At what point does the current downturn deserve to be reclassified as a depression? It’s not an easy question, but some economists think we’re in one already.
If there is a gold-plated definition of “depression,” I’ve not been able to find it. Here’s the basic idea, though, via Wikipedia:
Considered, by some economists, a rare and extreme form of recession, a depression is characterized by its length, by abnormally large increases in unemployment, falls in the availability of credit— often due to some kind of banking or financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.
Recessions are officially declared by the National Bureau of Economic Research (NBER). While the media often defines “recession” as two consecutive quarters of decline in real Gross Domestic Product (GDP), the NBER undertakes a more nuanced assessment.
Depressions, by contrast, are not announced by the NEBR. In fact, there will be no official declaration of any kind. Leaders of government have incentives to resist that characterization, even when it becomes obviously appropriate, lest they be blamed or inadvertently dampen the so-called “animal spirits” of consumers and businesses.
On August 24, 2011, David Rosenberg used the “D” word on CNBC:
Positive gross domestic product readings and other mildly hopeful signs are masking an ugly truth: The US economy is in a 1930s-style Depression, Gluskin Sheff economist David Rosenberg said Tuesday.
Writing in his daily briefing to investors, Rosenberg said the Great Depression also had its high points, with a series of positive GDP reports and sharp stock market gains.
But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.
Rosenberg calls current economic conditions “a depression, and not just some garden-variety recession,” and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered “euphoric response.”
“Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the market at all times,” he said.
The 1929-33 recession saw six quarterly bounces in GDP with an average gain of 8 percent, sending the stock market to a 50 percent rally in early 1930 as investors thought the worst had passed.
“False premise,” Rosenberg said. “And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.”
Nouriel Roubini — who called the housing bubble near its peak, warning that the fallout would be deep and worldwide — today made the call that we are now in a “double dip.” Here’s his tweet via the indispensable econ prof, Brad DeLong:
Economist Richard Koo earlier today, compared the U.S. to Japan’s “lost decade”:
US balance sheet recession may be deeper than Japan’s. . . . Not only has the US economy’s response been similarly anemic, but the unemployment rate is also more than twice as high. Moreover, it took seven years from the collapse of the Japanese bubble for long-term rates to fall to that level, whereas only three years were needed in the US. Real GDP also stood substantially above bubble-peak levels in 1997 Japan, while in the US it has already slipped below the high-water mark.
End of US housing “myth” may have far-reaching consequences. The more pronounced weakness in the US economy in spite of lower real interest rates suggests the housing bubble collapse had at least as serious an impact as it did in Japan. The belief that it was impossible to lose money buying Japanese property persisted for 45 years after World War II. The corresponding US housing myth lasted even longer—some 70 years—and the psychological damage resulting from its collapse may be that much larger.
Here’s Ryan Avent’s gruesome assessment mentioned in another post. (It assumes that European governments will fail to muster the political will to save the union.) For those who think better in pictures, some useful charts can be found here.