If you read the Wall Street Journal, there is at least a 30% chance that the economy will slip in to a depression rather than only the recession that we’re currently in. Before we decide if we believe that a recession is in our future, let’s take a look at what each of these are.
Remember that the economy is a relatively predictable thing. Generally 6 to 10 years of steady growth will be followed by a downturn. Often, it’s a recession of some degree of severity. Although the effects of a recession can be seen affecting the lives of real people and that alone makes it a big deal, speaking in the purely economic sense, a recession is part of the cycle and it will get better.
A recession is hard to define. We can’t identify it until long after it starts because sometimes downturns are temporary blips that quickly recover. The general definition of a depression is 2 consecutive quarters (6 months) where the Gross Domestic Product decreases. The GDP is simply the value of our stuff and our talents. All of us and the businesses we run are added up. Even the worst recession isn’t largely considered to be catastrophic for the country as a whole. We all know about “The Great Depression” but how many every day Americans can speak about the last recession?
The last Depression was The Great Depression of 1929. Unemployment was 25%. (as of the printing of this article, we are at 7.2%) Wages fell 42% (If you make $35,000 per year, your wages would have fallen to just over $20,000) and the output of all goods and services produced by the U.S. was cut in half. We have all seen the pictures of people standing in line for food and standing in the streets homeless. Double digit unemployment last until 1941 when the U.S. entered World War II. Recessions may last a couple of years where depressions last much longer.
What causes a recession to become a depression? This is another question that is very difficult to answer. In this case, politicians will blame their opposing parts and its policies, others will say that it’s a normal part of an economy that is always expanding and contracting, and many other theories too complicated for us to discuss here.
So the question is this: Is the Wall Street Journal’s article saying that the recession of the early part of 2008 may become a depression? First, it’s important to remember that after The Great Depression, numerous policies and agencies were created to prevent a downturn of that magnitude to ever happen again. Next, we are still quite a long way away from anything of the magnitude of 1929.
None of us can say with any confidence how bad it will be. I think it’s highly important to be defensive with your money. Put all of your “wants” on the back burner and only buy what you need. Save as much money as you can and be as thrifty as possible. Assume the worst right now.
If you want my prediction, I believe that this will be a recession that will start recovering in early 2010.