Is it a depression yet?

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.


About Guy N. Texas

Guy N. Texas is the pen name of a lawyer living in Dallas, who is now a liberal. He was once conservative, but this word has so morphed in meaning that he can no longer call himself that in good conscience. Guy has no political aspirations. He speaks only for himself.
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4 Responses to Is it a depression yet?

  1. Pingback: Prominent Deflationist Schilling Sees Deflation, A China Hard Landing And 800 On The S&P

  2. hortonw says:

    Nonsense. The downturn consisted of four quarters of GDP declines (admittedly some of those declines were quite sharp). We have since had eight quarters of GDP growth. Not great growth, to be sure, but still growth nonetheless.

    Bank failures? Where are they? Yes, Bank of America is still suffering. But, Citicorp had net income of $3.3 billion last quarter.

    People need to distinguish trends from levels. Expressions like recession and depression refer more to a trend relative to some prior level, not the absolute level of economic activity. Even during the 2008 recession, we were still a very wealthy country. The trend is not that bad. But, the absolute level of employment has adjusted to a new and worse level. That reflects changes in the world that may persist wholly apart from pick-ups in US GDP.

    • Craig Marker says:

      Yes.. this is a depression. The mobsters..err bankers have ripped off the middle class. People have to eat but groceries are experiencing inflation, as is gas. Nonsense you say?.. how about you tell that to the MILLIONS of unemployed people.

  3. Guy N. Texas says:

    Rather than just semantics, the question of whether this is a depression or a recession has important consequences. When there’s a consensus that it’s the former, we can muster the political will to do what’s necessary. If we continue to think of this as a recession, then the thing to do is simply bide our time until the trends revert to the mean. That’s not been happening.

    Horton’s right that we’ve had several quarters of GDP growth, but they have been so small that the resulting job creation has been too weak to keep pace with normal population growth. Growth of that sort is not inconsistent with being in a depression. The Great Depression, for example, which spanned the years 1929-40, hit bottom in 1933. There was good growth (far more rapid than we’ve seen so far) from then until the second “dip” hit in 1937. Then growth turned negative from the second half of 1937 and 1938, before resuming a slow climb. GDP did not return to pre-crash (i.e. October 1929) levels until 1940, when the Great Depression is usually considered to have ended.

    An economist who contended in early 1937 that the claim of depression is “nonsense” because of preceding periods of strong growth would have been mistaken in the eyes of economists today, even though GDP growth rose 7.7% in 1934, 8.1% in 1935, and 14.1% in 1936. Those years saw much better growth rates than we’ve seen in the past seven quarters.

    You’re right that bank failures have slowed down a lot. But there were some spectacular “bank” failures (defining the term broadly, as is appropriate given the demise of the Glass Steagall Act), most notably Lehman Brothers, Bear Stearns, AIG – some ameliorated by extraordinary government actions. Defining bank conventionally, there were 140 bank failures in 2009, compared to 25 the year before, There were 157 in 2010. That figure is likely to be lower in 2011 — perhaps 75-100, if the current pace continues. But if Europe goes the way it seems likely to go, the financial system could seize up as it did before, not just in the U.S., but globally. Perhaps things will work out in Europe. But that’s hardly clear.

    Disinflation has been occurring for a long time. Inflationary expectations are less than 2% and falling. The Fed’s main interest rate benchmark is at zero. The Fed has already fired its big guns. Still growth is trivial. Congress is now debating a protectionist measure against China (to call them out for manipulating their exchange rate). Significant fiscal stimulus is off the table and likely to remain so. China is already slowing considerably. The economic geniuses in the European Union — an economy larger than ours, by the way — have mishandled monetary and fiscal policy so spectacularly that they may no longer be growing at all. This looks a lot like the mid 1930s to me. And if the European shoe drops, there is little doubt that the second dip will hit us hard and long. If that should happen, I’d bet a good deal that economists 10 years from now will call this current era a depression — not as deep as the Great Depression, perhaps, but possibly more intractable and devastating in long-term consequences, because the collective refusal to call this a slow-motion depression is hamstringing policy makers.


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