Recessions and depressions share comparable indicators and causes, but the severity, duration, and overall impact are the most significant distinctions.
A depression lasts years, not months, and is marked by increased unemployment and a deeper drop in GDP. While a recession normally affects only one country, a depression is usually severe enough to affect global trade.
Because economists haven’t agreed on a definition for what constitutes a depression, the public sometimes confuses it with the term recession. However, there has only been one depression in the United States: the Great Depression of the 1930s, which lasted ten years.
Is there a distinction between a recession and a depression?
A recession is a natural element of the business cycle that occurs when the economy declines for two consecutive quarters. A depression, on the other hand, is a prolonged decline in economic activity that lasts years rather than months.
Which is more severe, the recession or the depression?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump.
Is the United States experiencing a recession or depression?
The United States is officially in a downturn. With unemployment at levels not seen since the Great Depression the greatest economic slump in the history of the industrialized world some may be asking if the country will fall into a depression, and if so, what it will take to do so.
What occurs when you’re depressed?
Depression is a serious mental condition that can have a significant impact on a person’s life. It can lead to emotions of melancholy, hopelessness, and a loss of interest in activities that linger for a long time. It can also cause physical symptoms like as pain, a change in appetite, and sleep issues.
Can a downturn become a depression?
Although the following definition is bleak and detailed, its dullness serves to emphasize the fact that the recession/depression question is not so easy to solve. The Federal Reserve Bank of San Francisco attempted to come to a conclusion in 2007 – What is the difference between a recession and a depression? They agreed with the National Bureau of Economic Research’s definition of a recession:
A recession is defined as a major drop in economic activity across the economy that lasts more than a few months and is reflected in real GDP, real income, employment, industrial output, and wholesale-retail sales. A recession starts when the economy reaches its peak of activity and concludes when it hits its lowest point. The economy is expanding between the trough and the peak. The typical state of the economy is expansion; most recessions are brief and have been uncommon in recent decades.
And I turned to Gregory Mankiw to help me understand the difference between two types of economic contraction:
Real GDP has been falling for many years, the most striking example being the early 1930s. If the period is moderate, it is referred to as a recession; if it is more severe, it is referred to as a depression.
Despite the Federal Reserve’s best efforts, the simpler and more widely recognized definition of a recession is a drop in GDP for two consecutive quarters. However, there is little agreement when it comes to depressions; the two most prevalent descriptions are:
While the two meanings are not mutually exclusive, they do differ significantly. The distinction between a recession and a depression, in my opinion, is more complex. A recession is an unavoidable component of the business (or credit, as the case may be) cycle. A depression, on the other hand, entails the physical ruin of the economy: enterprises are irrevocably damaged, job possibilities are obliterated, and investment must be completely written off.
Examining prior Great Depressions is an alternative technique. Unfortunately, this strategy is also inconclusive. The Great Depression of the 1930s, for example, is widely thought to have lasted from 1929 to 1941, yet as the graph below shows, there were only two separate phases of decreased GDP growth between 1930 and 1933, and again between 1937 and 1938:
Despite my more practical definition above, I prefer the two-year-plus definition to the one based on a dramatic drop in GDP. Some aspects of the economy are harmed during a recession. Depression is becoming more common.
A rise in the unemployment rate is another element frequently linked to recessions and depressions. Historically, increased unemployment has preceded the commencement of recessions, and recessions have only been labeled depressions after they have lasted for a long time.
Another factor to consider is the absolute degree of inflation. In general, central banks respond to rising inflation by boosting short-term interest rates. This aids in the cooling of overheated economies. However, if they tighten too quickly, they risk triggering a recession by forcing the credit cycle into a rapid contraction. A depression, on the other hand, is frequently accompanied by an absolute drop in the price level, which is produced by an excessive amount of domestic or corporate debt.
