With unemployment at levels not seen since the Great Depression the greatest economic slump in the history of the industrialized world some may be asking if the country will fall into a depression, and if so, what it will take to do so.
What makes a recession different from a depression?
A recession is a negative trend in the business cycle marked by a reduction in production and employment. As a result of this downward trend in household income and spending, many businesses and people are deferring big investments or purchases.
A depression is a strong downswing in the business cycle (much more severe than a downward trend) marked by severely reduced industrial production, widespread unemployment, a considerable decline or suspension of construction growth, and significant cutbacks in international commerce and capital movements. Aside from the severity and impacts of each, another distinction between a recession and a depression is that recessions can be geographically confined (limited to a single country), but depressions (such as the Great Depression of the 1930s) can occur throughout numerous countries.
Now that the differences between a recession and a depression have been established, we can all return to our old habits of cracking awful jokes and blaming them on individuals who most likely never said them.
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
Which is more severe, the recession or the depression?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump.
Can a downturn become a depression?
Although the following definition is bleak and detailed, its dullness serves to emphasize the fact that the recession/depression question is not so easy to solve. The Federal Reserve Bank of San Francisco attempted to come to a conclusion in 2007 – What is the difference between a recession and a depression? They agreed with the National Bureau of Economic Research’s definition of a recession:
A recession is defined as a major drop in economic activity across the economy that lasts more than a few months and is reflected in real GDP, real income, employment, industrial output, and wholesale-retail sales. A recession starts when the economy reaches its peak of activity and concludes when it hits its lowest point. The economy is expanding between the trough and the peak. The typical state of the economy is expansion; most recessions are brief and have been uncommon in recent decades.
And I turned to Gregory Mankiw to help me understand the difference between two types of economic contraction:
Real GDP has been falling for many years, the most striking example being the early 1930s. If the period is moderate, it is referred to as a recession; if it is more severe, it is referred to as a depression.
Despite the Federal Reserve’s best efforts, the simpler and more widely recognized definition of a recession is a drop in GDP for two consecutive quarters. However, there is little agreement when it comes to depressions; the two most prevalent descriptions are:
While the two meanings are not mutually exclusive, they do differ significantly. The distinction between a recession and a depression, in my opinion, is more complex. A recession is an unavoidable component of the business (or credit, as the case may be) cycle. A depression, on the other hand, entails the physical ruin of the economy: enterprises are irrevocably damaged, job possibilities are obliterated, and investment must be completely written off.
Examining prior Great Depressions is an alternative technique. Unfortunately, this strategy is also inconclusive. The Great Depression of the 1930s, for example, is widely thought to have lasted from 1929 to 1941, yet as the graph below shows, there were only two separate phases of decreased GDP growth between 1930 and 1933, and again between 1937 and 1938:
Despite my more practical definition above, I prefer the two-year-plus definition to the one based on a dramatic drop in GDP. Some aspects of the economy are harmed during a recession. Depression is becoming more common.
A rise in the unemployment rate is another element frequently linked to recessions and depressions. Historically, increased unemployment has preceded the commencement of recessions, and recessions have only been labeled depressions after they have lasted for a long time.
Another factor to consider is the absolute degree of inflation. In general, central banks respond to rising inflation by boosting short-term interest rates. This aids in the cooling of overheated economies. However, if they tighten too quickly, they risk triggering a recession by forcing the credit cycle into a rapid contraction. A depression, on the other hand, is frequently accompanied by an absolute drop in the price level, which is produced by an excessive amount of domestic or corporate debt.
Why does a depression definition matter to you as an investor? Because financial markets are anticipatory. If investors believe the recovery from the Covid-19 pandemic will be ‘V’-Shaped, even a 20% drop in GDP, combined with zero interest rates, price support for government bonds, and fiscal expansion on a scale not seen since FDR’s ‘New Deal,’ will result in a steeply rising stock market. If, on the other hand, it becomes evident that a tsunami of creative destruction is sweeping entire industries away, even the most sumptuous of New Deals may not be enough to stem the flood of stock liquidation as investors flee to the safety of cash.
So far, the official policy response has been enough to persuade investors that a slump will not occur. If you scratch the surface of the S&P 500, however, you’ll see a very different picture. The graph below depicts the market’s performance through the end of May. Since then, the S&P 500 index has been driven by the same five technology stocks:
The most successful industry has been technology. One rationale for such high valuations is that the pandemic has hastened a wide range of technological advancements, resulting in the possibility of considerably faster profits. The net present value of future technology cash flows has been shifted forward by several years, according to some analysts. It’s no surprise, they say, that these equities have shattered new all-time highs and will continue to rise.
