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What Is An Economic Depression

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Where Are We In The Current Business Cycle

Causes of economic depression explained

The best way to find out if we are in a recession or a depression is to understand where we are in the business cycle. A recession typically follows the peak of the business cycle. The peak is marked by irrational exuberance and asset bubbles.

In early 2020, the U.S. economy entered the contraction phase of the business cycle. The 2020 recession was caused by the COVID-19 pandemic. The government closed non-essential businesses and urged people to stay at home to stop the spread of the virus. The economy contracted 5.0% in the first quarter of 2020. By April, there were 23.1 million unemployed, sending the unemployment rate to 14.7%.

Breakdown Of International Trade

Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. In a 1995 survey of American economic historians, two-thirds agreed that the SmootHawley Tariff Act at least worsened the Great Depression. Most historians and economists blame this Act for worsening the depression by seriously reducing international trade and causing retaliatory tariffs in other countries. While foreign trade was a small part of overall economic activity in the U.S. and was concentrated in a few businesses like farming, it was a much larger factor in many other countries. The average ad valorem rate of duties on dutiable imports for 19211925 was 25.9% but under the new tariff it jumped to 50% during 19311935. In dollar terms, American exports declined over the next four years from about $5.2 billion in 1929 to $1.7 billion in 1933 so, not only did the physical volume of exports fall, but also the prices fell by about 13 as written. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber.

Effect of tariffs

Business Cycle Dating Procedure: Frequently Asked Questions

Q: What is the basic job of the Business Cycle Dating Committee?

A: The NBERs Business Cycle Dating Committee maintains a chronology of US business cycles. The chronology identifies the dates of peak and trough months in economic activity. The peak is the month in which a variety of economic indicators reach their highest level, followed by a significant decline in economic activity. Similarly, a month is designated as a trough when economic activity reaches a low point and begins to rise again for a sustained period.

Q: What is a recession? What is an expansion?

Q: If the most recent trough was in April 2020, is it correct to say the expansion started in April or in May?

A: The NBER chronology does not identify the precise moment that the economy entered a recession or expansion. In the NBERs convention for measuring the duration of a recession, the first month of the recession is the month following the peak and the last month is the month of the trough. Because the most recent trough was in April 2020, the last month of the recession was April 2020 and the first month of the subsequent expansion was May 2020.

Q: How is the duration of expansions and contractions calculated from NBER peak and trough dates?

Q: What indicators does the committee use to determine peak and trough dates?

Q: How does the committee’s quarterly chronology relate to its monthly chronology?

Q: How does the committee weigh employment in determining the dates of peaks and troughs?

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Cause Of The Great Depression

During the Depression, the Federal Reserve raised interest rates when should have lowered them. It was trying to protect the gold standard. Today, the world is no longer on the gold standard. Instead, the U.S. dollar is the global currency.

The Fed did not increase the money supply, as it should have, to combat deflation. As consumers noticed prices were falling, they put off making major purchases. That further lowered demand. The Fed also ignored bank failures.

Follow the Great Depression Timeline to find out what caused the Depression, how bad it was, and what finally ended it.

As a result of the Great Depression, the Fed now lowers interest rates at the first sign of a recession. It makes sure that banks have plenty of capital to lend.

What Does Economic Depression Mean

The Great Depression

What is the definition of economic depression? During a phase of economic depression, firms are facing excess capacity because consumer spending is low and people have less disposable income to sustain consumption, thereby lowering the production and the profitability of firms. More workers are laid off due to downsizing, whereas prices generally fall.

Furthermore, investment activity is low, and the market is pessimistic about the future. The intensity of these effects increases as the economy sinks into deeper depression. In many cases this becomes snow ball that keeps getting worse until economic activity changes.

Lets look at an example.

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When Have Recessions Ordepressions Occurred Inaustralia

There are several episodes of very weak economicactivity in Australia that are recognised asrecessions or depressions by most economists.There are also some episodes of weak economicactivity where there is disagreement amongeconomists about whether these were recessions,in part because of the different definitions ofrecession that can be used.

How To Differ An Economic Depression From An Economic Recession

Depression is a more severe recession. Real GDP falls during an economic depression, such as during a recession. However, the decline occurred significantly and lasted for years, not just for a few quarters.

The effects of depression are much more severe than that of a recession. Unemployment was widespread, poverty soared, hunger was rampant, many businesses went bankrupt and defaulted, and economic activity shrank.

Severe depression is called the Great Depression, which has occurred in the United States and lasts for a decade. During the Great Depression, unemployment was 25%, and wages fell 42%.

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How Photos From The Battle Of Antietam Revealed The American Civil Wars Horrors

Roosevelt took immediate action to address the countrys economic woes, first announcing a four-day bank holiday during which all banks would close so that Congress could pass reform legislation and reopen those banks determined to be sound. He also began addressing the public directly over the radio in a series of talks, and these so-called fireside chats went a long way towards restoring public confidence.

