dispatches from the new world of work

What's the Difference Between a Recession and a Depression?

Last March, a London-based Financial Services Company Executive I know quite well used the term "depression" to describe the extent of the economic crisis he saw ahead. At the time, I was quite shocked at his use of that term and told him so. We ended the conversation in polite disagreement, and I wrote a blog on this site to see what readers thought about the scale of the coming financial crisis. The popular view then was that we were all talking ourselves into a financial crisis and that my "depression" blog was an example of the kind of unhelpful negative behaviour that was undermining confidence!

Well, six months have passed and I called him again this week fully expecting to get the "I told you so!" treatment. He well remembered how shocked I had been at his previous "doomsday" forecast, and used words like "turmoil," "massive consolidation," and "never the same again" to describe the disruption going on all around us in London financial circles. But I am pleased to say that his forecast of a 1930s-style crisis ahead has been downgraded (or is that upgraded?) to an "official recession." I was again somewhat surprised—to put it mildly!

I wanted to share this more optimistic prognosis again on this site, and to say that for me at least, this person is a highly credible source on this subject. If the remorseless barrage of negative economic news and harrowing expert comments that we have to endure these days undermine people's confidence, and bankers, Prime Ministers, and Presidents are among those people, then maybe more positive talk may have the reverse effect. Could it make the economic outlook better than it would otherwise be? Maybe in this current financial mess, created by whomever we prefer to blame, and whoever's job we think it is to sort out, the only difference between a depression and a recession ahead may turn out to be a big intangible one, i.e., confidence.

Richard King posted this on 10/08/08.

Comments

Yesterday's NY Post headline was, in very large letters:

THE ONLY THING WE HAVE TO FEAR IS FEAR ITSELF.

Still rings very true. Perhaps a lot of this craziness is a self-fulfilling prophecy?

I really don't know much about economics, but I do believe that fear of loss is a human's biggest motivator. Examine your own past intentions if you're not sure.

And if there is one underlying current over the last few weeks, it is definitely fear.

Posted by gayle at October 8, 2008 10:25 AM

There is a lot of evidence to suggest that the "Great Depression" would have resolved itself around 1936 (give or take 18 months) if the socialistic programs had not been put in place and if the drought had not occurred.

When FDR was first inaugurated, there was such a lopsided majority in Congress that the Checks and Balances system was almost completely canceled.

So here are three topics which could not have been solved by "positive speech" alone. Positive Speech would not have prevented a drought; Positive Speech probably would not have prevented a "blame the feds" attitude which affected the 1930 and 1932 congressional elections. And positive speech would have probably only served to make FDR's election even more likely.

What is needed is a focus on consistent conduct towards the small details over a long period of time. When businesses and banks and investors consistently behave as if a downturn is going to work itself out in a couple or three years (without rousing speeches) the country will conduct itself accordingly.

But when businesses, banks and investors make rousing speeches but behave as if the sky is falling - the economic situation only worsens.

The resolving of a financial panic occurs when there is a genuine conviction in the core of the business community that "this too shall pass."

Posted by James H Shewmaker at October 8, 2008 11:38 AM

I'm with you Richard - see my comments on Tom's 'Musings' posting

'I think therefore I am' springs to mind.

BTW - Zola is good news for the Hammers methinks.

Posted by Trevor Gay at October 8, 2008 6:39 PM

I'm unsure that the intangible that's lacking right now is confidence. The folks who work in the city have never lacked confidence. Perhaps an "injection" of integrity is what's needed.

Posted by Michael Saunby at October 9, 2008 6:13 AM

My father used to say the difference between a recession and a depression was that if your neighbor was out of work it was a recession and if YOU were out of work--it was a depression.

Posted by Red Island Rhodes at October 9, 2008 12:33 PM

Brilliant - love it Red!

Posted by Trevor Gay at October 9, 2008 1:09 PM

On a different note, I thought it would be nice to share this on TP Blog:

The new BALANCE SHEET

A Balance Sheet is often described as a snapshot of a company's financial position showing the assets and liabilities (including owners' equity) as at a given date.

In India, the format of a Balance Sheet (in 'T' form) for presentation & disclosure would appear to include the value of Liabilities & Owners' Equity on the Left hand side and the value of Assets on the Right hand side.

Following the recent global financial crisis, an interesting remark was made on the Balance sheet - "There is nothing right on the left hand side of the Balance sheet and nothing left on the right hand side of the Balance Sheet" – so simple, yet profound. Isn't it?

Posted by Sriram Kannan at October 19, 2008 11:30 PM

Sriram - like all the great thoughts my friend Simplicty is the Key!

Posted by Trevor Gay at October 20, 2008 4:32 AM