Friday, March 6, 2009

What is a Depression?

There has been talk of recessions, deep recessions and depressions and I am confused. I think I have my head around a recession but what the hell is a depression?

You would have to be blind, deaf plain stupid or just Al Gore if you didn't know about the current global recession.

So read on and let me explain how I see things

Some commentators are saying recession, some deep recession and some the dreaded "D" word, depression.

A recession is technically 2 quarters of negative economic GDP growth with various other determinants depending on what school of economics you when to.

A deep recession is a prolonged deeper felt recession.

But what is a depression?

Well, those of us old enough to know about economic depressions know about them from their knowledge of the Great Depression. Briefly, in case you didn't, the Great Depression kicked off on October 24, 1929, or “Black Thursday” when U.S. stock prices fell 15 - 20%, causing a stock market crash. The following depression was a worldwide economic collapse that lasted approximately 10 years and led to massive unemployment in the U.S. of 25% at its peak in 1933 and those that were in work having their incomes drop by 40%. GDP halved and world trade dropped 65% ! Similar events occurred world-wide.

We have all seen the images of long lines of people queuing at soup kitchens for food, rushing their banks to get their money out and vast tracts of empty business.

Assets were worth what you could get for them depending on your need to sell.

We are also aware of the bailouts by the Roosevelt Government and the subsequent failure of those measures as they prolonged the downturn.

People were in despair.

The globe only recovered because of WW2.

A depression though seems technically harder to define than a recession but many economists think that a 10% GDP drop in one year indicates one but others would define it by the number of quarters there was double digit unemployment.

Many economists would say that a depression is merely a "prolonged recession" and from the reading I have done I think that this description best suits.

The impetus for the current global recession was the U.S. housing bubble finally bursting and that took the banks down, then weak businesses, then the US stockmarket dropped by nearly half and unemployment looks set to top 10% when figures are released tomorrow.

Global trade has been hit badly in January dropping by around 40%.

Assets of all kinds are not selling for their true worth.

This has also reverberated around the globe.

I don't know whether we are currently in the middle of a deep recession or some kind of depression but one would have to consider the amount of fear and angst there was during the Great Depression and what is happening now.

89 year old Victor Zarnowitz has an interesting take:

Victor Zarnowitz also doesn't think we're there yet. He ought to know. The 89-year-old is one of six NBER board members that date U.S. business cycles. Besides being one of the world's leading economists, Zarnowitz was also a young man himself during the Depression of the 1930s. "It's too close, and the information is too incomplete to be sure we are in a depression and not a severe recession," he said. "Unemployment is much lower than it was at the peak. It was much worse than what I see today."

Personally I have not been affected badly yet.

It is really hard to know in the middle of all this what is really happening and we will always know more looking back but what is clear is that the recession we are experiencing now is nowhere near as bad as the Great Depression.

What is also very clear is that we have not seen the worst yet.

Roll on 2018 or boom 2011?

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The Great Crash of 1929

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c Share Investor 2009

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