Is This A Depression?

Although almost everyone believes we are in an economic recovery, it behooves us to at least consider whether instead we are in a continuing Depression, as I have previously written.  Beginning on June 22, 2009, I wrote a series of four blog posts that examined various aspects of our economic situation and whether we were in, or heading into, a Depression.

As I wrote on January 19, "Of course, over the last few months there have been signs of economic recovery – or at least a lessening of economic weakness.  However, I believe that these signs represent the type of intermittent economic strength that is often seen during periods of prolonged economic weakness."

Let's assume, for a moment, that we are in a continuing Depression, as opposed to an economic recovery as almost everyone believes.  How could virtually everyone be wrong on such a prominent issue?

I believe the answer is complex and lengthy.  However, there are at least three basic underpinnings of such a mistaken belief.

First, judging the sustainability of economic strength after a steep economic decline seems challenging.  During the 1930's, there were many prominent people who believed that the Depression was over, only to have the economy relapse into further weakness.

Second, since the late 1920s, this country has had very few periods of Depressions or prolonged recessions, as defined.  Due to this lack of "experience," it may be very difficult to discriminate between continual Depression characteristics, during which intermittent economic strength manifests, and that of a new economic recovery that follows a definite end of economic weakness.  As well - and this is of critical importance - how should government, business and citizens act during a Depression?  Needless to say, how these parties should act during a continual Depression will vary greatly as opposed to that of an economic recovery.   Acting as if one is in a sustainable recovery, when in fact one is in a continuing Depression, would prove devastating.

Third, as I have written of previously, do we, as a nation (and by extension the world) really understand our present economic environment?  We, as a nation, failed (some examples are found here) to predict  the severe economic weakness of late '08 and early '09.  Was this failure a "one-time" event - i.e. a fluke not to worry about - or the early "innings" of what will prove to be a colossal, long-running economic misinterpretation?  Before one can flippantly dismiss this concern - as I'm sure most will be tempted to do - one should heed the existence (often mentioned in this blog) of many negative "outliers" during this purported sustainable economic recovery.  Perhaps most noticeable among these outliers is unemployment issues that are proving rather intractable.

Of course, the hope is that we are avoiding a Depression.  However, if we are actually in one, it would strongly behoove us to acknowledge such and act accordingly.

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SPX at 1047.61 as this post is written