What Exactly is an Economic Depression?

Have you noticed lately, that almost every news article or TV or radio interview piece regarding the state of the economy has some combination of the words “recession” and “depression” in them?

Especially interviews with financial experts or economists. One of the last questions the reporter will ask is “Do you think that a depression is coming?”, after which the “expert” or person being interviewed will usually go on about how this is totally different than the “Great Depression”, there are more controls in place, etc. But each one has his or her own opinion, and some think that a depression of some fashion is here or may be coming.

Obviously, the news media is trying to prey on everyone’s fears, because fear sells.

While I do not believe there will be a depression of the magnitude of the Great Depression, it is hard to determine what constitutes “an economic depression” for sake of comparison-even if it is of a lesser magnitude than the Great Depression.

Unlike an economic recession, which is defined as “2 or more consecutive quarters with negative GDP growth”, their is no real “official” definition of an economic depression.

Here is the definition from wikipedia:

In economics, a depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle. Considered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.

Sounds like it includes a lot of the things happening now, doesn’t it!

Also from the wikipedia article “there are two rules of thumb found widely on the internet. One is a decline in real GDP exceeding 10%, and the other is a recession lasting 3 or more years.”

It was announced friday that the GDP dropped 6.2%, so we are not quite there yet, but it was a lot higher than the estimate of a 3.8% drop.

Do you think we are in store for a depression, or just a recession? When do you think things will begin to turn around?