Wednesday, February 4, 2009

Recession Vs Depression

Depression and Recession are hot topics that experts argue about how to define, but which ordinary folk know when they see them. There is no exact definition of a depression, even now, more than 70 years after the last one ended. That is mainly because the Great Depression is pretty much the only example of the phenomenon that we have, and it is well beyond most people's living memory. The debate is not helped by the fact that, way back then, economic data were scratchy and unreliable at best.

I myself, at the beginning, don’t really understand what is meant by recession. For me, literally, recession comes from the root word recess that means break - recess of the senate session, court hearing and school classes. I was late to know and realize that recession on the broad perspective associates with economy. On the other hand, depression, as I define it, relates to tropical depression, great depression and psychological depression. That's the way I call it.

Gordon Brown, Britain's Prime Minister defines recession as a headlong economic retreat and depression for him means a disaster - a problem on a wholly different scale.
Some are calling our current recession the worst economic downturn since the Great Depression. It's a comparison most of us can't comprehend but if we tried to ask some folks who lived through the Depression to get some perspective, surely, too many senior citizens will be quiet, pensive on hearing the word depression. It was a time that shaped their lives forever. And it makes today's economic climate feel like paradise.

What we can say is that on the Richter scale of economic events a depression is a calamity, wreaking destruction on human misery on a wide scale that makes a common or garden recession look like a mere hiccup, and a bad recession — such as the one we now seem to be suffering — seem like a severe tremor, but no more.
The best way to understand the relative scale of a depression, as generally understood, compared with a recession is to contrast the economic catastrophe in the US in the 30's with what is happening now, and what took place in the recessions of the 70's, 80's and 90,s.

Compare that with the experience of the Great Depression in the US. Then, US national income and output from the economy — GDP — collapsed by 30 per cent over a number of years: it dropped by 8.6 per cent in 1930 alone, and then by another 6.4 per cent in 1931, 13 per cent in 1932, and 1.3 per cent in 1933. Recovery in 1934 to 1937 was followed by a relapse. The proportion of the workforce lining up for the dole and at soup kitchens surged from 2 per cent to a quarter of those of working age, output from US factories halved, consumer prices fell by a quarter as the economy slid into deflation, four-fifths of the value of the US stock market was wiped out, from the Wall Street crash onwards, and house prices fell by nearly a third.

The great US crash of the Depression was the ultimate bust. It followed the Roaring Twenties, perhaps the ultimate boom, and sowed the seeds of the disaster that followed. The Depression was a heavy price to pay for the party of the century; the mother of all hangovers. Before the bust, Capital Economics notes that US house prices had surged by 70 per cent from the turn of the century until 1925; commodity prices rocketed in the wake of the First World War, in another echo of recent times; and share prices charged upwards.

Yet the British experience was very different. Britain skipped the Roaring Twenties, spending that decade in the doldrums. Come the Depression, Britain's experience was less searing, although undeniably painful. In the early Thirties, GDP plunged by about 5 per cent – so roughly twice as bad a fall as is expected in the present UK downturn on a worse case scenario. At the same time, share prices tumbled by more than two-fifths from their peak, and the unemployment rate doubled from 7 per cent to 15 per cent.

In reality, for Britain the period of the US Great Depression was less brutal than the start of the Twenties, when the exhausted nation paid the price for the toil of the Great War. No sooner had victory over Germany been secured, than economic defeat loomed, with the economy shrinking by 10.9 per cent in 1919, by 6 per cent in 2910 and by 8.1 per cent in 1921. Overall, during those three years the UK's GDP plummeted by 23 per cent, mirroring the fate of the US a decade later.

Depression may have no precise definition, but it not word to be bandied about carelessly, not a fate to be tempted.

I think economic depression is also leading to a psychological depression to those near the vortex of the event.
Even if the recovery starts by 2010 or 2011 the trauma of the episode is likely to linger on for years to come which is more worrying.



Walt said...

Don't be a fool, the worst is yet to come. The United States and it's outlaw banking systems will destroy all the worlds economies in a mad effort to save itself!

ruphael said...

If that's the case, The United States is so desperate and its leader is not a promising one.

Cadence Hart said...

We have to remember folks that recession is like a cycle. It begins and it ends. The only important thing is to try to cope and survive while we are at it. True, the worst may yet to come, but soon enough things will pick up and improve again. Some business people may even argue that recession is the best time to take advantage of new emerging markets and explore new opportunities. It all boils down to your attitude. How do you intend to face these challenging times? Blame the government? Wallow in self-pity? Lose hope? Or rise above it!

GB said...

I'd like to believe and be optimistic that the worst part is over.

As I also touched on the subject in my blog, there are optimistic views that the recession will end this year.