The broader stock market has been riding the coattails of tech since May (at the time of writing, the MSCI World Index is up 1.73 percent YTD). For the time being, hope wins out over fear, but vaccines are still months away from becoming widely available. Meanwhile, autumn is approaching in the Northern Hemisphere, bringing with it fears of a second wave of diseases.
The situation is even worse for emerging markets. In Foreign Affairs The Pandemic Depression, Carmen and Vincent Reinhart wrote:
Despite being labeled a “global financial crisis,” the 2008 downturn was mostly a banking crisis in 11 advanced economies. Emerging economies were remarkably immune to the volatility of the recent global crisis, thanks to double-digit growth in China, strong commodity prices, and lean balance sheets. The current economic downturn is unique. Because of the worldwide nature of this shockthe new coronavirus knows no national bordersa bigger percentage of the global society is in recession than at any point since the Great Depression. As a result, the recovery will be slower and less robust than the downturn. Finally, the fiscal and monetary policies implemented to combat the contraction will alleviate rather than erase economic losses, implying that the global economy will take a long time to recover to where it was at the beginning of 2020.
According to the World Bank, more than 60 million people will be forced into extreme poverty globally. Meanwhile, in wealthy countries, bankruptcies that have been postponed due to government involvement may experience personal epiphanies as fiscal generosity is abruptly withdrawn. The demise of broad swaths of sophisticated market economies has just been postponed unless the lockdown limitations are relaxed and people feel safe, both medically and financially, to venture out and spend.
We will have had two quarters of reduced growth by next month, indicating that we are already in a serious recession. Large swaths of the economy have been irreversibly transformed, increasing the likelihood of a slump. Millions of workers have been displaced, and retraining them will take far longer than a few months. It will be difficult for new and existing businesses to grow and hire new staff without the consumer demand from these former employees.
Fiscal spending will have to be done on a far larger scale and for much longer than previously anticipated. Since 1850, it has taken an average of eight years for per capita GDP to recover to pre-crisis levels in all major financial crises. The G20 response to the epidemic is estimated to have cost $11 trillion so far. The majority of these actions have been described as “temporary” or “short-term.” It is becoming increasingly evident that the disruption to employment, business, and economic sectors will be lengthy and, in many cases, permanent.
According to the IMF, the deficit-to-GDP ratio in advanced nations will grow from 3.3 percent in 2019 to 16.6 percent this year. The ratio is predicted to rise from 4.9 percent last year to 10.6 percent in 2020 for emerging nations, where budgetary expansion is more limited. While borrowing rates in established economies have stayed low, they have increased in emerging markets. The burden of fiscal stimulus will invariably fall most heavily on the advanced economies’ treasuries.
Conclusion
This isn’t the conclusion of the story. This isn’t even the start of the end. But it’s possible that this is the end of the beginning.
Individual economic needs are still important in Western (and other) aging civilizations. Governments in developed countries are fortunate in that they can borrow at lower rates than at any other period in history. While it goes against my Austrian, free-market principles, I have to admit that fiscal policy is the least painful weapon available to resist the pandemic’s economic catharsis. There will be a significant cost in terms of economics, but the alternative is a deadly mix of political fragmentation and polarization.
The goal of securing consistent real income for investors remains difficult. High-yielding private debt and asset-backed lending carries both default and liquidity risk. Financial repression is rampant across the credit spectrum, as shown in the chart below, which looks at some of the public market options:
High-income stocks may be a viable option, but no matter how ‘blue-chip’ the name, there is no certainty. Growth stocks, in general, are benefiting from the historically low-interest environment, but there will be a higher number of failures because the cost of speculative capital is also at an all-time low. Active management has been out of favor for at least a decade, but in the future, capital preservation will be more important than reaping large returns.
In June, I published a piece called A Brave New World for Value Investing, in which I concluded that:
Since late March, the stock and corporate bond markets have restored most of their stability. The repercussions of the global economic slowdown have been mitigated by central banks and governments. As the dust settles, the financial markets will adjust to a new environment, one in which value-based stock and bond market analysis will be an invaluable tool for navigating the waters.
