Welcome to the Great Depression Episode 2

With the financial situations getting worse and worse every day, everyone now admits that we’re already in recession. But not everyone, certainly not the governments, will admit that we’re in a depression.

The textbook definition of a recession is that when a nation’s economic outputs shrinks for two consecutive quarters, the nation is said to be in recession. This is a clear-cut criterion. Once when the GDP figures for the previous two quarters are available, it can easily be determined whether the country is, or is not, in recession.

For depression, that’s not so clear-cut because there is no straight-forward definition of depression. Generally speaking, a depression is a prolonged and severe recession. But there are no objective statistical figures that enable one to say with certainty that whether it is, or it is not, a depression.

While there were many recessions littered throughout recent economic history, there was only one depression – the Great Depression that started in 1929 and lasted for decades. Many economists quote figures from the period of the Great Depression (such as 25% unemployment rate) in order to characterize a recession as a depression. The unemployment figure is 7.6% (as of January 2009), so we’re not in a depression. When the Great Depression began, the unemployment rate was 8.7%, and eventually reached its peak of 25% a few years later.
My take is that we're in a depression – just the early stage of it. However, “depression” is a taboo word for governments. Governments would try to do anything but to declare depression because that will not only weaken the government’s reputation, it may also cause people to panic, and society may become unrest.

Some (I, for one) believe that we are sliding into a depression. Our current economy does not exhibit those figures – yet, because we are still early in the depression cycle. However, given the magnitude and the coverage of the current financial crises, I believe this depression will be even “greater” (read: longer and deeper) than the first one, the Great Depression of the 1930s, which I call the Great Depression I. Logically I call the depression we’re in now the Great Depression Epsiode 2.

Note: This post is a republish from Welcome to Great Depression II on wordpress and has been back-dated to refelct the original date of publish.