How do you define “Depression”?

March 16, 2009 at 2:00 am Leave a comment

Now, you know I am no pointy-headed economist, so I’ve been doing a LOT of reading on the GFC or global financial hissy fit as I prefer to call it. Interesting to see our current financial mess has its very own acronym. Hopefully, one day soon we can say LOL GFC – because we’ll experience an upturn.

But cast your eye over the ThinkingShift Book Club on the right panel of this blog – see the book I’m reading? It’s freaking me out frankly. Basically, it says late 2009 or early 2010 we’re all doomed as the Big D will hit us. Big D being Depression, major financial drama. I’ll do a future post and let you know what the book says but with all the talk of the Big D, it did prompt me to wander off and find out how a Depression is defined.

As I understand it: a Depression can be recognised by changes in the Gross Domestic Product (GDP). The GDP is the total value of goods and services produced within a country’s physical borders during a period of time (usually one fiscal year). GDP excludes net income from abroad. So apparently you know you’re in the icy grip of a Depression when real GDP declines by 10% or more. Anything else, it’s a Recession. I read somewhere that this distinction had to be made because prior to THE depression of the 1930s, any economic downturn was referred to as a depression, so economists named smaller economic declines “recessions”.

So far so good. During the last major economic drama in 1982, when we teetered on The Edge of the Big D, GDP fell by 3%, so it didn’t reach that magical 10% threshhold. So let’s look at the current GFC – is there a 10% GDP decline and are we about to teeter off The Edge? Yeah, well it ‘aint good news.

The Wall Street Journal is talking prophecies of doom and darkness saying:

“The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.”

Mmmm….my cunning mathematical ability tells me that’s a 20% chance of slipping off The Edge. The article was written by a professor of Economics so guess he has a better idea than most of us about what’s going to happen. Research apparently shows that depressions are closely associated with stockmarket crashes like we’ve just witnessed. So there’s an increased chance of a depression looming when the stockmarket goes haywire. So of course the 1930s Depression was accompanied by a stockmarket crash of 55%. And the WSJ research uncovered 71 cases of stockmarket crashes that were followed by depressions.

In fact, looking at 34 countries, research shows that there is a 28% probability that a “minor depression” (macroeconomic decline of 10% or more) will occur when there is a stock-market crash. And there is a 9% chance that a “major depression” (a fall of 25% or more) will occur when there is a stock-market crash. I thought a depression was a depression, full stop/period. Didn’t realise there are minor and major depressions.

More interestingly, there is a 73% probability that a “minor depression” will also feature a stock-market crash whilst for a “major depression” to be accompanied by a stock-market crash, the probability is 92%.

I’m sure this was not meant to be humorous but the WSJ article finishes off by saying:

“The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression. The bright side of a 20% depression probability is the 80% chance of avoiding a depression.”

Okay, so I’m hanging on to the 80% bright and happy statistic. But when I stick my nose in Harry S Dent’s book, The Great Depression Ahead, I’m afraid he’s not so optimistic. I’ll bring you what Dent has to say in a future post.

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Entry filed under: Economics. Tags: , , , .

Is it the 1870s? Something more sane this way comes

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