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Economic Depression: Are We in One?

Posted By Isaac Nuriani |

The COVID-19 pandemic and its economic consequences rage on. In the second quarter, U.S. gross domestic product (GDP) fell by 32.9% annualized. That’s the worst-ever drop for the U.S. economy. “Neither the Great Depression nor the Great Recession nor any of the more than three dozen economic slumps over the past two centuries have ever caused such a sharp drain over so short a period of time,” writes CNBC.

The Chicago Tribune reports that large companies are going bankrupt at record speed. And a multitude of small companies – employing nearly half of all Americans – are in danger of closing their doors forever. The Tribune cites a U.S. Chamber of Commerce survey revealing that nearly 60% of small business owners are worried they’ll have to shutter permanently.

The situation is dire enough that essentially the entire country is receiving free money from the Treasury. An initial round of 1,200-dollar-per-taxpayer checks was deployed earlier this year, and it’s believed a second round will go out soon. To paraphrase comedian Jeff Foxworthy: When everyone in your entire country is on welfare, you might be in a depression.

Could it really be the case that we are in an economic depression? A closer look at the features that typically characterize depressions suggests we at least could be on the verge of one. But it’s getting easier to find economists who say we’re already there for all practical purposes.

Unlike Recessions, Economic Depressions Lack a Clear Definition

It can be difficult to know precisely when a downturn becomes an economic depression. The reason: There’s no specific agreed-upon technical definition of a depression as there is for a recession. The technical definition of a recession is two consecutive quarters of a decline in economic activity.

Investopedia defines an economic depression this way:

A depression is a severe and prolonged downturn in economic activity. In economics, a depression is commonly defined as an extreme recession that lasts three or more years or which leads to a decline in real gross domestic product (GDP) of at least 10% in a given year. Depressions are relatively less frequent than milder recessions, and tend to be accompanied by high unemployment and low inflation.

The Balance agrees that what makes a depression is a measure of economic contraction in terms of years, not quarters. They also say high unemployment levels and low inflation rates – direct consequences of significant, sustained economic contractions – are common to economic depressions. And a significant drop in asset prices, such as the stock market and real estate, can accompany depressions, as well. The Balance also notes that depressions tend to be global events. Recessions, they say, usually are not similarly infectious across the borders of nations (although the 2008 Great Recession is a notable exception).

So there is general agreement on the conditions that constitute an economic depression, such as an economic contraction that stretches much longer than two consecutive quarters. However, there is no universally accepted, specific definition of a depression. That opens the door to interpretation of our present situation by experts.

And there’s no getting around the fact that some of these educated, experienced professionals say we’re either in a depression right now or heading straight into one.

Economists: We’re in a “Pandemic Depression”

Economists Carmen Reinhart and Vincent Reinhart think we’re fully in an economic depression right now – what they term a “pandemic depression.” The pair admits that what we’re living through is not akin to the Great Depression. However, they point out that history is “filled with depressions” that did not match the Great Depression in severity.

According to the Reinharts, one important characteristic that distinguishes the “pandemic depression” from the 2008 financial crisis is the current failure of all growth engines around the world. As the 2008 crisis evolved, emerging markets – including China – continued to grow. “Not this time,” say the Reinharts. “The last time all engines failed was in the Great Depression; the collapse this time will be similarly abrupt and steep.”

Renowned geopolitical consultant Ian Bremmer recently penned an article for Time in which he makes the case that we’re in an economic depression. He cites three criteria for a depression, and notes the pandemic satisfies all three:

There are three factors that separate a true economic depression from a mere recession. First, the impact is global. Second, it cuts deeper into livelihoods than any recession we’ve faced in our lifetimes. Third, its bad effects will linger longer.

Mark Zandi, chief economist at Moody’s Analytics, has said he defines an economic depression as 12 months (at least) of double-digit unemployment. A June Bankrate survey of economists found that, as a whole, the group believes double-digit unemployment will last well into 2021. That would certainly satisfy Zandi’s definition of a depression. In fact, 1 in 8 of the economists surveyed by Bankrate says the country is in a depression already.

Analyst: The Current Crisis Will Fuel Gold and Silver for Years

There’s a tendency to define the landscape of an economic depression solely in terms of the granddaddy of all downturns – the Great Depression. That’s one reason why it’s difficult for many to view what’s going on right now as a depression.

But economic conditions don’t have to descend to the abysmal levels of that cataclysmic event to produce a depressionary environment. Things don’t have to get that bad to cue Federal Reserve quantitative easing and record deficit spending that provides precious metals with so much upward thrust.

In other words, it doesn’t matter whether you call this an economic depression or not. Gold and silver each began the third quarter with no loss of the momentum they demonstrated in Q2. Gold followed its 13% rise in Q2 with a jump of another 13% last month. Silver was even more impressive, surging 34% in July after climbing 32% in Q2. There’s been some moderation of those trends in August. But that’s to be expected after the sharp increases we’ve seen recently.

Analysts expect precious metals to continue soaring for a long time. Augusta Precious Metals senior economic analyst Devlyn Steele has big expectations of both metals. He sees no end in sight to drastic measures taken by the Federal Reserve and government to “fix” the badly damaged economy. As a result, Steele updated his 36-month price targets for gold and silver to 5,000 dollars per ounce and 125 dollars per ounce.

Are we in an economic depression? It depends who you ask. At the very least, some of the conditions generated by the pandemic are depression-like, such as the massive contraction in GDP. Everyone agrees, though, is that this is one of the worst crises our economy has ever faced. The Congressional Budget Office says the economy will feel the effects of the pandemic a decade from now. Assuming that’s true, it’s reasonable to expect both the Federal Reserve and the government to continue pulling out all the stops in their efforts to “fix” what’s broken, economic depression or not. And as long as that happens, there’s little reason to believe gold and silver will stop climbing.

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