Believe it or not, there is not an actual consensus definition of what a depression is. Economists, government officials, and television pundits cannot agree on how to define it, and many are not trying too hard for fear of bringing back visions of a financial time that many Americans would like to forget. The term recession did not even exist in our vocabulary until the crash of 1937. The country was still in the middle of the Great Depression when the economy took another turn for the worst, but no one knew what to call the dip in the stock market. Hence, the term recession was born, and America never returned to depression.
After the Great Depression, politicians and economists were rightfully reluctant to label any other downturn in the stock market as another depression. Many like to test the waters calling our current calamity a “Mini D”. They cannot even bring themselves to say the word “Depression” let alone claim we are / were in one.
But, that leads us back to our question, what makes a depression a depression? Let’s take a look at some economic data between now and the 1930’s.
2009 Bear Market
|– 36 months of negative returns||– Only 15 months so far|
|– 10% Gross Domestic Product (GDP) drop||– 3.8% so far|
|– Unemployment over 11%||– 7 to 8%|
|– Under employment of 20%||– 13.9% of Americans taking lesser jobs|
|– Stuck on the gold standard||– Floating fiat currency|
|– No guarantees||– FDIC insurance, unemployment benefits, SEC, Social Security, etc. now in place|
|– Smoot-Hawley Act of 1930 raises protectionism & tariffs ***||– Free trade and open markets keep imports & exports flowing|
|– Over 9,000 banks failed||– 25 failed in 2008 and 19 so far in 2009 (as of March 24th)|
|– The money supply shrank by 1/3||– The Federal Reserve has already added over $1 trillion of new money into the economy.|
*** The average rate of taxes on imports between 1921 and 1925 was 25.9%. But, under Smoot-Hawley, tariffs jumped to 50% between 1931 and 1935.
So, are we in a depression now? I think that the statistics speak for themselves. We would have to see a bear market that lasts a lot longer than our current one to really deserve talks of the dreaded D. Now that America’s economy is showing signs of finally flattening because our federal government has pumped trillions of dollars into it, maybe we call all set aside some of our worst fears that we have all been afraid to address or even acknowledge.