The simultaneous supply and demand shocks, as well as their impact on global supply networks, have heightened the geopolitics of trade policy, which was already a source of conflict before the epidemic arrived. Supply networks will become shorter and more diverse. In the months and years ahead, robustness, not efficiency, will be the watchword. This shift in the global economy’s functioning will not come without a price. It will manifest itself in higher pricing or lower corporate profits. In this brave new world, value-based investment analysis will be the finest guidance.
An additional approach, a momentum overlay, would be added to the investment toolbox. Capital flows will be a formidable arbiter of investment return as fiscal and monetary policy continue to support economies as they transition to the new world order. By most conventional measures, technology companies appear to be overvalued, yet the trend is undeniable. After all, financial market liquidity flows like a tide, so don’t be like Cnut The Great and follow Brutus’ advice in the opening statement.
What occurs when someone is depressed?
Depression is a serious mental condition that can have a significant impact on a person’s life. It can lead to emotions of melancholy, hopelessness, and a loss of interest in activities that linger for a long time. It can also cause physical symptoms like as pain, a change in appetite, and sleep issues.
What should I put away in case of economic collapse?
Having a strong quantity of food storage is one of the best strategies to protect your household from economic volatility. In Venezuela, prices doubled every 19 days on average. It doesn’t take long for a loaf of bread to become unattainable at that pace of inflation. According to a BBC News report,
“Venezuelans are starving. Eight out of ten people polled in the country’s annual living conditions survey (Encovi 2017) stated they were eating less because they didn’t have enough food at home. Six out of ten people claimed they went to bed hungry because they couldn’t afford to eat.”
Shelf Stable Everyday Foods
When you are unable to purchase at the grocery store as you regularly do, having a supply of short-term shelf stable goods that you use every day will help reduce the impact. This is referred to as short-term food storage because, while these items are shelf-stable, they will not last as long as long-term staples. To successfully protect against hunger, you must have both.
Canned foods, boxed mixtures, prepared entrees, cold cereal, ketchup, and other similar things are suitable for short-term food preservation. Depending on the food, packaging, and storage circumstances, these foods will last anywhere from 1 to 7 years. Here’s where you can learn more about putting together a short-term supply of everyday meals.
Food takes up a lot of room, and finding a place to store it all while yet allowing for proper organization and rotation can be difficult. Check out some of our friends’ suggestions here.
Investing in food storage is a fantastic idea. Consider the case of hyperinflation in Venezuela, where goods prices have doubled every 19 days on average. That means that a case of six #10 cans of rolled oats purchased today for $24 would cost $12,582,912 in a year…amazing, huh? Above all, you’d have that case of rolled oats on hand to feed your family when food is scarce or costs are exorbitant.
Basic Non-Food Staples
Stock up on toilet paper, feminine hygiene products, shampoo, soaps, contact solution, and other items that you use on a daily basis. What kinds of non-food goods do you buy on a regular basis? This article on personal sanitation may provide you with some ideas for products to include on your shopping list.
Medication and First Aid Supplies
Do you have a chronic medical condition that requires you to take prescription medication? You might want to discuss your options with your doctor to see if you can come up with a way to keep a little extra cash on hand. Most insurance policies will renew after 25 days. Use the 5-day buffer to your advantage and refill as soon as you’re eligible to build up a backup supply. Your doctor may also be ready to provide you with samples to aid in the development of your supply.
What over-the-counter drugs do you take on a regular basis? Make a back-up supply of over-the-counter pain pills, allergy drugs, cold and flu cures, or whatever other medications you think your family might need. It’s also a good idea to keep a supply of vitamin supplements on hand.
Prepare to treat minor injuries without the assistance of medical personnel. Maintain a well-stocked first-aid kit with all of the necessary equipment.
Make a point of prioritizing your health. Venezuelans are suffering greatly as a result of a lack of medical care. Exercise on a regular basis and eat a healthy diet. Get enough rest, fresh air, and sunlight. Keep up with your medical and dental appointments, as well as the other activities that promote health and resilience.
What should I do to prepare for a Depression in 2021?
We’ve talked about how individuals survived the Great Depression in Survival Scout Tips, but today we’d want to take a look at the Great Depression from a different perspective. Rather of focusing on surviving the Great Depression, let’s think about what efforts we can take now to prepare for the Greater Depression, which experts fear could happen in our lifetime.
