In order to understand whether we are or aren’t in an economic depression, we need a definition of the phenomenon that we can compare to our current conditions.
Wikipedia defines “depression” as follows:
“In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as inevitable part of capitalist economy.
“Considered by some economists to be a rare and extreme form of recession, a depression is characterized by its length; by abnormally large increases in unemployment; falls in the availability of credit, often due to some kind of banking or financial crisis; shrinking output as buyers dry up and suppliers cut back on production and investment; large number of bankruptcies including sovereign debt defaults; significantly reduced amounts of trade and commerce, especially international; as well as highly volatile relative currency value fluctuations, most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.”
That’s a decent definition of “depression”. It lists objective phenomena that, in sum, can tell us if we are or aren’t in a depressed economy.
But that definition is incomplete because it doesn’t mention the psychological forces that are intrinsic to a true economic depression. The truth is that we’re not really in a depression until the public generally believes we’re in a depression.
For example, we’re told that the Great Depression began with the stock market collapse of A.D. 1929. We vaguely presume that one day the economy was strong, and then, following the stock market collapse, the national economy slipped instantly into a full-blown depression. We tend to believe that the economy went suddenly from prosperous to depressed, much like a room goes from light to dark by flipping a light switch.
But that’s not so. The Great Depression wasn’t a sudden vertical fall from an economic top to an economic bottom. Instead, it was a slide at, say, a 45-degree angle, that included some significant ups before reaching the final “down”
Because the Great Depression was an up-and-down slide that took several years to reach “bottom,” it wasn’t clear to most Americans that they were in a depression until A.D. 1933.
In retrospect, we agree that the Great Depression started in A.D. 1929. But, at the time, it took most Americans four more years to agree that there even was a “depression”. Thus, for the first four years of the “Great Depression,” most Americans weren’t fully aware that they might even be in a depression.
But once most Americans believed the national economy was depressed, it became extremely difficult for government to overcome that belief and cause an economic recovery. Some people think the Great Depression would’ve lasted 5 to 10 years longer if WWII hadn’t begun and forced a dramatic change in public sentiment.
My point is that, just as many Americans of A.D. 1929 didn’t recognize they were in a depression for up to four years, it’s entirely possible that today’s Americans could also be an economic depression for several years without knowing it.
• Therefore, I’m fascinated by Richard Russell (Dow Theory Letters) who recently wrote,
“I hesitate to say this because it’s so extreme, but I believe the world is in a depression. We’re being lied to by a frightened and desperate government and Federal Reserve. Sooner or later the US public is going to realize that we’re in a depression. The government and the Fed will fight the gathering depression with lies and propaganda. To fight the depression, the Fed will open the money spigots wide, creating new trillions of ‘dollars.’ Some wise investors are aware of all this, which is why gold continues to push higher . . . .”
Richard dared to say the “D-word” four times in five sentences. That’s very politically incorrect.
He’s not alone. There are a few other gurus who’ve also dared to say the “D-word”. While the number of Americans who currently believe we’re in an economic depression are a small minority, their numbers are growing.
But are they right?
Is it possible that ten or twenty years from now, historians will look back and declare that the “Greater Depression” actually began with stock market “crash” of 2008? If so, you and I aren’t living in a “pre-recovery” economy. Instead, we may already be several years into the “Greater Depression”—and not yet even know it.
You might suppose that being in an economic depression without knowing it is impossible. There should be objective signs and economic indicators (of the sort listed in the Wikipedia’s definition of depression) that can tell us, right now, how to accurately assess our current economy.
But that’s not completely true because an economic depression is determined at least as much by psychology as mathematics. While we might be able to see the mathematical indicators, we might not be able to see the national psyche.
Being in a depressed economy, without knowing it, is possible because an economic depression is more of a subjective state of mind than an objective state of mathematics. We’re not really in a depression, until most of the people believe they’re in a depression. It’s hard for people to accept the belief that we’re in a depression—but once they do, it’s extremely difficult to escape the resulting “depression psychology”.
• Again, much of the public’s understanding of economic depressions is based on the myth that the onset of the Great Depression was sudden and traumatic. The stock market collapsed, stock-brokers jumped out windows, and OMG!, we were “instantly” in a depression!
