Great Depression II?

By Tim Wright | March 6, 2009

Everyday the politicians, pundits and analysts discuss the "subprime mortgage collapse," "the recession," "the credit crunch," and "the global financial crisis." Are these really euphemisms for the dreaded D-word that is avoided like the Black Death for fear of causing a panic. Are we really headed for an economic depression?

There is an old joke among economists that states: A recession is when your neighbor loses his job; A depression is when you lose your job. However, it's no joking matter. Job losses have hit close to home for all of us. By now we either know someone who has lost their job or are in fear of losing our own.

So are we headed for an economic depression? How can we tell the difference between a recession and a depression when there is no widely-agreed-upon definition for a depression?

A proposed definition for depression is a "sustained recessionary period in which the population is forced to dispose of tangible assets to fund every day living." Some economists require a drop in GDP of 10% or more before a recession would be referred to as a depression.

While a definition may be elusive, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, and reduced amounts of trade and commerce-all symptoms the U.S. economy is currently suffering.

If we use the 10% drop in GDP as a yardstick, the last depression in the U.S. occurred during the Great Depression of the 1930s. From August 1929 to March 1933 GDP declined by almost 33%. From May 1937 to June 1938 GDP declined by roughly 18%.

The U.S. hasn't seen anything close to this type of severe depression in the post-WWII period. The worst recession in the last 60 years was from November 1973 to March 1975, where GDP fell by 5%.

Weekly columnist for Forbes.com, Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, says the latest data from the fourth quarter of 2008 leaves little room for optimism. In 2008's fourth quarter GDP fell by approximately 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea.

With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, Roubini said, "The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe."

While we're not yet in a full-blown depression, we are facing very hard times relative to the standards we've grown accustomed to. So is there a dim light at the end of the current recession tunnel? CNN reported that according to a new study of independent financial advisors, who manage more than $300 billion of assets, the recession ought to be over in the next couple of years. In an online study conducted for Charles Schwab, 85% of advisors believe the downturn will end within the next two years. Fifteen percent see it going longer.

Guess we'll just have to hold on and wait and see.

Tim Wright