Saturday, 11 April 2009

Recession or Depression?

Economically things aren’t looking too good at the moment. They didn’t look too good in 1933 when Franklin D Roosevelt said “There is nothing to fear but fear itself." It was in the middle of the Great Depression which started in America with the stock market crash of 1929 and went on for over ten years. He was making the point that how we view things affects the economic climate. If we perceive things to be bad then we are not going to spend money and the economy spirals into decline. However there are many people who are in secure jobs or who have savings. They could spend money but may be thinking that their circumstance could change so they hold onto their money. FDR tried to get them to spend.

I like the old joke that defines a recession as when your neighbour loses his job and a depression as when you lose your job. The actual definitions are a bit more complicated. A recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. A depression lasts for several years. However these definitions do not take into consideration changes in other factors like the unemployment rate or FDR’s concern, consumer confidence. Another point is that if you use quarterly information then you are never quite sure when a recession begins or ends. So a recession for nine months may not be considered a recession.

The problem with telling people to fear nothing and go and spend is that there are a lot of people who already have huge debt and you are making their problems worse. So I suppose the best advice is if you have the ability, keep the wheels of the economy lubricated and keep spending.

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