Calling a Depression

I’m going out on a limb here, and I’m going to suggest that we have already entered a depression.  The concept of a depression is even less objective than that of a recession,  but some suggest that a decline in real GDP of 10% or more is the criterion, which we have not attained yet.

I don’t think a 10% decline in GDP is the right threshold.  Depressions are different because of their widespread nature, often coming through financial systems that are in danger.

As it is now, many things are happening that are depression-like.  Here we go:

• Record high levels of total debt to GDP
• Many go hat in hand to the government.
• The spreads of the bond market are at record levels since the last depression, and maybe comparable.
• There is policy paralysis and confusion.  No one knows what to do (or leave alone), they act blindly or cower in fear.
• Ultrasafe investments have record low yields.
• Banks don’t trust each other.
• GDP is shrinking, and unemployment is increasing at a rapid rate.
• Financial businesses are failing and shrinking at high rates.
• The government comes in to “help” the markets, and ends up replacing the markets.
• The security of banks and other financial entities is open to question.

Will we get a 10% decline in real GDP?  I think so, but I am nowhere near certain on that.  What I am certain of is that the gears of finance are jammed.  The bond market is a shadow of its former self, and few are willing to take seemingly prudent risks.  I’m not sure the government can do much to affect this; it will work out over time, as debts are paid off and forgiven, as the last depression did.

I won’t be your host through this depression, should I live so long.  But knowing what things will be like if we are in a depression is a real advantage for those who invest or run businesses.  Be careful.

Comments

[Jason Rines...:]

We are not at what we would call a depression, just the beginning of one. But this comes as a W shaped formation with a recession then a likely 3-4 quarter rally, then the hyperinflation, positive loop effects cumulating around 2011. That is a forecast I had predicted almost a year ago and I do not believe I needed to be a rocket scientist to figure it out. Things move faster then in 1929 due to technology. That is why I believe we will reach depressionary conditions faster then that era but also why we will revive a bit more quickly (Washington policy is wild card on this timing forecast). I also will reiterate that the U.S. will see a bull market in 2013.

Don't worry Mr. Merkle, I wager you will do just fine economically over the next few short years. The geopolitical consequences and history rythming and creating a world war is another matter entirely. I live in faith, not in fear. Man is on the verge of the best era of scientific and qualitative living in history.

2008 Nov 20 03:12 PM

[punk_ash:]

I bet people will have no choice but to take on real jobs during this era and we can get rid of millions of useless and unproductive jobs and replace them with hard science jobs...

2008 Nov 20 05:48 PM

[Smarty_Pants:]

I'm thinking that limb you're climbing out on is a pretty sturdy one.

2008 Nov 20 08:45 PM

[moonbat1775:]

What is the economy?

It is you and me.
It is liberty and dignity.
It is honesty and property.

But some think
human need + human greed + counterfeit money = prosperity

2008 Nov 20 09:43 PM

[dshort:]

Depression? Today's decline moved the S&P closer to the tipping point than decline since the birth of the S&P 500. Here's an disturbing comparison of the current S&P 500 with two post WWII bears and the Dow destruction of 1929-32:

dshort.com/charts/bear...

Hopefully we're nearing a recovery like we did after the massacres of 1973-74 and 2000-2002. But so far, today's market bears an eerie similarity to debacle that marked the end of the roaring twenties.

The thing that worries me most is the financial impact to boomers nearing retirement. The demographic implications are enormous. Delaying retirement may be difficult if a severe and extended recession sends the financially ill-prepared to the unemployment lines.

2008 Nov 20 10:46 PM

[tginomorebush:]

ithinkbig ........... did you mean "W (dubya) shaped formation"??

2008 Nov 21 09:26 AM

[swaps:]

We have a depression in the stock market and one well underway in the financial industry.

A broader economic depression won't happen until tax revenues become so bad the huge government sector on all levels has to lay people off too. Right now, government and utility employment some sectors of the basic food are a drag on a depression.

2008 Nov 21 09:41 AM

[Smarty_Pants:]

"The demographic implications are enormous."

Yep. Many will not be able to afford to retire in the manner they had planned. If they are lucky they will be able to keep a job past retirement age. If so, they will limit the promotion potential for their younger co-workers as a result. The pain will be felt beyond the group which reaches retirement age.

And don't even get me started on the Social Security and Medicare issues. If those programs survive they won't be worth much to anyone once the dollar implodes.

2008 Nov 21 10:02 AM

[svkoho:]

excellent commentary as always by David. Looking at just GDP and employment statistics is misleading at best. Unemployment is calculated far differently now than in 1932. Everyone knows what a hash the Feds have made of inflation statistics. One example as regards GDP is the huge increase in energy use, petroleum use in the past 75 years. 20 million barrels a day on oil use is added to GDP as consumption. This is just one example of the problem of using consumption in GDP calculation. If it isn't a depression, it's a Panic or a severe prolonged recession. With the level of debt, what's the difference?

2008 Nov 21 10:06 AM

[Mowog:]

Where will the new gang find the money to give me that free education, Medicare, public pension, food, house, job--and lower sea levels? I can't cash a check for Hope™ but I can use some spare Change™. Cutting down all the trees necessary to print that money would require more carbon offsets than Al Gore can create in time to sell.

2008 Nov 21 10:37 AM

[Asbytec:]

A year ago, I would have scoffed at the possibility. No longer. Been calling for a "new deal" style package for a while now. Get ahead of the power curve, for a change.

Bailing out the top just won't cut it, in my view. Freeing up the credit markets presumes the same failed financial system will be intact when this blows over. I suspect, and pray, we're in for a new, better financial order.

2008 Nov 21 11:24 AM

[Did U Think...:]

My pseudonym says it all. The whole market is a Ponzi scheme based on greater fool theory. The depression is nothing more than the mass realization of this fact. The ponzi scheme is now in full unwind mode and smart people will buy and hold Jan 2010 puts on just about anything. Deep out of the money = better.

2008 Nov 21 01:04 PM

[PainfullyAware:]

Well, I am Depressed, so I guess I entered the depression early.

I am bummed about what I have learned of the Systematic Silliness and the Lameness of Leaders.

2009 is going to get a bit wild.

However, with people like iThinkBig, Smarty_Pants, Moonbat1775, and the other REALISTS out there shouting wisdom, I have hope of Recovery.

The Circus Continues.

Down With Clowns !!!

2008 Nov 21 01:37 PM

[Asbytec:]

A recovery is certain, and we will emerge top dog, again. (That's not certain, but I like to think so.)

The thing that scares me is we're actually trying to save this failed system by freeing up credit markets. Yea, we need credit. I am not saying that. But, the vastness of it is where the danger lies.

Its like an ice burg, remember those? The MBSs are the tip that shows above the surface. Fed power money is what remains after it drifts into the gulf stream.

The ponzi scheme is a great analogy, in my view.

2008 Nov 21 09:17 PM