The Difference Between Recession and Depression 

The economic freefall continues.  Last Friday [April 3, 2009] the Labor Department reported that 663,000 jobs were cut in March.

With this, the tally of jobs lost since December 2007 – the official start date of the depression – hit 5.1 million.

In other words, 5.1 million less people are earning a paycheck than just 15-months ago…pushing the unemployment rate up to 8.5 percent…the highest level since 1983.

Here in the land of fruits and nuts it’s up to 10.5 percent.

Yet the mainstream press still doesn’t get it.  They’re still calling it a recession – not a depression.  Maybe it’s just a matter of semantics.  But we believe we’re in a depression – not a recession. 

Here’s why…

In a recession a dose or two of fiscal and monetary policy succeeds in giving the economy a springboard to bounce off of.  Growth soon returns.  And everything’s just fantastic. 

In a depression – regardless of how much money the government and central bankers throw at it – rather than bouncing off a springboard, the economy lands waist deep in a muddy peat bog.  It then slogs and plods along for years – even decades – unable to return to its former glory.

Today we’ve yet to hit bottom.  But when we do, there won’t be a cushy springboard to bounce us back to the up and up.  Rather there’ll be a mucky mire of scum and sludge to wade through before finding solid ground.

The difference between recession and depression stems from where the economy is in the business cycle.  And when so many debts have been contracted and so much capital has been misallocated to value subtracting endeavors…the whole structure of the economy breaks down.

Mistakes must be reckoned, marginal businesses must fail, reckless lenders must be expunged, and the whole economy must be retooled and restructured so capital is reallocated to productive endeavors.  This takes time.  And when the government intervenes to support the failures, this takes even more time.

By value subtracting endeavors, we mean enterprises that loose money.  Last year, for example, General Motors lost nearly $31 billion.  Thus, for their efforts, they subtracted $31 billion in value from the face of the earth.

Does that mean General Motors should go out of business?  We don’t know.  Perhaps they’ll turn things around and retool their business to meet the demands of the present world.  For what worked in 1970 no longer works today.  And what works today will no longer work tomorrow.

But to do so, they’ll have to make cars that people want at prices that people will pay…with operating expenses that don’t exceed revenue.  The market will decide if General Motors is successful at this by allowing people to vote with their money.

Yet General Motors is just one example.  Up and down…in and out of the economy these gross misallocations of capital exist.  And some have existed for years.  It just takes a depression to make things so painfully obvious.  For pain is a great motivator for change.  And that’s what depressions are for.

Sure some of you may not be happy with this distinction of recession from depression.  In fact, you may find it wholly inadequate.  But if you’re looking for certainty in an uncertain world you’ve absolutely, without a doubt, come to the wrong place.  We neither are economists or academics.

We don’t have a definition to fall back on or a criteria sheet to cross reference.  No formulas, tables, charts, or graphs.  Rather we have our conjectures, guesses, and estimations to guide us.  And we have our gut to check things against.

So when we lick our index finger and hold it up to the wind, we feel a gusty cold gale of depression whipping about from all directions.

Still for those of you who want something concrete, we won’t leave you hanging…

The difference between recession and depression is the difference between you and your neighbor.  In the words of the late Ronald Reagan: “Recession is when your neighbor loses his job.  Depression is when you lose yours.”

The distinction is rigorous.

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