Is this a depression?
What’s a depression anyway? Basically, a depression is a very long recession.
You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.
The economy is in a depression when the banks are sitting on $1.3-trillion (U.S.) of cash and yet there is no lending going on to the private sector. It’s called a liquidity trap.
Depressions, usually, are caused by a bursting of an asset bubble and a contraction in credit, whereas a “plain-vanilla” recession is typically caused by inflation and excessive manufacturing inventories.
You tell me which fits the bill today.
After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead... The fact that there has been no sustained response is testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression.
When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession. True, we can’t see the soup lines; but the soup lines are in the mail – 99 weeks of unemployment cheques for more than 10 million jobless Americans. Don’t be lulled into the view that we are into anything remotely close to a normal economic cycle.
In a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away. That could be a reason why we saw existing home sales slide to 15-year lows and new home sales to record lows despite mortgage rates tumbling to their lowest levels in modern history.
More fundamentally, in a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between these two states.
Let’s be clear. After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response is testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the bond market is signalling, with U.S. Treasury yields rapidly approaching Japanese levels.
