Tuesday, March 3, 2009

What is an Economic Depression?

Ever since this financial crisis started 5-6 months ago, we have been hearing the word "depression" thrown around more then ever. So what exactly is an Economic Depression?

When people hear "depression" they think, economic catastrophy, the Great Depression, bank runs, and financial collapse. The thing is, every depression is not the Great Depression. The us had several depressions in it's history, many not even close to as severe as the Great Depression, but since the Great Depression is the last one the country went through, and happens to be by far the worst, we all associate the 2 terms.

An Economic depression is simply a total of a 10% decrease in national Gross Domestic Product in 4 consecutive quarters. In the Great depression the GDP fell by 30% in just 3 years. To put this in comparison, the US GDP for the forth quarter of 2008 fell 1.625% or 6.5% if annualized. So is a depression the end of the world? Economist now give us a 25% chance of hitting Depression status. In my opinion we won't, but if we do, it will likely be short, and not even close to as severe at the early 1930's.

Look for key indicators such as pending home sales, and a slow down in job losses to see if the trend continues or we fall lower. To discuss the possibilities of a depression and other investment topics check out Talkgold Investment Forum

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