Econ: Depression or Recession, where are we going?
A CNBC report inspired me to do a quick Google , which lead me to this article. However, Silvia Wadhwa summed it up best in her article. Yes, that does look a bit disconnected but that’s the way my subconscious processor works. Huge amounts of disparate information flowing into a tentative conclusion. I spend at least 6 hours per day plugged into the business news, trying to get a glimpse of the next-big-thing. The next-big-thing (NBT?) eludes me at the moment because of current economic conditions. My hunt for the NBT is being interrupted by the current economic monster, the Credit Crunch, the recession, and the threat of a depression. All these things conspire to side-line my NBT hunt.
Depression or Recession, what’s the difference?
The flippant answer is as follows
A recession is when your neighbor loses his job.
A depression is when you lose your job.
The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a more specific definition as;
The time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period.
This is a bit different from the two successive quarters of negative GDP growth, that is generally used. But it isn’t all that accurate, in time.
So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.
That said, a definition of an Economic Depression is readily available.
Other definitions
- Inflation - A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services 1 .
- Disinflation - Downward movement of inflated prices to a more normal level.
- Deflation - A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available currency and credit.
Last year, when the US dollar was digging its way towards the sewers, the talking heads were predicting a recovery by 4th quarter of this year. I wasn’t because I was expecting the mortgage defaults that we finally wound up with. I called the last recovery as unsustainable because it was fueled by unsustainable Real Estate appreciations.
The Call
Normalizing all currencies to the price of gold shows that they aren’t falling much. It’s the USD that’s gaining. The reason why is the repatriation of USD from around the globe, driven by massive deleveraging. Once that deleveraging is completed, expect the USD to drop back to it previous trajectory.
The US has been constantly losing jobs, at rate greater than 100K per month, for the past 18 months, at least. The rate just hit 249K for October.
The unemployment rate rose by 0.4 percentage point to 6.5 percent in October, and the number of unemployed persons increased by 603,000 to 10.1 million. Over the past 12 months, the number of unemployed persons has increased by 2.8 mil- lion, and the unemployment rate has risen by 1.7 percentage points.
With the present news, this can get nothing but worse and it would be difficult for the US to avoid a Depression that will last through 2010. The EU doesn’t look so bad and will only suffer a recession 2 .
China will only be helped by a mild recession and a period of disinflation (they sort of need that right now).
Footnotes:
- The economy of the Weimar Republic is the most clear case of inflation. [ ↩]
- Germany is officially in one right now. [ ↩]
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