depression

A Decade of High Unemployment

If this isn't a definition of a Depression, I just don't know what is. Carmen Reinhart, University of Maryland Economist, is projecting a decade of high unemployment:

Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.

The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.

Not ready for prime time: Some ideas on the relationship between gold and depressions

Barry Eichengreen and Kevin H. O’Rourke have been updating us on the progress of this depression by comparing it to the big one, The Great Depression. Their original post, in April 6, 2009, captivated their audience.

One thing that struck me was that we might compare the two events to the totally overlooked depression of the 1970s – The Great Stagflation. The reason why this one is missing and, perhaps, lost from official economic history is that it did not look anything like how we expect a depression to look – at least by the accepted, albeit vague, standard of what constitutes a depression. For instance, as shown in the graph below, year over year Gross Domestic Product enjoyed an unbroken expansion during the entire period.

 

USGDPYOY - 1970-1980.jpg

Chart 1 (Source: Bureau of Economic Analysis)

Compare this performance to the contraction of GDP during the Great Depression

 

 USGDPYOY%20-%201929-1933.jpg

Chart 2 (Source: Bureau of Economic Analysis)

 

Greece has nothing on Latvia

All the attention of the financial world has been focused on Greece. This is captured in one alarming statement made by the head of the German debt management agency.

"I think if one of the 16 members would default, it would be a collapse of the whole system," German Finance Agency managing director Carl Heinz Daube told a bond conference in London.
"If a country goes bankrupt, it will be the end (of the euro zone)," he told a panel discussion at a bond conference in London.

You would think that Greece is suffering from an epic economic collapse. In fact their economy has shrunk less than 3%.

Thomas Palley - A Second Great Depression is Possible

Thomas Palley has a new op-ed in the Financial Times. Palley overviews some facts which give credibility to those economists predicting a double dip recession. If recession goes on long enough, it can be classified as a depression. A recession can be classified as a depression if it lasts more than 3 years.

There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.

Spain sinks into Depression

Spain is no longer in a recession. They've gone straight into Depression with levels of distress not seen since shortly after the end of their civil war.
The primary source of Spain's economic problems is a housing bubble that, on a relative scale, was even bigger than America's.

The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP....
RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain's unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression.

Youth unemployment is at 38%.

Record fall in household net worth

The fact that it is happening shouldn't surprise anyone, considering the housing bust and the stock market crash. But the size and speed of the decline is still breathtaking.

The net worth of American households fell by the largest amount in more than a half-century of record keeping during the fourth quarter of last year.

The Federal Reserve said Thursday that household net worth dropped by a record 9 percent from the level in the third quarter.

The decline was the sixth straight quarterly drop in net worth and underscored the battering that U.S. families are undergoing in the midst of a steep recession with unemployment surging and the value of their homes and investments plunging.

Net worth represents total assets such as homes and checking accounts minus liabilities like mortgages and credit card debt.

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