During Roosevelts first 100 days in office, his administration passed legislation that aimed to stabilize industrial and agricultural production, create jobs and stimulate recovery.

In addition, Roosevelt sought to reform the financial system, creating the Federal Deposit Insurance Corporation to protect depositors accounts and the Securities and Exchange Commission to regulate the stock market and prevent abuses of the kind that led to the 1929 crash.

Ways To Prevent Another Economic Depression

What is an economic depression?

There is always that constant fear of another Great Depression happening, which is why economists suggest the following policies to keep it from happening.

1. Expansionary monetary policy

An expansionary monetary policyExpansionary Monetary PolicyAn expansionary monetary policy is a type of macroeconomic monetary policy that aims to increase the rate of monetary expansion to stimulate involves cutting interest rates to encourage investment and borrowing. When interest rates are lower, consumers will enjoy more value for their money and will be encouraged to spend more.

2. Expansionary fiscal policy

An expansionary fiscal policy means increasing government spending, reducing taxes, or a combination of both. Tax reduction gives consumers disposable income which, in turn, encourages spending.

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Can Recessions Have Long

The social and economic costs of recessions canbe large and persistent. The central bank andother economic policymakers seek to ensure theeconomy continues to grow at a sustainable rateto avoid any unnecessary slowdown in economicactivity. If a negative shock does occur that causesactivity to slow, policymakers will attempt tostimulate the economy to try to avoid a recessionand minimise the economic costs faced byhouseholds and businesses.

There can be long-term consequences from anincrease in unemployment and business failuresthat occur during recessions. Some people whobecome unemployed in recessions face long-termunemployment, even when normal rates ofeconomic growth resume. This is because duringa recession their work skills may have reducedthrough lack of use, or because employersmay think that this has occurred. Long-termunemployment can also occur because arecession can speed up structural changes tothe way the economy works. Reflecting thesedevelopments, the unemployment rate aftereach recession tends to be higher than before theeconomy entered a recession and takes a longtime to decline.

The rise in unemployment that occurs duringa recession results in increased economichardship that is borne unequally across society. This, in turn, reduces theopportunities available to households directlyaffected by the recession and can have long-termeffects on their health, learning, achievementof qualifications and social mobility .

Will The Us Economy Collapse

A U.S. economy collapse is unlikely. When necessary, the government can act quickly to avoid a total collapse.

For example, the Federal Reserve can use its contractionary monetary tools to tame hyperinflation, or it can work with the Treasury to provide liquidity, as during the 2008 financial crisis. The Federal Deposit Insurance Corporation insures banks, so there is little chance of a banking collapse similar to that in the 1930s.

The president can release Strategic Oil Reserves to offset an oil embargo. Homeland Security can address a cyber threat. The U.S. military can respond to a terrorist attack, transportation stoppage, or rioting and civic unrest. In other words, the federal government has many tools and resources to prevent an economic collapse.

These strategies may not protect against the widespread and pervasive crises that may be caused by climate change. One study estimates that a global average temperature increase of 4 degrees celsius would cost the U.S. economy 2% of GDP annually by 2080. The more the temperature rises, the higher the costs climb.

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There’s A Difference Between Crisis And Collapse

Economic Depression: Definition, Causes, Prevention

Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.

The U.S. economy’s size makes it resilient. It is highly unlikely that even the most dire events would lead to a collapse. If the U.S. economy were to collapse, it would happen quickly, because the surprise factor is a one of the likely causes of a potential collapse. The signs of imminent failure are difficult for most people to see.

Most recently, the U.S. economy almost collapsed on September 16, 2008. That’s the day the Reserve Primary Fund broke the buckthe value of the funds holdings dropped below $1 per share. Panicked investors withdrew billions from money market accounts where businesses keep cash to fund day-to-day operations. If withdrawals had gone on for even a week, and if the Fed and the U.S. government had not stepped in to shore up the financial sector, the entire economy would likely have ground to a halt. Trucks would have stopped rolling, grocery stores would have run out of food, and businesses would have been forced to shut down. That’s how close the U.S. economy came to a real collapseand how vulnerable it is to another one.

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The Current Financial Landscape

Between 1929 and 1939, president Franklin D. Roosevelt passed numerous pieces of legislation aimed at stabilizing the economy. He established the FDIC to protect consumers’ bank accounts. The SEC was created to regulate the stock market, and the Social Security Act guaranteed pensions to Americans and set up an unemployment insurance program.

The programs and reforms put in place in response to the Great Depression were established in hopes that an economic downturn of parallel magnitude would unlikely be repeated.