Why does a depression definition matter to you as an investor? Because financial markets are anticipatory. If investors believe the recovery from the Covid-19 pandemic will be ‘V’-Shaped, even a 20% drop in GDP, combined with zero interest rates, price support for government bonds, and fiscal expansion on a scale not seen since FDR’s ‘New Deal,’ will result in a steeply rising stock market. If, on the other hand, it becomes evident that a tsunami of creative destruction is sweeping entire industries away, even the most sumptuous of New Deals may not be enough to stem the flood of stock liquidation as investors flee to the safety of cash.
So far, the official policy response has been enough to persuade investors that a slump will not occur. If you scratch the surface of the S&P 500, though, you’ll see a very different image. The graph below depicts the market’s performance through the end of May. Since then, the S&P 500 index has been driven by the same five technology stocks:
The most successful industry has been technology. One rationale for such high valuations is that the pandemic has hastened a wide range of technological advancements, resulting in the possibility of considerably faster profits. The net present value of future technology cash flows has been shifted forward by several years, according to some analysts. It’s no surprise, they say, that these equities have shattered new all-time highs and will continue to rise.
The broader stock market has been riding the coattails of tech since May (at the time of writing, the MSCI World Index is up 1.73 percent YTD). For the time being, hope wins out over fear, although vaccines are still months away from becoming publicly available. Meanwhile, autumn is approaching in the Northern Hemisphere, bringing with it fears of a second wave of diseases.
The scenario is even worse for emerging markets. In Foreign Affairs The Pandemic Depression, Carmen and Vincent Reinhart wrote:
Despite being labeled a “global financial crisis,” the 2008 downturn was mostly a banking crisis in 11 advanced economies. Emerging economies were remarkably immune to the volatility of the recent global crisis, thanks to double-digit growth in China, strong commodity prices, and lean balance sheets. The current economic downturn is unique. Because of the worldwide nature of this shockthe new coronavirus knows no national bordersa bigger percentage of the global society is in recession than at any point since the Great Depression. As a result, the recovery will be slower and less robust than the downturn. Finally, the fiscal and monetary policies implemented to combat the contraction will alleviate rather than erase economic losses, implying that the global economy will take a long time to recover to where it was at the beginning of 2020.
According to the World Bank, more than 60 million people will be forced into extreme poverty globally. Meanwhile, in wealthy countries, bankruptcies that have been postponed due to government involvement may experience personal epiphanies as fiscal generosity is abruptly withdrawn. The demise of broad swaths of sophisticated market economies has just been postponed unless the lockdown limitations are relaxed and people feel safe, both medically and financially, to venture out and spend.
We will have had two quarters of reduced growth by next month, indicating that we are already in a serious recession. Large swaths of the economy have been irreversibly transformed, increasing the likelihood of a slump. Millions of workers have been displaced, and retraining them will take far longer than a few months. It will be difficult for new and existing businesses to grow and hire new staff without the consumer demand from these former employees.
Fiscal spending will have to be done on a far larger scale and for much longer than previously anticipated. Since 1850, it has taken an average of eight years for per capita GDP to recover to pre-crisis levels in all major financial crises. The G20 response to the epidemic is estimated to have cost $11 trillion so far. The majority of these actions have been described as “temporary” or “short-term.” It is becoming increasingly evident that the disruption to employment, business, and economic sectors will be lengthy and, in many cases, permanent.
According to the IMF, the deficit-to-GDP ratio in advanced nations will grow from 3.3 percent in 2019 to 16.6 percent this year. The ratio is predicted to rise from 4.9 percent last year to 10.6 percent in 2020 for emerging nations, where budgetary expansion is more limited. While borrowing rates in established economies have stayed low, they have increased in emerging markets. The burden of fiscal stimulus will invariably fall most heavily on the advanced economies’ treasuries.
Conclusion
This isn’t the conclusion of the story. This isn’t even the start of the end. But it’s possible that this is the end of the beginning.
Individual economic needs are still important in Western (and other) aging civilizations. Governments in developed countries are fortunate in that they can borrow at lower rates than at any other period in history. While it goes against my Austrian, free-market principles, I have to admit that fiscal policy is the least painful weapon available to resist the pandemic’s economic catharsis. There will be a significant cost in terms of economics, but the alternative is a deadly mix of political fragmentation and polarization.
