10 Things That Could Happen in a Depression vs. a Recession - Part 1

The terms depression and recession are often used interchangeably to describe a period of economic decline and hardship. However, they are not the same thing. A depression is a more severe and prolonged downturn than a recession, which is a normal part of the business cycle. A recession is defined as two consecutive quarters of negative growth in gross domestic product (GDP), the total value of goods and services produced in a country. A depression has no official definition, but it is generally characterised by a decline in GDP of more than 10% or lasting more than three years.

The last time the world experienced depression was the Great Depression of the 1930s, which lasted for about a decade and affected many countries. The most recent recession was the Great Recession of 2007-2009, which lasted for 18 months and was the worst since World War II.

What are some of the things that could happen in a depression versus a recession? Here are 10 possible scenarios:

1. Unemployment

One of the most visible and painful effects of an economic downturn is unemployment, which measures the percentage of people who are actively looking for work but cannot find it. Unemployment tends to rise during a recession and fall during an expansion. However, the magnitude and duration of unemployment vary depending on the severity of the downturn.

In a recession, unemployment may increase by a few percentage points and last for a few months or years. For example, during the Great Recession, the U.S. unemployment rate peaked at 10% in October 2009 and returned to pre-recession levels by May 2016.

In a depression, unemployment may skyrocket by double digits and last for several years or decades. For example, during the Great Depression, the U.S. unemployment rate reached 25% in 1933 and remained above 10% until 1941.

2. Income

Another effect of an economic downturn is a decline in income, which measures the amount of money that people earn from work or other sources. Income affects people’s ability to spend, save, and invest, which in turn affects their standard of living and well-being.

In a recession, income may decrease by a small percentage and recover relatively quickly. For example, during the Great Recession, the U.S. median household income fell by 4% from $60,985 in 2007 to $58,476 in 2011 and surpassed its pre-recession level by 2016.

In a depression, income may plummet by a large percentage and take much longer to recover. For example, during the Great Depression, the U.S. per capita income dropped by 40% from $857 in 1929 to $510 in 1933 and did not reach its pre-depression level until 1940.

3. Inflation

Another effect of an economic downturn is inflation or deflation, which measures the changes in the prices of goods and services over time. Inflation means that prices are rising, while deflation means that prices are falling. Both inflation and deflation can have negative consequences for the economy and consumers.

In a recession, inflation may slow down or turn into deflation due to weak demand and excess supply. For example, during the Great Recession, the U.S. annual inflation rate fell from 3.8% in 2008 to -0.4% in 2009 and remained below 2% until 2017.

In a depression, deflation may become severe and persistent due to collapsing demand and production. For example, during the Great Depression, the U.S. annual deflation rate reached -10% in 1932 and averaged -2% between 1930 and 1939.

4. Consumption

Another effect of an economic downturn is consumption, which measures the amount of goods and services that people buy for their own use or enjoyment. Consumption is influenced by income, expectations, preferences, prices, credit availability, taxes, and other factors.

In a recession, consumption may decline moderately and bounce back relatively quickly. For example, during the Great Recession, U.S. personal consumption expenditures fell by 3.2% from $10.6 trillion in 2008 to $10.3 trillion in 2009 and surpassed their pre-recession level by 2011.

In a depression, consumption may plummet drastically and take much longer to recover. For example, during the Great Depression, U.S. personal consumption expenditures dropped by 18% from $77.4 billion in 1929 to $63.3 billion in 1933 and did not reach their pre-depression level until 1936.

5. Savings

Another effect of an economic downturn is savings, which measures the amount of money that people set aside for future use or investment. Savings are influenced by income, expectations, preferences, interest rates, taxes, and other factors.

In a recession, savings may increase or decrease depending on the trade-off between consumption and precaution. Some people may increase their savings to prepare for possible income loss or emergencies, while others may decrease their savings to maintain their consumption levels or pay off debts. For example, during the Great Recession, the U.S. personal saving rate rose from 3.7% in 2007 to 6.1% in 2009 and then fell to 4.9% in 2011.

In a depression, savings may increase significantly due to a lack of consumption opportunities or confidence. People may hoard their money or invest in safe assets such as gold and silver to preserve their wealth and hedge against inflation or deflation. For example, during the Great Depression, the U.S. personal saving rate soared from 4.8% in 1929 to 10% in 1933 and then remained above 8% until 1940.

6. Investment

Another effect of an economic downturn is investment, which measures the amount of money that businesses spend on capital goods such as machinery, equipment, buildings, etc. Investment is influenced by factors such as profitability, expectations, interest rates, taxes, regulations, etc.

In a recession, investment may decline sharply due to a fall in demand, profits, and confidence. Businesses may postpone or cancel their planned projects or reduce their inventories to cope with the slowdown. For example, during the Great Recession, the U.S. gross private-domestic investment fell by 23% from $2.6 trillion in 2008 to $2 trillion in 2009 and did not reach its pre-recession level until 2014.

In a depression, the investment may collapse dramatically due to a collapse in demand, profits, and confidence. Businesses may stop or liquidate their existing projects or sell their assets to survive the crisis. For example, during the Great Depression, the U.S. gross private domestic investment plunged by 76% from $16.2 billion in 1929 to $3.9 billion in 1933 and did not reach its pre-depression level until 1941.

