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Here is a quick look at an article from the WSJ that asks the question: what might a Depression look like in 21st century America?

(From The WSJ): "In the wake of the biggest financial shock since 1929, economists say the odds of a depression are less than 50-50 -- though still uncomfortably high. But even if a depression comes to pass, a 21st-century version would look very different from the one 80 years ago.

There is no consensus definition for "depression." Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%. Many economic historians say the line between recession and depression is crossed when unemployment rises above 10% and stays there for several years.

The current recession, though severe, is not at depression levels now. Unemployment in February was at 8.1%, not as bad as in the early 1980s -- the last time the idea of a depression was being kicked around seriously, when it remained over 10% for 10 months. In the Great Depression it reached 25%

...Today's government response is a far cry from the early 1930s, when the Fed raised interest rates, the infamous Smoot-Hawley Tariff Act crushed trade and Treasury Secretary Andrew Mellon's prescription for the economy was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

"The Great Depression was a mass of policy errors that made it worse," says historian and investment consultant Peter Bernstein, 90. "This time we have our fill of policy errors, but at least they're not making it worse."...

...The different structure of today's economy means that a modern depression would differ from the Great Depression of the 1930s. Fewer than 2% of Americans working today have agricultural jobs, compared with one in five in 1930. Three-quarters of today's workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.

And then there are the social-safety-net programs that emerged after the Great Depression to blunt the blows. "There were no unemployment insurance, no food stamps, none of the automatic things that maintain some income for people who are out of work," says former Massachusetts Institute of Technology economist Robert Solow, a Nobel laureate. Mr. Solow, 84, grew up in Brooklyn, N.Y., and remembers his parents' constant worry about the next month's money….

...As a University of Chicago student during the Depression, Mr. Samuelson remembers attending economic lectures that seemed completely out of step with the times, based on laissez-faire principles that stopped making sense after the 1929 crash. "I was perplexed because I could not reconcile the assignments I got from these great economists with what I heard out the windows and I heard from the street," he says.

Starting in the 1980s, the U.S. saw an extraordinary period of economic quiescence, where growth was steady and policy makers dealt with financial crises handily. Economists began to doubt the possibility of a financial crisis so severe it would upend the economy. And that left them as blind-sided as their counterparts when the crisis came 80 years ago."

For the most part I agree with the article's overriding theme: our economy has changed so much that a modern day depression (or severe recession) won't play out like the one from the 1930s. However that doesn't mean that a 21st century won't "hurt" (in relative terms at least) as much as the last one did, nor do we really know how this one will play out against the current structure of the economy. Especially since the current downturn is invalidating a lot of the economic thinking that led us down this path in the first place.

In many ways you could argue that the situation is like your NCAA Tournament Bracket: even if you pick the winning team, you only have a vague idea of "how" they will win and what kind of a game it will be. There are so many unknowns at this point that predicting how a prolonged Depression or "lost period" will affect us is anyone's guess.

I have to admit that I had to laugh at the commentator who said that the current policy mistakes aren't making things worse, as I truly believe that the administration's efforts to fight foreclosures will prolong the housing downturn by several years. Not to mention the fact that many of the policies being implemented seem more aimed at resurrecting the old days, than they are at working towards adjusting and preparing for the new ones.

Perhaps the greatest lesson to be taken from this article is the fact that economists in the 1930s were teaching theories that were out of touch with reality, can not the same thing be said of much of the economic and financial theory being taught today?

In any event if I had to guess what the future holds: I predict that we're going to fall into a multi-year "lost period", where the biggest pain will come from the massive adjustments we'll all have to make with respect to our economic expectations, and in terms of how we manage our finances. While it won't necessarily be an "official depression", the pain inflicted from the readjustment may very well make that official designation moot in the eyes of many citizens. In my view the post recessionary "lost period & adjustment" coupled with the cost of latter day economic interventions, is where the real pain from this recession/depression will be felt.

In any event the article is a good read and you can find more here, you can also find an interactive graphic that looks at past recessions and recoveries here.

Sources:

The Wall St. Journal: "How a Modern Depression Might Look -- If the U.S. Gets There" -- Justin Lahart, March 30, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Source: What Would a 21st Century Depression Look Like?