's a Recession?

February 12, 2020

What's a Recession?

Most of us would probably be apprehensive about another recession.

The Great Recession caused financial devastation for millions of people across the globe. But what exactly is a recession? How do we know if we’re in one? How could it affect you and your family? Here’s a quick rundown.

So what exactly is a recession?
The quick answer is that a recession is a negative GDP growth rate for two back-to-back quarters or longer (1). But reality can be a bit more complicated than that. There’s actually an organization that decides when the country is in a recession. The National Bureau of Economic Research (NBER) is composed of commissioners who dig through monthly data and officially declare when a downturn begins.

There’s also a difference between a recession and a depression. A recession typically lasts between 6 to 16 months (the Great Recession was an exception and pushed 18 months). The Great Depression, by contrast, lasted a solid decade and witnessed unemployment rates above 25% (2). Fortunately, depressions are rare: there’s only been one since 1854, while there have been 33 recessions during the same time (3).

What happens during a recession
The NBER monitors five recession indicators. The first and most important is inflation-adjusted GDP. A consistent quarterly decline in GDP growth is a good sign that a recession has started or is on the horizon. Then this gets supplemented by other numbers. A falling monthly GDP, declining real income, increasing unemployment, weak manufacturing and retail sales all point to a recession.

How could a recession affect you?
The bottom line is that a weak economy affects everyone. Business slows down and layoffs can occur. People who keep their jobs may get spooked by seeing coworkers and friends lose their jobs, and then they may start cutting back on spending. This can start a vicious cycle which can lead to lower profits for businesses and possibly more layoffs. The government may increase spending and lower interest rates in order to help stop the cycle and stabilize the economy.

In the short term, that means it might be harder to find a job if you’re unemployed or just out of school and that your cost of living skyrockets. But it can also affect your major investments; the value of your home or your retirement savings could all face major setbacks.

Recessions can be distressing. They’re hard to see coming and they can potentially impact your financial future. That’s why it’s so important to start preparing for any downturns today. Schedule a call with a financial professional to discuss strategies to help protect your future!

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