Chance of another Depression

[IndependentlyPoor]

Quote:

Originally Posted by dex I answered 'unavoidable' because we have had them in the past and nothing has change to avoid them. If anything the world is in a fragile financial situation due to the sovereign debt, corporate debt, and personal debt If the question had a time period, I may have answered differently. For those who answered 'somewhat unlikely' or better the question is: What has changed to prevent a future depression?

Securities Act of 1933
Banking Act of 1933 (oops, a little back-sliding here.)
Securities Exchange Act of 1934

[FUEGO]

Quote:

Originally Posted by dex For those who answered 'somewhat unlikely' or better the question is: What has changed to prevent a future depression?

I assumed that the poll was referring to chances of a Depression in the current economic down-cycle, not that it may happen sometime between now and eternity.

What's different now vs the 1930's depression? So many social safety nets. Social security. Larger government employment. Welfare, bailouts, medicaid, FDIC/NCUA insurance, securities regulation (see previous post). Agricultural subsidies. People are generally wealthier. More available credit and liquidity to access wealth tied up in assets (refi mortgages, HELOCs, etc although the credit crisis in 2008 dampened the availability of some of this).

I recently finished reading Studs Terkel's "Hard Times". My take on the Depression of the 1930's is that the poor got poorer, the middle class got poorer and the rich got poorer. Plenty of middle class and rich folks made do with less income and they mostly experienced a more muted form of "hard times". But the middle class and the rich were still middling to rich. The poor of course were hit the hardest - no savings to draw on, low education levels, hence little prospect to find different kinds of work.

Will a Depression ever happen again? Sure, maybe next year (but very unlikely in my opinion), maybe this decade, maybe this century. Who knows? Most on this board who have accumulated sufficient assets and have little or no debt will be poorer should a depression hit. But they will still be middle class to rich relative to all the other poor people out there.

[audreyh1]

Quote:

Originally Posted by Tigger In December 2008 the NBER decided that a recession had started a year earlier. They met again in April 2010 and decided that was it too soon to conclude that the current recession has ended. I suppose that IF this is (becoming) a "depression", it will only be officially recognized after a loooooong delay - official sources will probably avoid the D word as long as they can, as scaring the consumer hurts the "recovery" and elections are coming.

The NBER is well known for taking a year or more to declare the end of a recession. We have had several quarters of decent growth, and many other experts, most noticeably ECRI say the recession ended early summer 2009.

I don't think this current business cycle will count as a super long recession considering that we aren't currently in one.

Audrey

[dex]

Quote:

Originally Posted by FUEGO What's different now vs the 1930's depression? So many social safety nets. Social security. Larger government employment. Welfare, bailouts, medicaid, FDIC/NCUA insurance, securities regulation (see previous post). Agricultural subsidies. People are generally wealthier. More available credit and liquidity to access wealth tied up in assets (refi mortgages, HELOCs, etc although the credit crisis in 2008 dampened the availability of some of this).

None of those thing prevent a depression. The question was about prevention. There have been 10 contractions since 1940. If contractions can not be prevented; how can depressions be prevented? They are a more severe downturn than a recession.

http://www.nber.org/cycles/cyclesmain.html


Wikipedia on economic depressions:
"a more severe downturn than a recession, which is seen by economists as part of a normal business cycle. Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormally large increases in unemployment, falls in the availability of credit— quite often due to some kind of banking/financial crisis, shrinking output and investment, numerous bankruptcies— including sovereign debt defaults, significantly reduced amounts of trade and commerce— especially international, as well as highly volatile relative currency value fluctuations— most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression. (...) There is no widely agreed definition for a depression, though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions. Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output). Another proposed definition of depression includes two general rules: 1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2 or more years."

[Tigger]

Quote:

Originally Posted by REWahoo "Things rarely turn out as good as you hope or as bad as you fear."

I agree! But then again, D's rarely happen but do hurt a lot when they end up happening.

