Four Reasons The Next Recession Will Be Worse Than The Last One – Analysis

September 11, 2021  MISES  0 Comments


By Jon Wolfenbarger*

With the stock market at all-time highs and seemingly endless “free liquidity” being provided by the Fed, the last thing most people can envision right now is a major recession—particularly one that will be the worst since the Great Depression of the 1930s!

But the facts we will detail in this article show that this is entirely possible. This is an extraordinary statement, but we are living in extraordinary times!

Here are the four key reasons to believe the next recession could be worse than the Great Recession of 2008–09—which would make it the worst since the 1930s.

Reason No. 1: Extremely High Asset Valuations

Informed investors know that we are currently in an “everything bubble” driven by massive and persistent central bank money creation.

For example, Warren Buffett’s favorite valuation measure—and the one that best predicts future long-term stock market returns—is the stock market capitalization–to–GDP ratio, which is shown below. Based on this measure, stocks are trading 30 percent higher than the prior all-time high during the tech bubble peak of 2000! Stocks would have to fall over 60 percent for this ratio to return to the levels it reached at the stock market bottom in March 2009.

Source: FRED, with annotations by

Real estate is also expensive. As shown in the chart below of the S&P/Case-Shiller 20-City Home Price Index, home prices are currently 27 percent higher than they were at the housing bubble peak of 2006!

Source: FRED, with annotations by

Reason No. 2: Weak Economic Fundamentals

The US economy is not as strong as it used to be. That is certainly true in the wake of the covid pandemic, but it has also been true for the past two decades. All of the taxes, regulations, and other government interventions in the economy in recent decades have created a weaker and more fragile economy that will make the next recession even worse.

The chart below of industrial production shows it is only 8 percent higher than at the 2000 peak and 1 percent lower than at the 2007 peak. It has nearly flatlined over the past two decades. That is much weaker than the 3.9 percent annual growth in industrial production from 1920 to 2000.