7. Trade

Another effect of an economic downturn is trade, which measures the amount of goods and services that a country exports and imports from other countries. Trade is influenced by factors such as exchange rates, tariffs, quotas, subsidies, demand conditions, supply conditions, etc.

In a recession, trade may decrease moderately due to a decline in global demand and supply. Countries may experience lower export revenues and lower import costs, which may affect their trade balance and current account balance. For example, during the Great Recession, the U.S. exports of goods and services fell by 14% from $2.1 trillion in 2008 to $1.8 trillion in 2009 and surpassed their pre-recession level by 2011. The U.S. imports of goods and services fell by 23% from $2.7 trillion in 2008 to $2.1 trillion in 2009 and did not reach their pre-recession level until 2013.

In a depression, trade may collapse drastically due to a collapse in global demand and supply. Countries may experience severe export losses and import shortages, which may affect their trade balance and current account balance. Countries may also resort to protectionist measures such as tariffs, quotas, subsidies, etc. to protect their domestic industries and markets, which may trigger trade wars and retaliation from other countries. For example, during the Great Depression, the U.S. exports of goods and services dropped by 66% from $5.2 billion in 1929 to $1.7 billion in 1933 and did not reach their pre-depression level until 1940. The U.S. imports of goods and services dropped by 55% from $4.4 billion in 1929 to $2 billion in 1933 and did not reach their pre-depression level until 1940. The U.S. also enacted the Smoot-Hawley Tariff Act in 1930, which raised tariffs on thousands of imported goods, which provoked retaliation from other countries and worsened the global trade situation.

8. Government Spending

Another effect of an economic downturn is government spending, which measures the amount of money that the government spends on public goods and services such as defence, education, health care, infrastructure, etc. Government spending is influenced by factors such as fiscal policy, budget constraints, political preferences, social needs, etc.

In a recession, government spending may increase moderately due to an expansionary fiscal policy, which aims to stimulate the economy by increasing public spending and/or reducing taxes. Government spending may also increase due to automatic stabilisers, which are programs that increase spending or reduce taxes when the economy is weak and vice versa. For example, during the Great Recession, U.S. government spending rose by 18% from $2.9 trillion in 2008 to $3.5 trillion in 2009 and reached $3.8 trillion in 2011.

In a depression, government spending may increase significantly due to an aggressive fiscal policy, which aims to rescue the economy by increasing public spending and/or reducing taxes substantially. Government spending may also increase due to automatic stabilisers, which are amplified by the severity of the downturn. For example, during the Great Depression, U.S. government spending rose by 83% from $9.4 billion in 1929 to $17.2 billion in 1933 and reached $92 billion in 1940.

9. Government Debt

Another effect of an economic downturn is government debt, which measures the amount of money that the government owes to its creditors such as domestic or foreign individuals, institutions, or governments. Government debt is influenced by factors such as fiscal policy, budget deficits or surpluses, interest rates, economic growth, etc.

In a recession, government debt may increase moderately due to a rise in budget deficits, which occur when government spending exceeds government revenue. Budget deficits may result from an expansionary fiscal policy, which increases spending and/or reduces taxes, or from a decline in economic activity, which reduces tax revenue and increases spending on social programs. For example, during the Great Recession, the U.S. government debt rose by 40% from $10.7 trillion in 2008 to $14.8 trillion in 2011 and reached $16.4 trillion in 2013.

In a depression, government debt may increase significantly due to a surge in budget deficits, which occur when government spending exceeds government revenue by a large margin. Budget deficits may result from an aggressive fiscal policy, which increases spending and/or reduces taxes substantially, or from a collapse in economic activity, which reduces tax revenue and increases spending on social programs drastically. For example, during the Great Depression, the U.S. government debt rose by 150% from $16.9 billion in 1929 to $42.9 billion in 1933 and reached $258.7 billion in 1940.

10. Stock Market

Another effect of an economic downturn is the stock market, which measures the value of shares of companies that are traded on public exchanges such as the New York Stock Exchange or the Nasdaq. The stock market is influenced by factors such as earnings, dividends, expectations, sentiment, interest rates, inflation, etc.

In a recession, the stock market may decline moderately due to a fall in corporate profits, dividends, and confidence. Investors may sell their stocks and shift to safer assets such as bonds or cash. For example, during the Great Recession, the S&P 500 index fell by 37% from 1,468 points in December 2007 to 926 points in December 2008 and recovered to 1,258 points by December 2010.

In a depression, the stock market may collapse dramatically due to a plunge in corporate profits, dividends, and confidence. Investors may panic and dump their stocks and shift to safer assets such as gold or silver. For example, during the Great Depression, the Dow Jones Industrial Average fell by 89% from 381 points in September 1929 to 41 points in July 1932 and did not reach its pre-depression level until November 1954.

Conclusion

A Depression is a much worse and longer-lasting economic downturn than a recession, and it can have more severe and lasting impacts on various aspects of the economy and society. A depression can cause widespread unemployment, poverty, hardship, social unrest, and political instability. A recession can also cause some of these problems, but to a lesser extent and for a shorter duration. Therefore, it is important to understand the difference between a depression and a recession and to take appropriate measures to prevent or mitigate them.

Disclaimer: This article is intended as an opinion piece and does not constitute financial advice. Investing in bullion carries risks, and individuals should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.

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