My experience in talking with people about this issue tends to flow along these patterns: most old people (80+) expect a depression soon, and most younger people say it can’t happen. Could the U.S. have another depression?
Well, there are always cyclical recessions and depressions, aren’t there?
Could there be another Great Depression as in the 1930s, I doubt it. Economics is a well-versed subject and investors don’t tend to put all their eggs in one basket nowadays.
But IANAE.
We may be in a recession right now.
That said, another Great Depression (1929-1939) is unlikely, though of course not impossible. There were a number of policy errors made during the depression that are unlikely to be repeated. The Federal Reserve cut interest rates slower than it should have, partly because the US was on the gold standard at the time. There were weaker automatic fiscal stabilizers.
Plus, economists had yet to develop a model of the whole economy – that only was proposed in 1936 by Keynes.
That’s not “experience”, that is “opinion” and unless those old people are bankers or economists or other people well versed in economics, it is largely meaningless.
A depression certainly could happen in the sense that there is a non-zero probability of it happening. Many economists believe we are heading into a recession in 2008, mostly precipitated by the subprime lending fiasco.
I don’t believe that we will head into a full-fledged depression any time soon though. The government will pretty much bail out all the dummies who bought houses they couldn’t afford.
His experience is of talking to people about economics, not economics itself.
If enough people lose confidence in the system, then it will surely collapse. However, before that happens, the U.S. government will do just about everything it can to shore up peoples’ confidence. Given that the government has, at present, a huge amount of power and prestige, it seems very unlikely that a depression will occur.
In my (lay) opinion, the most likely scenario that would cause a U.S. depression in the next 50 years is a major disaster, such as an meteor strike.
How shall we define “depression”?
There could be a deflationary spiral like in the Great Depression.
Do I Expect one? - nope. Do I think it is really, really likely? Nope. Is is impossible? Nope. We should be OK, largely because People are on the watch for it after seeing what happened in Japan in the early 90’s easy credit artificially in some cases creating an unrealistic and unsustainable bubble.
From the link what caused Japan’s deflation I think almost all of these are present today in the U.S.
*Systemic reasons for deflation in Japan can be said to include:
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Fallen asset prices. There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.
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Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid. The banks could try to collect on the collateral (land), but this wouldn’t pay off the loan. Banks have delayed that decision, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an “unrealized loss”, and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy. Improving bankruptcy law, land transfer law, and tax law have been suggested (by The Economist) as methods to speed this process and thus end the deflation.
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Insolvent banks: Banks with a larger percentage of their loans which are “non-performing”, that is to say, they are not receiving payments on them, but have not yet written them off, cannot lend more money; they must increase their cash reserves to cover the bad loans.
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Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices.
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Imported deflation: Japan imports Chinese and other countries’ inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.*
We can and, in time, WILL fall into a depression. Nothing lasts forever. Will it happen during my lifetime? I don’t know. During my kids’ lifetime? More likely, but I still don’t know.
If nothing else, let’s keep in mind the Dust Bowl… if changing climate patterns made our farms far less productive - even if only for 4 years or so… - we’d have problems.
We might be more diversified, but… you can only take so many hits to any economy.
petew83: "Could we have another depression?"
You forgot to say please.
Yeah, and Fed Chairman Ben Bernanke wrote a very influential paper up the links between the Great Depression and banking failure.
You missed one. Japan got itself in a liquidity trap when the central bank permitted prices to fall (deflation). With core inflation running at around 2% now, we have a ways to go before that happens… and the Federal Reserve Board is very much attuned to this risk.
Someday though, (30 years, 130 years?) the experts may fall asleep at the switch.
I don’t think there’s an agreed definition, other than “If your neighbor loses his job, it’s a recession, but if you lose your job…”
My definition would be, “A situation in a developed country during times of peace where unemployment stays above 20% for years.” That is, it’s a recession which is both deeper and longer than the ordinary kind.
I would informally define depression as a sort of economic “gridlock”: a state where the economy is trapped in a self-defeating circle of low demand, low production, unemployment, and low income, leading back to low demand. As Japan showed, merely being schooled in the tenets of Keynesian economics doesn’t mean you can’t fall into that trap, but it’s much less likely. The big question is whether some economic catastrophe could strike that all the government policy in the world couldn’t do anything about. It might not technically be a “depression”, but the distinction would be lost on a country suffering unemployment, crippling debt, and a loss of competitiveness.
Japan had a decent safety net in place though. So when they experienced an extended period of low growth during the 1990s, there was insufficient political pressure to take certain necessary steps (i.e. liquidate some of the banks and start over).
It was not a depression, but rather an extended period of poor growth policy. Something like that could and will happen anywhere.
That seems as good a definition as any. Most people define a recession as a period of reduced real production over several quarters. A depression seems to have that ‘vicious circle’ effect where the economy can’t correct itself without help. Keynesians believe that increased government spending is critical to reduce the effects of a depression as private industry tends to be adverse to investing and expanding under those circumstances.
Recession is when your friends and neighbors get laid off.A depression is if you get laid off.
The rich have been doing very well the last few years. To them the economy is just percolating right along. Country wide to dump 26,000 workers. No problem. Wont affect them. The pols are safe and secure. They will not be laid off.
I have seen horrible indicators. The unemployment rate is a scam. The real rate is much higher. I just had a friend run out of unemployment . No extension because the rate is under 5.5. It is no where near that.
The economy is run by monkeys. Too short term to be humans. No consideration beyond a year. It is reactionary .It has no real long term planning .
I was really astonished by the “Let them eat cake” -style replies of most of the Republican candidates a while back when asked about the economy in front of a Michigan audience. They seemed to have no idea that the economy was in any sort of trouble. (The troubles hadn’t made a serious dent in Wall Street yet, at that point.)
The disconnect between Wall Street and Main Street is pretty large, I think, which explains in part why Huckabee’s populist economic message has found an audience.
Yeah, that “Let Them Eat Cake” stuff was a significant contributor to the cause the Great Depression and it’s depth. Lessons were not learned, judging from the continued blinkered hubris, and it can happen again if we let that lot run things much longer.
Georgia is a bit of a canary in the coal mine on foreclosure rates, since our laws make Georgia the easiest state in which to foreclose on a home. As a consequence, foreclosure statistics nationally tend to lag a few months behind those in Georgia.
So here’s a little preview for the nation:
Metro Atlanta foreclosures shot to a record high of 7,000 this month.
:dubious: Not until you finish every last bite of your recession!