As a result, most people today won’t believe they’re in an economic depression unless they see a sudden, painful collapse. So long as we don’t see a sudden fall in the stock markets and bankers jumping from skyscraper windows (or roofs), we won’t believe that the economy is depressed. So long as our entry into another depression is characterized by a slow slide over a period of years, most people won’t believe that they’re in a depression until their political leaders finally tell them so.
(Curiously, we did have a stock market “crash” in A.D. 2008 that was at least similar to the stock market crash of A.D. 1929. I don’t recall any suicidal stock brokers or bankers jumping out of tall buildings in 2008. But, in the last few months there’ve been reports of somewhere between 5 and 20 people in the global banking community who’ve jumped off of skyscraper roofs or otherwise checked out of the economy . . . permanently.)
Politicians know that an economic depression is much more than mathematics. They know that an economic depression is, to large degree, psychological. Therefore, insofar as politicians can manipulate and control the people’s psychological belief in their economic state of affairs, politicians can thereby influence whether we really are or aren’t in a full-blown depression.
One of the usual characteristics of a depression is deflation which causes prices to fall and the value of the currency to rise. Deflation probably causes the most profound psychological change in a depression.
Once people see that their currency is growing in value, they realize that their currency will buy more tomorrow or a year from now, than it will today. As a result, based on greed, people who have jobs or savings will refuse to spend or go into debt and instead choose to save for the time when they can get the best bargains.
As savings grow, spending declines and there’ll be less production, less credit and less sales. Unemployment will rise, production will falter, profits will fall. All economic activity will slow and the depression will grow more severe. Businesses eager to generate cash flow will cut prices, the currency will become increasingly valuable.
People will worry that they won’t have a job or savings in the future and therefore refuse to spend a dime on anything that’s not absolutely necessary. People will be increasingly motivated to save and not spend by fear rather than greed. Once the depression psychology takes hold in the public mindset, it’ll become a kind of self-fulfilling prophecy that feeds on itself as the economy spirals deeper down into inactivity.
• The psychological impact of falling prices (deflation) may be more important than rising mathematical rates of unemployment. The fact that over 20% of American workers are unemployed may be depressing for them, but it doesn’t have too much effect on the psychology of the other 80% who still have jobs. Yes, the volume of sales may decline because there are 20% less able-bodied consumers—unless government provides generous welfare for the unemployed so they can continue to purchase necessities.
However, until prices deflate and are generally expected to continue falling for several years into the future, the depression psychology may not take hold and the public can instead be persuaded to believe that they are in, or nearly in, a “recovery”. Thus, if America was currently on the verge of an economic depression, we could expect leaders like “Helicopter Ben” Bernanke or Janet Yellen to spend every dollar they could print, borrow or steal in order to encourage Americans to borrow and spend and thereby “stimulate” the economy and inflate prices. If deflation is the disease, inflation is the cure.
• So long as the psychological force of falling prices (deflation) is more conducive to economic depression than rising rates of unemployment, we might even expect our government to spend more of its resources on causing inflation than on curing unemployment. (If we look back over the past six years, has government spent more on unemployment or inflation?)
What do you suppose the primary purpose for the past six years of “Quantitative Easing” has been, if not to fight the forces of deflation? Without government subsidies and “stimulation,” would today’s Dow Jones Average still be over 16,000 and near record-high levels? Or would the Dow—which fell over 50% from 14,163 in A.D. 2007 to 6,594 in A.D. 2009—have fallen further and ultimately matched the 90% stock market fall in the Great Depression?
What did our more recent fall in stock prices indicate? Deflation.
What does the government-inspired rise in the stock markets indicate? Inflation.
Unemployment is mathematically bad, but deflation is psychologically worse. Once people believe that prices are generally falling and likely to continue doing so, they’ll refuse to spend and the economy will grind towards a halt.
Trying to determine if we are or aren’t in a depression is difficult because government understands that public psychology may be the most important element of depression. Therefore, in order to maintain public confidence in the economy, government will lie by staunchly denying that a depression exists or is even possible. Unlike Richard Russell, government will almost never officially say the “D-word”—even though the mathematics indicate that we are in a depression. The public can’t be told because they’ll overreact and slip into the depression psychology.
In fact, if I had to distinguish between a recession and a depression, I’d say that a recession and depression were almost identical on a mathematical basis—but the depression alone was characterized by “depression psychology” of fear and an expectation of falling prices.
