Recession or Depression? Part 3

“In their 1963 book A Monetary History of the United States, 1867-1960, Milton Friedman and Anna Schwartz laid out their case for a different explanation of the Great Depression. … The failure of the Federal Reserve to deal with the Depression was not a sign that monetary policy was impotent, but that the Federal Reserve exercised the wrong policies. They did not claim the Fed caused the depression, only that it failed to use policies that might have stopped a recession from turning into a depression.” – Wikipedia.

Definitions: Bear Market or Crash?  from the October 10th Forbes magazine provides useful background information.

Stocks are falling, unemployment is rising and even banks seem to be hiding their money under mattresses. It’s tough to measure how bad things are and impossible to say whether they’ll get worse. With commentators throwing around words usually reserved for the worst of economic times – crash, recession, depression – the one question we can answer is what those words mean.

The economy expands and shrinks in cycles, with times of growth followed by times of contraction.

In an expansion, manufacturers build new factories, retailers open more stores and, most of the time, companies hire additional workers. The 1990s saw a decade of growth, the longest peacetime economic expansion in U.S. history.

In a recession, the economy shrinks for months. Factories produce less, cutting shifts, or laying off workers altogether. Incomes fall. Sales drop. The last recession lasted nine months ending in November 2001.

A depression is a more severe and prolonged version of a recession. In a depression, prices often fall as unemployment rises. Shoppers drastically cut their spending. In the Great Depression, which began in 1927 and lasted for more than a decade, unemployment peaked at nearly 25 percent, and many of those who did work were only able to find part-time jobs. By contrast, the current unemployment rate is 6.1 percent.

Recent talk about depressions has been sparked by worsening economic data and the frightening drop in stock prices, which has been almost as steep as the 1929 crash that began the Great Depression. Most professional investors call a 20 percent decline within a few days a crash.

A 20 percent decline over a longer time is called a bear market. A bear market is a prolonged decline in prices for stocks, bonds, commodities, or all three. While there’s debate about whether the decline of the seven trading days ending Thursday was a crash, there’s no argument that we are in a bear market. The Dow Jones industrial average is nearly 42 percent lower than it was at its highest point last October; marking the largest decline since 1973-1974.

The opposite of a bear market is a bull market, which brings a prolonged increase in the price of stocks, bonds or commodities. Market historians may point to Oct. 9, 2007 as the crest of the most recent bull market – notching a 48 percent rise over five years – and the beginning of a bear market of undetermined length.

photo credit: Lee Jordan