Are We Avoiding a Depression?

Are We Avoiding a Depression?

Monday, June 22nd, 2009

Perhaps the most common refrain heard with regard to our current economic situation, and why it won’t become a Depression, is that we as a nation have been proactive and aggressive in “managing” this period of economic weakness.

This theory, more or less, has the following generalized (and summarized) structure:

1. There has been rigorous research conducted on the causes of The Great Depression.
2. Ben Bernanke is widely proclaimed as an expert on The Great Depression era.
3. Through the knowledge derived through the extensive research of The Great Depression, as well as Ben Bernanke’s expertise of the era, we (as a nation) have a thorough understanding of the causes of The Great Depression, and how that period could have been better managed, if not avoided either fully or in part.
4. During our current period of economic weakness, widely called “The Economic Crisis” (or “Financial Crisis”), we (as a nation) have been very proactive in deploying various intervention measures that would have avoided The Great Depression and therefore will act to help us avoid a Depression.

I question a variety of the assumptions above. Additionally, and perhaps most importantly, is our current economic predicament analogous to that of The Great Depression? While there are certain similarities, there appear to be notable differences as well. Plus, just the time differential alone would appear to make comparisons difficult.

If the two periods are fundamentally different, why are people apt to compare them? While this is difficult to answer, it may be (at least in part) because Americans have few periods of severe economic weakness to reference, especially over the last 100 years or so. If this is correct, it may also call into question the appropriateness of comparisons between this period and The Great Depression.

With regard to whether we, as a nation, have a thorough knowledge of The Great Depression, has been questioned by some. If our current period of economic weakness is not comparable to that of The Great Depression, it becomes more of an ”academic question” as “lessons learned” from The Great Depression would not necessarily be applicable to the situation we now face.

Furthermore, if our current period of economic weakness is not comparable to that of The Great Depression, the main concern becomes whether our intervention efforts, that purportedly would have avoided The Great Depression, will help us avoid going into our own Depression.

As one can see from the above, I think there are considerable questions that can, and should, be raised with regard to the widely held aforementioned theory and generalized structure presented.

SPX at 904.99 as this post is written