The goal of securing consistent real income for investors remains difficult. High-yielding private debt and asset-backed lending carries both default and liquidity risk. Financial repression is rampant across the credit spectrum, as shown in the chart below, which looks at some of the public market options:
High-income stocks may be a viable option, but no matter how ‘blue-chip’ the name, there is no certainty. Growth stocks, in general, are benefiting from the historically low-interest environment, but there will be a higher number of failures because the cost of speculative capital is also at an all-time low. Active management has been out of favor for at least a decade, but in the future, capital preservation will be more important than reaping large returns.
In June, I published a piece called A Brave New World for Value Investing, in which I concluded that:
Since late March, the stock and corporate bond markets have restored most of their stability. The repercussions of the global economic slowdown have been mitigated by central banks and governments. As the dust settles, the financial markets will adjust to a new environment, one in which value-based stock and bond market analysis will be an invaluable tool for navigating the waters.
The simultaneous supply and demand shocks, as well as their impact on global supply networks, have heightened the geopolitics of trade policy, which was already a source of conflict before the epidemic arrived. Supply networks will become shorter and more diverse. In the months and years ahead, robustness, not efficiency, will be the watchword. This shift in the global economy’s functioning will not come without a price. It will manifest itself in higher pricing or lower corporate profits. In this brave new world, value-based investment analysis will be the finest guidance.
An additional approach, a momentum overlay, would be added to the investment toolbox. Capital flows will be a formidable arbiter of investment return as fiscal and monetary policy continue to support economies as they transition to the new world order. By most conventional measures, technology companies appear to be overvalued, yet the trend is undeniable. After all, financial market liquidity flows like a tide, so don’t be like Cnut The Great and follow Brutus’ advice in the opening statement.
What does a recession look like?
There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.
Is another Great Depression on the horizon?
ITR Economics has predicted that a second Great Depression will emerge in the 2030s for many years. The path to the Great Depression will be significant in and of itself, with numerous opportunities and changes presented. As we all want to optimize earnings and enterprise value, business leaders must begin planning for such changes today.
What trends are influencing this prediction? What should businesses do to prepare for the 2020s? Is there anything that could cause this forecast to change? Check out our resources to discover more about the global impact of this economic catastrophe.
How might a depression appear?
Although depression manifests itself differently in each individual, there are certain similar indications and symptoms. It’s crucial to keep in mind that these symptoms are common throughout life’s low points. However, the more symptoms you experience, the more severe they are, and the longer they’ve been present, the more probable you are suffering from depression.
common depression symptoms
- Helplessness and a sense of hopelessness. A pessimistic outlooknothing will ever get better, and there’s nothing you can do to change things.
- Loss of interest in day-to-day tasks. Former hobbies, diversions, social activities, and sex are no longer important to you. You’ve lost your ability to experience pleasure and delight.
- Changes in appetite or weight. A change of more than 5% of body weight in a month is considered significant weight loss or increase.
- Sleep patterns shift. Oversleeping or sleeplessness, particularly waking in the early hours of the morning.
- Irritability or rage. Feeling restless, irritated, or even violent. You have a low tolerance level, a quick temper, and everything and everyone grates on your nerves.
- Energy depletion. I’m tired, sluggish, and physically exhausted. It’s possible that your entire body feels heavy, and even simple tasks become exhausting or take longer to perform.
- Self-loathing. Feelings of insignificance or remorse. You are critical of yourself for perceived flaws and errors.
- Unpredictable behavior. You indulge in escapist activities such as substance misuse, compulsive gambling, reckless driving, or dangerous sports as a means of escaping reality.
- Problems with concentration. Focusing, making decisions, and remembering things are all difficult for you.
- Aches and pains that don’t seem to be going away. Physical symptoms such as headaches, back discomfort, hurting muscles, and stomach pain have increased.
