Business & Investment

The difference between recession and recession

Recession is technically defined as a two-quarter or more consecutive decline in GDP. Depression is not technically defined, but is understood as a long-term trend or long-term growth that is below potential growth.

A technical recession can occur during a recession. There were two technological recessions (1929–33 and 1937–38) during the Great Depression (1929–40), all of which were characterized by sub-trend growth, high unemployment and deflation. This happened at least until the FDR raised the dollar price of gold in 1933. Stock market and commercial real estate prices did not recover to their 1929 highs until 1954, 25 years later.

We are now in a new depression. Growth declined in 2008. The 2009-19 recovery averaged around 2.2% annual growth, well below the long-term trend of 3.5% to 4.5%. GDP fell again by 3.4% in 2020. The sharpest one-year decline since 1946. The annual growth rate for the first half of 2021 is 6.4%, but it is slowing down rapidly. The latest estimate for the third quarter of 2021 from the Atlanta Federation is an annual growth rate of 5.7%.

Production in December 2019 did not recover until July 2021. Interest rates are falling sharply. This is a sign of expectations for disinflation and could be an early warning of a new recession in 2022. This is a feature of a new Great Depression that can last for years. As the story of inflation fades and the story of disinflation comes to the fore, stock market corrections can be expected as asset prices adapt to the resurgence of a low-growth era.

How is this pandemic-fueled economic crisis different from past financial crises?

The impact of a pandemic on the economy is transgenerational. After most financial panics and recessions, it will recover within a year. Pandemics produce a variety of patterns.

According to a study conducted by the Federal Reserve Bank of San Francisco in collaboration with outside scholars, of the 15 pandemics with the highest mortality rates since the plague in the 1350s, it is necessary to return to normal interest rates, growth and employment. The average time is longer than 30 years.

This pattern of recovery from extreme events was seen in the aftermath of the Great Depression (although it was an extreme economic collapse, not a pandemic).

The Great Depression ended in 1940 (partly due to war spending as the United States advanced toward World War II), but the behavioral changes it brought about did not slow down until the late 1960s.

How to survive Australia’s biggest recession in 90 years. Download the free report to find out more.

The 1950s were an era of peace and prosperity in the United States. Still, Americans maintained high savings rates, avoided conspicuous consumption in most cases, and lived a simple life as they learned during the 1930s and World War II. This did not change until the baby boomers became young adults and teens in the late 1960s. The behavioral changes caused by the Great Depression did not diminish until thirty years after the Great Depression ended. This is the sustainability of social trauma, whether it is war, depression or a pandemic.

In terms of savings, consumption, disinflation, low interest rates and low growth, we will not fully recover from this pandemic until after 2045. The only exception to this estimate is if the pandemic is followed by another similarly shocking event, such as a war or a financial panic.

What major mistakes have you made regarding the government’s policy response to the pandemic?

Almost all of the economic and social harm caused during the pandemic comes not from the virus itself, but from the policy response to the virus.

Public health authorities should do their best to do what they can. It’s all good to stay home and wash your hands regularly if you have symptoms. The economic blockade does not necessarily stop the spread of the virus, but it does destroy the world economy to some extent. Health authorities should not have been in charge of the economy. It was a big mistake by Trump and was exacerbated by Biden.

Immunologists have seen some benefits from the blockade, but these would have happened anyway, as the outbreak of each virus runs a predictable 8-10 week course. Experts ignored the costs of suicidal death, excessive alcohol intake, substance abuse, domestic violence, depression, anxiety, and other dysfunctional behaviors. The benefits of public health policies were minimal, but the economic, social and psychological costs were high and still paid.

Learn to live with COVID from an illness perspective. Still, mental health costs, social dysfunction, and financial resistance will continue for decades.

Next time, we’ll look at how COVID affects the future of the global economy. It’s another area with some big questions, and the answers are essential to you as an investor.

nice to meet you,

Jim Rickers signature

Jim Rickers,
Strategist, Daily Reckoning Australia

PS: Our publication The Daily Reckoning is a great place to start your investment journey. Let’s talk about the big trends that drive the most innovative stocks in ASX. Learn all about it here.

The difference between recession and recession The difference between recession and recession

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