Government might admit to having been in a recession, but will insist that official data proves that recession is over and gave way to a recovery. Insofar as the people believe that the Great Depression was caused by the stock market collapse of A.D. 1929, government will provide sufficient capital to keep today’s stock market afloat. I.e., so long as the stock markets are high, the public is less likely to believe we’re in a depression. So long as most Americans don’t know or believe that the economy is in a depression, the people won’t “panic”; the people won’t choose to save and will instead continue to borrow and spend. That borrowing and spending will “stimulate” economic activity and the depression may be avoided, or at least postponed.
By preventing the “depression psychology,” government may be able to stop or prevent the depression, itself.
In order to prevent people from believing that they’re in a depression, government will even falsify economic data in order to maintain public confidence in the economy. For example, if the real unemployment rate was over 20% (as alleged by John Williams at Shadowstats.com), government might still insist that the official rate of unemployment is less than 7%. If Williams is right, that deception is actually happening right now.
There are other leaves in the breeze which, like Richard Russell, hint that we may be in or near to a depression.
For example, The New York Times (“World’s largest economy Flirts With Deflation”) reported that,
“. . . the economies of many European countries remain very weak, and the euro zone as a whole could soon experience deflation . . . . Last month, inflation in the 18 countries that use the euro was just 0.7 percent . . . . far below the European Central Bank’s target for an inflation rate of just under 2 percent.
“Deflation is a pernicious and self-reinforcing [psychological] phenomenon that debilitates economies, as Japan experienced for much of the past 15 years. When prices fall broadly, consumers put off purchases and businesses see little value in investing for the future, creating a downward spiral. Deflation also makes it more difficult for governments and other borrowers to repay their debts.
“Earlier this month, the central bank’s president, Mario Draghi, dismissed the fear of deflation, but his words were hardly reassuring. ‘There is certainly going to be subdued inflation, low inflation for an extended, protracted period of time, but no deflation,’ he said.”
Point: Deflation is the boogie-man responsible for depression. Assuming the European governments are telling the truth about inflation/deflation rates, Europe is not yet in a state of deflation or depression—but it’s coming close.
Are deflation and depression contagious? If Europe slides into a depression, will the U.S. and the rest of the world follow the world’s biggest regional economy?
• The BBC reported in “Japan’s Quarterly Growth Disappoints,” that the economy of Japan (the 3rd largest national economy),
“. . . grew less than expected last year . . . . Gross domestic product rose by 1% on an annualized basis in the three-month period to December, compared to market estimates of a 2.8% expansion. . . . This was due to weaker private consumption and capital spending, as well as lower export figures.”
Japan has arguably been in a state of depression for the past 15 years. Recent reports suggests that Japan’s slide into depression will continue. That’s evidence that, once a depression psychology takes hold, the people are not easily persuaded to abandon that belief.
• The Associated Press reported in “UK inflation below target for 1st time in 4 years” that the inflation rate in Great Britain,
“. . . slipped in January below the official 2 percent target for the first time since 2009, making it less likely that the Bank of England will move soon to raise interest rates. . . . Official figures on Tuesday showed consumer prices were up 1.9 percent in the year to January, down from the 2 percent rate in December. The drop was due to retailers slashing prices on furniture, alcohol and tobacco.”
Assuming these figures are accurate, they’re no big thing, right? The difference between 2.0% and 1.9% inflation doesn’t seem worth mentioning.
But, on the other hand, the United Kingdom is the world’s 6th largest national economy. Therefore, any slide towards deflation is cause for concern.
• The world’s largest economy (the Euro-zone) is flirting with deflation. Japan has been in a depression for 15 years. England is slightly tending towards deflation. The U.S. appears to have been fighting deflation and depression with some success for several years. We may be in a recession, but we are not yet certainly in a depression.
So, is we is, or is we ain’t in an economic depression?
Hard to say. The evidence is mixed.
It’s clear that most of the American people have not yet succumbed to the depression psychology. Therefore, I’d tend to argue that we are not (yet) in a full-blown economic depression.
But it’s also clear that the governments of the world are working hard, even desperately, to try to print enough currency, manipulate enough economic indicators, and tell enough lies to prevent the people from believing that we’re in an economic depression.
Nevertheless, the strength of government’s determination to lie, manipulate markets and economic data, and print more fiat currency implies that we are at least near to an economic depression.
• This article is not intended to prove that we’re in a depression. But it is intended to show that it’s possible that: 1) we may be close to a depression; or 2) already in one, without yet realizing that truth.
Because depressions are more psychological than mathematical.