I’m going out on a limb here, and I’m going to suggest that we have already entered a depression. The concept of a depression is even less objective than that of a recession, but some suggest that a decline in real GDP of 10% or more is the criterion, which we have not attained yet.
I don’t think a 10% decline in GDP is the right threshold. Depressions are different because of their widespread nature, often coming through financial systems that are in danger.
As it is now, many things are happening that are depression-like. Here we go:
- Record high levels of total debt to GDP
- Many go hat in hand to the government.
- The spreads of the bond market are at record levels since the last depression, and maybe comparable.
- There is policy paralysis and confusion. No one knows what to do (or leave alone), they act blindly or cower in fear.
- Ultrasafe investments have record low yields.
- Banks don’t trust each other.
- GDP is shrinking, and unemployment is increasing at a rapid rate.
- Financial businesses are failing and shrinking at high rates.
- The government comes in to “help” the markets, and ends up replacing the markets.
- The security of banks and other financial entities is open to question.
Will we get a 10% decline in real GDP? I think so, but I am nowhere near certain on that. What I am certain of is that the gears of finance are jammed. The bond market is a shadow of its former self, and few are willing to take seemingly prudent risks. I’m not sure the government can do much to affect this; it will work out over time, as debts are paid off and forgiven, as the last depression did.
I won’t be your host through this depression, should I live so long. But knowing what things will be like if we are in a depression is a real advantage for those who invest or run businesses. Be careful.