Before the Great Depression, some people took advantage of windows of opportunity, such as diversifying their income. We can learn from history and use this information to make better judgments to secure our livelihoods in the case of a Greater Depression because hindsight is 20/20.
Millions of people lost their jobs during the Great Depression. The percentage of women employed, on the other hand, increased. “From 1930 to 1940, the number of employed women in the United States increased by 24%, from 10.5 million to 13 million,” according to The History Channel. Despite the fact that women had been progressively entering the workforce for decades, the Great Depression forced them to seek work in ever greater numbers as male breadwinners lost their jobs.”
Women took on more steady jobs, such as nurses and teachers, as one of the causes. During the epidemic, we became accustomed to hearing about “essential workers,” or those who were required to keep the country running while other firms were closed.
Take action now to make oneself indispensable. Make every effort to convince your manager that you are an indispensable employee. This will not only keep you employed during a downturn in the economy, but it will also improve your prospects of getting a raise or advancing up the corporate ladder.
Don’t succumb to lifestyle creep if you follow step one and boost your income (where you start spending more as you earn more). Do the polar opposite instead. With economic uncertainty looming, now is not the time to go big. Instead, seek for ways to cut back on your spending. Look for ways to cut your utility and insurance payments, cancel unnecessary subscriptions, and stop buying new just because you can (you don’t need the latest cell phone model, for example).
Use the extra money you’re earning and the money you’re saving to cut back on your expenditures to pay off your debt. “Debt is an issue even when the economy is prospering,” Forbes writes. It’s an even bigger concern during recessions, when you may be facing the prospect of losing your job or seeing the value of your investments plummet.” You’ll have a higher chance of surviving the Great Depression if you have less debts.
You must also develop your savings in addition to paying off your debt. Many Americans, however, do not have an emergency savings account. If another depression strikes, having an emergency fund will go a long way toward ensuring your family’s safety.
Avoid placing all your eggs in one basket when it comes to income and savings. Diversify instead. This is not only how the majority of millionaires become millions, but it is also a sound financial approach. For example, if your company closes during a recession and that is your main source of income, you will lose all of your savings. You will have other means of survival if you start a side hustle now or make savvy investments (such as sin and comfort stocks, gold, or precious metals).
Many Americans are unconcerned with living over their means. “Experts believe that being in a persistent scenario of having little or no emergency funds is unpleasant, and even harmful,” according to U.S. News (let alone adequate retirement savings).
But, like the partially shut down federal government, which relies on borrowing to keep afloat and threatens another credit downgrade if the closure continues, economists believe Americans are unable or unwilling to live within their means. Credit is much easier to obtain and has evolved into a convenience rather than an emergency solution, according to experts.”
Many Americans use credit cards or bank loans to “buy” expensive cars, designer clothing, and luxury vacations that they can’t afford but convince themselves they can because they have a credit card.
People nowadays frequently use their debit or credit cards for all of their purchases. We shouldn’t invest all of our money in one bank, as the Great Depression demonstrated. That doesn’t imply you should hurry to the bank and deposit your whole savings account under your mattress. Instead, make it a priority to keep emergency funds on hand at all times.
Growing your knowledge base will not only make you irreplaceable at work, but it will also aid you at home if you experience a Greater Depression. Start learning about common household replacements and do-it-yourself solutions, for example. You won’t be able to buy things as readily or afford a handyman if a Greater Depression happens. As a result, it’s a good idea to learn as much as you can on your own.
Food and clean water will be among the first items to run short during the Great Depression. When things do return to stores, they may be rationed or at excessive costs. During the coronavirus scare, we witnessed this personally. Because natural calamities and economic turmoil are always a possibility, it’s a good idea to stock up on long-lasting emergency food and water purification equipment.
In the same way, start thinking about nonperishable things that would likely rise in price owing to inflation if a slump occurs. Consider what individuals bought in a panic in 2020 and hoard them now. Toilet paper, for example.
What will the state of the economy be in 2022?
“GDP growth is expected to drop to a rather robust 2.2 percent percent (annualized) in Q1 2022, according to the Conference Board,” he noted. “Nonetheless, we expect the US economy to grow at a healthy 3.5 percent in 2022, substantially above the pre-pandemic trend rate.”
What is the cost of depression?
The term “depressed prices” refers to a period in which prices have fallen over an extended period of time. Economic depressions are defined as a country’s economic output declining for an extended period of time. Depressions, whether economic or stock-related, are frequently brought on by circumstances that reduce demand.