|
Perhaps because we are three generations removed from it and the images it evokes are so unpleasant and discomfiting, the Great Depression seldom intrudes explicitly into our thoughts. At the same time, however, and in ways that are rarely recognised, certain beliefs and habits that most of today’s investors hold dear were moulded during the late 1920s and 1930s. Their conceptions of recession and depression; their views about the cause of the Great Depression; their opinions about what ended the Depression; and perhaps most importantly, their beliefs about the proper role, benevolence and general efficacy of government economic management – all have been strongly influenced if not determined by ideas and actions which gained currency between 1929 and 1945.
Unfortunately, however, and as Gene Smiley demonstrates in a new summary of research (Rethinking the Great Depression: A New View of Its Causes and Consequences, Ivan R Dee, 2002, ISBN: 1566634725), much of what we think that we know about the Depression may be false; and many of the lessons we have learnt from it may be mistaken. People act upon ideas, and the ideas adopted at critical junctures – whatever their correspondence to reality – tend to become deeply entrenched. Most of today’s politicians, economists and market participants think and act like their fathers and grandfathers. To do so usually makes good sense: we benefit immeasurably from the cultural and economic inheritance our forebears bequeathed to us.
But not all of our inheritance is sacrosanct, and for this reason Sean Corrigan’s recent injunction to investors and custodians of capital, entitled Six Myths of the Crash, is apposite. Given the tragic and enduring errors committed during the 1930s, today is “a time for the careful and conservative stewardship of [capital] and for those charged with this to display a willingness to challenge prevailing myths, whether these arise from economic sophistry or from institutional prejudice and intellectual inertia. If we can all become convinced that these are aims well worth achieving [then] this recession might actually turn out to have been fully worth the cost.”
Mainstream Conceptions
A recession is conventionally defined as a rather short period of time, usually 6-18 months, during which the amount and pace of economic activity decreases modestly. Since the Second World War in Anglo-American countries, an increase in the rate of joblessness has usually accompanied a recession. A depression, in turn, is conventionally defined as an extended period of time during which business activity drops significantly. A high rate of unemployment and deflation allegedly occur in tandem with a depression. With the possible exception of New Zealand during the mid 1980s, no Western country has experienced a depression since the 1930s. The term “deflation,” as used by mainstream economists and commentators, refers to a decline in the general level of prices. Its cause can be direct, i.e., through a decrease of demand for goods and services (either in the form of a reduction of spending by governments, capitalists or consumers, or some combination of all three) or indirect, i.e., through a reduction in the supply of money or credit (see also Inflation and Deflation: Some Dissenting Thoughts for Value Investors). Deflation, it is said, is associated with an abrupt increase in the rate of unemployment.
The difference between the terms “recession” and “depression” is indistinct because the definition of neither term is universally agreed. If one asked a group of economists, financiers and business journalists to define them, it is likely that one would receive half a dozen or more separate categories of response. The definition of recession favoured by many journalists and commentators is a decline of Gross Domestic Product (GDP) during two or more consecutive quarters. Many economists dislike this definition because it excludes from consideration changes in other variables such as consumer confidence.
Further, if one relies upon quarterly data then it is rather difficult both to detect a recession and to pinpoint its commencement and termination. A sharp and painful contraction that lasts fewer than six months, for example, may either escape the notice of statisticians – or, given its short duration, fall outside the definition of recession. For this and other reasons, in the U.S. the Business Cycle Dating Committee of the National Bureau of Economic Research determines the extent and type of business activity by looking at a host of economic gauges. These include employment, production, income and wholesale and retail sales. NBER defines a recession as an interval of time between (a) the point when aggregate business activity reaches a peak and starts to fall and (b) the point when it reaches a floor and then begins once again to rise. By this definition, since the Second World War the average recession in the U.S. has lasted approximately 11 months.
Before the Great Depression, any downturn in economic activity, regardless of its length and severity, was called a depression. The term recession was subsequently developed in order to differentiate periods like 1920-21 and the 1930s from the less momentous economic declines that occurred in 1907, 1910 and 1913. Hence the simple but still vague definition of a depression: it is a recession that is unusually long-lived and entails a particularly sharp decline of business activity. How, then, to distinguish a recession and a depression?
A rule of thumb to which a plurality of the mainstream would likely assent is to focus upon changes of GDP. A depression is an economic downturn during which real GDP declines by more than 10 percent; and a recession is a less severe (in time or intensity) downturn. Using this rule of thumb, the last depression in the United States occurred between May 1937 and June 1938. During this 13-month interval real GDP declined by 18.2 percent. If we use this method then in the U.S. the Great Depression of the 1930s can be seen as two separate events: a depression of unprecedented severity that began in August 1929 reached its nadir in March 1933 (and during which real GDP declined by almost 33 percent); a period of recovery; and then a second, and mercifully less severe, depression in 1937-38.
By this method, nothing remotely resembling a depression has been experienced in the U.S. since the late 1930s. Countries such as Finland, Indonesia and possibly New Zealand, however, have suffered depressions during the past 10-15 years. America’s worst recession since the Depression occurred between November 1973 and March 1975: during this period real GDP fell by 4.9 percent. In an outstanding interview conducted in 1996, James Grant, publisher of Grant’s Interest Rate Observer, noted “central bankers may decry one form of inflation. But among the contributions of the Austrians is the insight that there can be an inflation of assets as well as an inflation of prices. In Wall Street and the financial press, inflation means one thing only: the CPI going up. But to students of the Austrian School, that isn’t even half of it.”
So too with the business cycle, recessions and depressions: aggregated national accounts and changes therein, which in various ways are unsatisfactory and incomplete (see, for example, Lawrence Parks, Burn Your House, Boost the Economy, Frank Shostak, What is Up With the GDP? and GNP and Consumer Confidence in Australia: A Dissenting Argument) are not even half of it.
...continued in Part II
 
Designed & maintained by
Artist Web Design
©1999-2010 All Rights Reserved |