I tend to "Prepare for the worst and hope for the best". Which can be harmful for my wealth, so I try not to get carried away.

Please be gentle with the tar and feathers when this thing will have blown over without any real D.

[audreyh1]

Quote:

Originally Posted by dex None of those thing prevent a depression. The question was about prevention. There have been 10 contractions since 1940. If contractions can not be prevented; how can depressions be prevented? They are [I]a more severe downturn than a recession.

You don't have to prevent a contraction to avoid a depression, you just have to have mechanisms in place that limit how bad contractions get. That is the whole point of most of the policies - and a big part of the Fed's job. And other policies try to limit things that make business cycle volatility worse on both extremes - things like leverage.

Audrey

[jIMOh]

Quote:

Originally Posted by shotgunner on the poll? Oops didn't see the option. Perhaps one of the mods can help by adding one.

Unavoidable in next 1000 years for sure, maybe within next 500, and possibly even next 100, might even be now LOL.

[FUEGO]

Quote:

Originally Posted by dex None of those thing prevent a depression. The question was about prevention. There have been 10 contractions since 1940. If contractions can not be prevented; how can depressions be prevented? They are a more severe downturn than a recession.

Audrey succinctly addressed this, but basically you dampen the severity of the contraction to prevent it from becoming a depression (or at the least, make it a less severe depression).

I don't think anyone is proposing a solution to the problem of recessions. I think they are a natural, beneficial, painful, and necessary part of our economic cycles.

Do you think things like giving people 2 years paid unemployment versus nothing have zero effect on peoples' ability to pay their debts and continue as consumers? Do you think having the full faith and credit of the USA behind $250,000+ of my money on deposit with banks does zero to prevent runs on banks and the cascading effect of bank failures?

I'm not trying to get into a debate on the relative merits of Keynesian vs. Hayek approach to recessions. Just sayin' there's some social safety nets in place today that seem to dampen the volatility of economic cycles. Whether the Keynesian approach is "better" on a macro scale is debatable, but it certainly seems that anecdotally I know people that have kept their houses because of unemployment payments. And business owners that refrained from rushing to the bank to withdraw their own and their company's millions in cash (instead spreading it around to a number of institutions so as to not max out the $250,000 limit).

[dex]

Quote:

Originally Posted by audreyh1 You don't have to prevent a contraction to avoid a recession, you just have to have mechanisms in place that limit how bad contractions get. That is the whole point of most of the policies - and a big part of the Fed's job. And other policies try to limit things that make business cycle volatility worse on both extremes - things like leverage. Audrey

According to the definitions a economic contraction is a recession. There is not definition of a depression except for a severe downturn than a recession. So the difference between a recession and depression is subjective.

I agree that one of the Fed's jobs is 'to try limit things that make business cycle volatility worse on both extremes'. However, since 1913 when the act was enacted they do not have a good track record of doing so. We will continue to have economic contractions of the severe and not so severe type.

If, in the poll the word 'depression' was changed to severe contraction, I think more people would vote towards the 'likely' response.

You might find this interesting.
http://ttheory.typepad.com/files/40y...epressions.pdf

[FinanceDude]

SURE, we COULD have another Depression, but also:

1)The world could end in 2012 if you believe the Mayan Calendar

2)One of those big supervolcanoes lurking under Yellowstone could erupt

3)An Ice Age could reappear and freeze us all to death

4)North Korea could start a nuclear war, which noone would win

These are things much worse than any Depression..........

[bbbamI]

I'm really depressed now. Dawg...may I borrow a med or two?

[Pete]

Quote:

Originally Posted by dex If, in the poll the word 'depression' was changed to severe contraction, I think more people would vote towards the 'likely' response.

If that were the definition, I'd say we've (Americans) been in one, and are still in one.

[FUEGO]

Quote:

Originally Posted by Pete If that were the definition, I'd say we've (Americans) been in one, and are still in one.

For a brief period it seems we were experiencing severe contraction. However we are still experiencing this now? Seems like we came out of it a while back and we are experiencing economic expansion now.