So could we be heading into another depression? With the COVID-19 pandemic sending the US into a recession, the next phase could be anyone’s guess. However, there have been troubling signs.

In July 2020, data relased by the Commerce Department revealed that the US economy experienced its worst quarterly slump ever. US GDP fell a historic 33% annualized rate in the second quarter of 2020, with no other downturn in history causing as sharp of a decline in the economy.

That said, there’s reason to be hopeful, according to Ullrich:”2007-2009 was different because much of the crisis began in financial institutions. That sector was heavily impacted immediately, and because of some of that, it couldn’t respond in the ways the economy needed it to The good news is that the financial system, the fundamentals of the economy were strong coming into the current crisis we’re facing.”

What Is Economic Collapse

An economic collapse is a breakdown of a national, regional, or territorial economy that typically follows a time of crisis. An economic collapse occurs at the onset of a severe version of an economic contraction, depression, or recession and can last any number of years depending on the severity of the circumstances. An economic collapse can happen rapidly due to an unexpected event, or it may be preceded by several events or signs pointing to fragility in the economy.

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What Would Happen If The Us Economy Collapses

If the U.S. economy collapses, you would likely lose access to credit. Banks would close. Demand would outstrip supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity might no longer be available.

A U.S. economic collapse would create global panic. Demand for the dollar and U.S. Treasurys would plummet. Interest rates would skyrocket. Investors would rush to other currencies, such as the yuan, euro, or even gold. It would create not just inflation, but hyperinflation, as the dollar lost value to other currencies.

If you want to understand what life is like during a collapse, think back to the Great Depression. The stock market crashed on Black Thursday. By the following Tuesday, it was down 25%. Many investors lost their life savings that weekend.

Coronavirus : Support And Advice

Economic Recession and Depression I A Level and IB Economics

An economic downturn is a general slowdown in economic activity over a sustained period of time. It can happen in a specific region or on a global scale . The main features of an economic downturn include rising unemployment, falling share and house prices, low consumer confidence and declining investment.

Although you may not be able to completely protect your business from an economic downturn, understanding how it could affect you will help you develop a plan to minimise its impact. You may also be able to identify new business opportunities.

Planning, reviewing and monitoring your business operations on an ongoing basis will give you the information you need to make changes to help you stay financially viable. This should make it easier for your business to respond to, and recover from, an economic downturn.

This guide explains how to make sure your business is in the best shape to survive an economic downturn.

  • Last reviewed: 28 May 2021

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A Depression With Sharp Inflation

4. David A. Rosenberg is a chief economist and global financial strategist at Gluskin Sheff & Associates. Prior to that he was the Chief North American Economist at Merrill Lynch.

He wrote a bleak warning in the Financial Post Monday:

Its time for investors to start saying the D-word this economic damage could be double 2008.

He argues while necessary to protect public health, efforts to contain coronavirus will plunge the economy into another financial crisis and high unemployment:

This national economic lockdown just has to last a month for us to see an absolute wave of defaults and bankruptcies with no jobs for people to go back to.

5. Peter Schiff is the the CEO and chief global strategist for Euro Pacific Capital. He predicts something much worse than the four others on this list, a depression accompanied by sharp inflation:

All of these so-called experts who think U.S. will just suffer a one quarter hit to GDP of 5% are nuts. Real GDP fell about 25% during the Great Depression. Since we are entering a Greater Depression, with sharply higher consumer prices, real GDP should collapse by more than 25%.

Usually during recessions and depressions, consumer prices go down deflation. When theres inflation during a period of economic contraction, it is especially miserable.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of

The Pandemic Depression Is Over The Pandemic Recession Has Just Begun

Signs of a slower, grinding recovery sure look familiar.

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By Neil Irwin

There is a straightforward narrative of the economy in 2020: The world shut down in the spring because of the coronavirus pandemic, causing an economic collapse without modern precedent. A sharp recovery began in May as businesses reopened.

That is accurate as far as it goes. But the snapback effect over the summer has masked something more worrying: Weve entered a longer, slower grind that puts the economy at risk for the indefinite future.

In the details of government employment data covering hundreds of industries can be seen a jobs crisis that penetrates deeply into the economy. Sectors that in theory shouldnt be much affected by the pandemic at all are showing patterns akin to a severe recession.

Business news headlines are reflecting a drumbeat of layoffs normally seen in recessions. In the last few weeks alone, the oil giant Shell said it was cutting 9,000 positions, with Disney eliminating 28,000 and the defense giant Raytheon 15,000.

After shedding jobs in the spring, these sectors have brought workers back slowly, or not at all, through the summer. Some have continued cutting positions. Employment at corporate headquarters management of companies and enterprises, in the official terminology fell by 92,000 in March and April, with another 4,000 jobs lost since.

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