What is an economic depression and what was different about the great depression?
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A recession is a widespread economic decline that lasts for several months. A depression is a more severe downturn that lasts for years. There's been only one depression in U.S. history: the Great Depression. It lasted a decade. Show
According to the National Bureau of Economic Analysis, the Great Depression was a combination of two recessions. The first lasted for 43 months, from August 1929 to March 1933. The next lasted 13 months, from May 1937 to June 1938. The severe downturn lasted for about 10 years combined. There have been 34 recessions since 1854. Recessions have lasted for approximately 10 months on average since 1945. Key Takeaways
Recession vs. DepressionGross domestic product (GDP) contracts for at least a few months in a recession. GDP growth will slow for several quarters before it turns negative in a typical recession. There's also a drop in four other critical economic indicators: income, employment, manufacturing, and retail sales. These reports come out monthly, so they usually signal a recession long before GDP turns negative. A depression is longer and more destructive than a recession. It has years, not quarters, of economic contraction. GDP was negative for six out of the 10 years during the Great Depression. It shrank by a record of 12.9% in 1932. Unemployment reached nearly 25%. International trade shrank by more than two-thirds, and prices fell more than 25%. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended. The stock market didn't recover until 1954. Recession
Depression
Where Are the Signs in Our Current Business Cycle?The best way to figure out if we're in a recession or a depression is to understand where we are in the business cycle. A recession typically follows the peak of the business cycle. The peak is marked by irrational exuberance and asset bubbles. The U.S. economy entered the contraction phase of the business cycle in early 2020 due largely to the COVID-19 pandemic. The government closed non-essential businesses and urged people to stay home to stop the spread of the virus. The economy contracted 5.1% in the first quarter. There were 23.1 million unemployed by April 2020, sending the unemployment rate to 14.7%. Stock markets have been up, and unemployment has been down through 2021 and into 2022 despite the pandemic and rising inflation. But not all economists agree that the near-term outlook is bright. A report from the National Bureau of Economic Research (NBER) argues that the U.S. may have already entered a recession in late 2021. Many of the red-flag indicators it points to were also ignored prior to the Great Recession. 12 Signs of a RecessionThere are 12 causes of a recession:
Consumers will stop buying and businesses will lay off workers when there's no confidence in the future. These situations create a downward spiral of unemployment, loan defaults, and bankruptcies. A shock often triggers this type of panic reaction, such as a stock market crash, wage-price controls, the collapse of an asset bubble, or an unanticipated reaction to government action, such as deregulation or an increase in interest rates. It's business behavior at other times, such as poor management or credit crunches. It was a pandemic in 2020. NoteStocks are a piece of ownership in a company, so the stock market is a vote of confidence in the future of these companies. It's also a referendum on the U.S. economy itself. A crash can scare consumers, who then buy less, and this triggers a recession. The crash restricts financing for new businesses. The sale of stocks provides them with the funds they need to grow. The stock market will continue to fall if confidence isn't restored. It's the start of a bear market if it drops more than 20%. This extreme loss of confidence is also enough to trigger a recession. The Cause of the Great DepressionThe Federal Reserve raised interest rates when it should have lowered them during the Great Depression. It was trying to protect the gold standard. But the world is no longer on the gold standard as of 2022. The U.S. dollar is the global currency. The Fed did not increase the money supply to combat deflation, as it should have. Consumers put off making major purchases as they noticed that prices were falling. This further lowered demand. The Fed also ignored bank failures. The Fed learned from the Depression. It lowers interest rates at the first sign of a recession. It makes sure that banks have plenty of capital to lend. Are We Headed Toward the Second Great Depression?Your life would change dramatically if the United States were to experience an economic downturn on the scale of the Great Depression. One out of four people would lose their jobs. The stock market would drop by 50%, and it would take decades, not months, to recover. The COVID-19 pandemic caused a recession, but it's unlikely to create a depression. Central banks around the world know how to prevent them. They make sure that banks have enough capital. They've lowered interest rates to zero. Unlike the early years of the depression, Congress has used expansionary fiscal policy to cushion recessions. The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. It also expanded unemployment benefits. Frequently Asked Questions (FAQs)Where should I put my money if a depression is likely?There were many bank failures during the depression. This made people take their money out of the bank, known as a "run on the bank." Fortunately, you don't have to hide your money under a mattress because the Federal Deposit Insurance Corporation insures 100% of your savings, checking, and money market deposits. Your money is safe in a bank as long as you're within FDIC guidelines. What was the worst recession?The Financial Panic of 1873 is considered by many to have been the worst recession. It was triggered by a series of banking crises after the Civil War. At least 100 banks failed during this time. What defines a economic depression?A depression is characterized as a dramatic downturn in economic activity in conjunction with a sharp fall in growth, employment, and production. Depressions are often identified as recessions lasting longer than three years or resulting in a drop in annual GDP of at least 10%. 1
Is economic depression and Great Depression same?A recession is a decline in economic activity spread across the economy that lasts more than a few months. A depression is a more extreme economic downturn, and there has only been one in US history: The Great Depression, which lasted from 1929 to 1939.
What was the Great Depression summary?The Great Depression was the worst economic downturn in US history. It began in 1929 and did not abate until the end of the 1930s. The stock market crash of October 1929 signaled the beginning of the Great Depression. By 1933, unemployment was at 25 percent and more than 5,000 banks had gone out of business.
What were the 3 main effects of the Great Depression?The U.S. economy shrank by a third from the beginning of the Great Depression to the bottom four years later. Real GDP fell 29% from 1929 to 1933. The unemployment rate reached a peak of 25% in 1933. Consumer prices fell 25%; wholesale prices plummeted 32%.
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