One can argue that it is all government stimulated and absent the stimulus we would be in a prolonged continued severe contraction. But the last few quarters we have seen economic expansion.

The Great Depression was characterized by four years of economic contraction, followed by general growth but sustained high unemployment for a few more years, and then in the mid-late 30's the economy weakened again. We haven't had it nearly that bad this time around.

[dex]

Quote:

Originally Posted by FUEGO For a brief period it seems we were experiencing severe contraction. However we are still experiencing this now? .

From the organization that calls them. If no turn up by Dec' 10 it will be 3 years. When you look at U6 (used during the '30s) instead of U3 - unemployment is in the teens.

Business Cycle Dating Committee, National Bureau of Economic Research


CAMBRIDGE, April 12 -- The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

[Pete]

Quote:

Originally Posted by FUEGO One can argue that it is all government stimulated and absent the stimulus we would be in a prolonged continued severe contraction. But the last few quarters we have seen economic expansion.

I would argue that. Stimulus is a nice word for borrowing. I hope people take the prudent action of saving as many of the dollars they print to prepare for inflation, higher taxes, and reduced gov't benefits and services from all this "expansion".

[FUEGO]

Quote:

Originally Posted by Pete I would argue that. Stimulus is a nice word for borrowing. I hope people take the prudent action of saving as many of the dollars they print to prepare for inflation, higher taxes, and reduced gov't benefits and services from all this "expansion".

By your logic, the Great Depression stretched well into the 1940's (some of the highest levels of employment our nation has ever seen)? I mean, all that war spending was just government spending, stimulus, borrowing, what have you.

[audreyh1]

Quote:

Originally Posted by dex From the organization that calls them. If no turn up by Dec' 10 it will be 3 years. When you look at U6 (used during the '30s) instead of U3 - unemployment is in the teens. Business Cycle Dating Committee, National Bureau of Economic Research CAMBRIDGE, April 12 -- The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

DEX!

I have pointed out several times, that the NBER often takes over a year to pinpoint the exact end of a recession. Don't interpret what they say to mean we are still in one! We are not. They aren't claiming we are in one either. They are just saying they haven't enough data to pin point the exact "trough" date and the beginning of the current expansion yet.

They likely will select early summer 2009 as the end of the Dec 2007 recession as most economists have already. That means it was a 1.5 year recession, and we have already had a year of expansion.

Audrey

[FUEGO]

Quote:

Originally Posted by dex From the organization that calls them. If no turn up by Dec' 10 it will be 3 years. When you look at U6 (used during the '30s) instead of U3 - unemployment is in the teens.

I'm no economic historian, and I honestly wish I knew more in that area.

From some quick searching, I found this:
U3 and U6 Unemployment during the Great Depression | The Economic Populist

U3 and U6 as we collect them today didn't exist pre-1947. At least one comparison has U3 and U6 peaking at 25% and 37% respectively at the worst part of the Great Depression. If so, we are still a loooong way from reaching those levels of unemployment. Even if the U6 during the Great Depression was "just" 25%, we are still a long ways from that level of U6 unemployment.

I really don't know which way the economy is headed. My educated guess is that we have rounded the corner from contraction and we are back into expansion or at the least things have leveled out. Private employers have started to hire. Productivity has been climbing for a while now. GDP growth is positive.

[FinanceDude]

Quote:

Originally Posted by FUEGO I really don't know which way the economy is headed. My educated guess is that we have rounded the corner from contraction and we are back into expansion or at the least things have leveled out. Private employers have started to hire. Productivity has been climbing for a while now. GDP growth is positive.

Depends on where in the US you are........anyone think Detroit is having a resurgence?

[FUEGO]

Quote:

Originally Posted by FinanceDude Depends on where in the US you are........anyone think Detroit is having a resurgence?

Sure, in some sectors. Bankrupcty attorneys, DEA agents, repo men, arson investigators, private security, medicaid docs, etc.