Chance of another Depression

[shotgunner]

I don't much like the fact the "D" word is being discussed but it is.

I was surprised by the number of replies to the Paul Krugman article I posted, "The Third Depression". Once again I enjoyed the intelligent discourse and variety of opinions. I am guessing at present overall sentiment is negative, but I am wondering now that we have read his article and some others that have been linked to it what the groups best guess is regarding the chances of another depression.


Of course this depends on how one defines a Depression. For starters, stock market falls at or below DOW 4200, unemployment as reported increase to 15% or more.

 

[Walt34]

I don't see a Depression coming, but a long slow period in inflation creeping up. There are only three ways out of the current national debt: Raise taxes, reduce spending, or reduce the value of the dollar via inflation to pay it back with cheaper dollars.

Since politicians don't have the stomach to do either of the first two I see the last as the most likely outcome.

But that's just my opinion.

 

[ziggy29]

Of course this depends on how one defines a Depression. For starters, stock market falls at or below DOW 4200, unemployment as reported increase to 15% or more.

I don't know about Dow 4200, but 15% unemployment wouldn't shock me. I think the day of reckoning for public employees is here. In the past they have largely been shielded from layoffs during an economic downturn but a look at state and local budgets tells me that this is no longer possible.

This will probably create another wave of consumer pullback and cash-hoarding and tank the economy anew.

Sounds gloomy, I know, but I don't know how else this resolves.

 

[dex]

You should added a time limit.

 

[audreyh1]

I don't see a Depression coming, but a long slow period in inflation creeping up. There are only three ways out of the current national debt: Raise taxes, reduce spending, or reduce the value of the dollar via inflation to pay it back with cheaper dollars.

Since politicians don't have the stomach to do either of the first two I see the last as the most likely outcome.

But that's just my opinion.

Unfortunately, I think we'll have to get through a long slow period of deflation first!

Audrey

 

[shotgunner]

You should added a time limit.

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

 

[dex]

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

I meant in the the options - e.g. within 20 years etc.

 

[ziggy29]

Unfortunately, I think we'll have to get through a long slow period of deflation first!

I think so. We won't have much inflation as long as the economy is terrible, the employment picture is dismal and people slam their wallets shut for anything that isn't necessary.

The seeds for inflation have been planted, but it won't "grow" until the economy improves enough to increase the velocity of money.

 

[FUEGO]

I doubt we'll see one. Too many social safety nets in place today to really have a full blown Depression a la The Great Depression. People won't be going hungry. Most won't become homeless. Men won't leave their families when they lose their jobs and can't find work.

But it really depends on how you define "Depression". 10 years of the economy muddling along in fits and spurts, with continued ~10% unemployment for most of a decade? Maybe. Probably not though. Sure, some will experience their own personal economic depressions. Those who grew used to asset bubbles from the 1990's until 2007 will eventually figure out that they can't live off of selling 10-bagger dot coms or endlessly refi'ing equity out of houses. For most folks, they will muddle through these difficult economic times, eventually unemployment will drop and we will all be busier than ever.

 

[seabourne]

One of my greater concerns in relation to inflation is that we've added an immense amount to M1 (generally, basic money) but because the banks aren't lending much and business are building up defensive cash positions, the multiplier has been so greatly reduced that the total effective money supply has not much increased, certainly not to the scale of the M1 change. Once you see an improvement in lending and capital investment, however, you'll kick up the multiplier, and the government is not likely to quickly reduce M1 to compensate. leaving the economy much more vulnerable to a sudden increase in inflation, because the M1 that the multiplier is working on is greatly increased and to inflation will be more sensitive.

 

[Bikerdude]

I certainly hope we never see another "Great Depression". I don't see the current generation passively accepting their fate standing in a soup line with hat in hand.

 

[Tigger]

Great Correction Expectations

EDIT:

@REWahoo: "A link without explanation is like a day without sunshine".

Ok, so what ARE the chances for another Depression?

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."

So a depression is a particularly bad and long recession, with a lot of unpleasant things that we have seen in recent years (high unemployment, falls in availability of credit, banking crisis, shrinking output, bankruptcies, significantly reduced trade (Baltic Dry Index is heading south again), currency volatility, etc.) or that may start unfolding soon (sovereign debt defaults (the Greeks are already sweating, several US states too), devaluations).

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.

IMHO the current situation doesn't look very good (which is what I hinted at with my link; I don't like Bill Bonner much, but this article struck a chord with me), even if you believe official numbers, which I don't. ("There are three kinds of lies: lies, damned lies, and statistics." - Benjamin Disraeli)

Maybe later 2010 will be considered as part of a depression. Maybe not. I'm a sourpuss and have been expecting a once in a generation crisis since 2008. But I'm no economist and maybe I'm just attaching too much importance to bearish noises on teh interwebs.

I voted "Likely".

 

[REWahoo]

"A link without explanation is like a day without sunshine".

 

[unclemick]

1966 to 1982 was kinda fun(or chewy depending on your view) - of course I was younger then - will the last person leaving Seattle turn out the lights.



Now that I'm older and the Saints have finally, finally, finally won a Superbowl and the lead sled dog in my ER is a Target Retirement fund rebalancing on full auto - what's a guy gonna do?

Hmmmmm

heh heh heh - I took all this stuff much more serious when I was younger.

 

[RonBoyd]

I voted with the majority... because that opinion is what allows me to sleep at night.

 

[harley]

Of course this depends on how one defines a Depression. For starters, stock market falls at or below DOW 4200, unemployment as reported increase to 15% or more.

I think things can and likely might get worse than they are now. Real unemployment (the U6 number - Table A-15. Alternative measures of labor underutilization) is already well above 15%. It could get worse, even if the official numbers don't reflect it. Despite my desire to buy back into the market at low prices, I doubt we'll see the Dow go much below 8000, maybe as far as 7000. I hope I'm wrong, but I just don't think the gov't can keep the pain away. Anyway, I said unlikely as far as a Depression goes. Just another depressing recession.

 

[chinaco]

Just as the stock market is suffering under uncertainty... businesses have some uncertainty about the near future which is causing them to hold back on hiring.

One uncertainty that needs to be resolved is Financial Reform. No matter what winds up in the bill... once it is done, companies will better understand how to set direction. Because the financial industry is central to all businesses... it has left many businesses somewhat paralyzed.

 

[Pete]

Interesting that only 43% of the people who voted think a depression is unlikely (so far). Pretty negative for this group with my experience here over the years. I hope the general public isn't thinking the same way.

I don't think a depression is as likely as some sort of debt default. I don't really know what a default looks like, but it wouldn't hurt to have plenty of food, water, ammo, and some physical gold around the house.

 

[REWahoo]

Pete, I think it is even more interesting a [-]couple of[/-] few posters believe another Depression is "Unavoidable". Whaddya bet they completed the poll from an undisclosed, secure underground bunker?

An old guy (come to think of it, probably about my current age ) I worked with for years was always saying "Things rarely turn out as good as you hope or as bad as you fear."

 

[dex]

Pete, I think it is even more interesting a couple of posters believe another Depression is "Unavoidable". Whaddya bet they completed the poll from an undisclosed, secure underground bunker?

An old guy (come to think of it, probably about my current age ) I worked with for years was always saying "Things rarely turn out as good as you hope or as bad as you fear."

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?

 

[IndependentlyPoor]

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]

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]

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]

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]

"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.