The main difference between a recession and a depression is that the former refers to an economic decline that lasts for months while the latter is a decline in economic activity that lasts for years. Generally, the length of each phenomenon varies.
Throughout U.S. history, there have been 50 recessions. The only depression was the Great Depression of the 1930s.
Read on to learn more about a recession, how it compares to a depression, and a brief overview of our current financial landscape.
What is a recession?
An economic recession is a decline in a country’s Gross Domestic Product (GDP) or a negative GDP. Reductions in income, employment, industrial production, and fluctuating prices for goods and services are just a few other noteworthy characteristics of a recession.
What is a depression?
Depression is a prolonged recessionary state. Compared to a recession, it’s significantly more harmful to an economy, and occurs when the GDP plummets quickly and severely.
High unemployment rates alongside stalled domestic business activity and international trade are two noteworthy attributes of a depression.
Effects of economic depression are experienced nationally and globally. It wasn’t until the 1950s that the American stock market was finally able to recover following the Great Depression. Foreign markets also dealt with the repercussions of the Great Depression.
Recession versus depression
Both a recession and a depression are known for a sharp, continual downward spiral of economic activity. Panic and even fear take hold, and rash actions on the part of consumers, companies, and even the government can lead to poor decisions and a longer period of unproductiveness.
It’s important to remember that although they appear similar, a recession and a depression are not interchangeable terms.
5 causes of recession
A recession usually means that there is a widespread loss of consumer confidence in businesses. People stop buying, so supply begins to outweigh demand. This results in layoffs and, in extreme cases, bankruptcies. A recession’s primary causes include the following:
One: Inflation. If supply begins to outweigh demand, the prices of goods and services rise. When prices rise, banks will raise interest rates alongside them. This can lead to fewer people taking out loans or making large purchases because they simply can’t afford it, and banks experience a significant decline in business. The economy is constantly changing, but major events like political conflict or pandemics can disrupt the supply chain and cause inflation.
Two: High interest rates. When interest rates increase, the liquidity of assets, like stocks and bonds, decreases. Liquidity refers to the ease with which entities are converted to cash. The Federal Reserve often raises interest rates to increase the value of the country's currency.
Three: Market crash. Recessions often lead to the presence of a bear market, which is when the prices of goods and services continually fall. Companies often lose a lot of capital when this happens.
Four: Asset bubbles burst. An asset bubble is when the cost of resources — including gold, stocks, or properties — experiences hyperinflation. This instability leads to a recession when the bubble “bursts,” and investors can no longer make a profit. Stock prices drop severely in response.
Five: Unexpected events. This refers to events that are nearly impossible to anticipate, which are also called “black swan” events. The COVID-19 pandemic is a recent black swan event.
Causes of the Great Depression
The Great Depression lasted from 1929 to 1939 and had ripple effects that traveled across most of the world.
A number of different events led to the Great Depression, including the stock market crash in 1929 and the drought of the early 1930s.
Prior to the stock market crash, spending was slowing down. The economic boom after World War I wasn’t sustainable, and when prices began to decline, shareholders panicked and rushed to sell their stocks. This caused the market to crash completely.
After the market collapsed, manufacturing ground to a halt, employment rates plummeted, and stocks lost most, if not all, of their value. Debts increased and, due to an abundance of unwise, illegal decisions made by housing market executives, many families faced home foreclosure. Economic growth pretty much ceased completely. Banks were failing, and there wasn’t enough money to lend.
Then-president Franklin D. Roosevelt passed various laws and reform measures to repair the U.S. economy and its monetary policies. Some of these include the Social Security Act, guaranteeing public servants pensions, the Federal Deposit Insurance Corporation (FDIC) to protect the deposits of bank customers in case the establishment fails, and Securities and Exchange Commission (SEC). The SEC is a supervisory body that promotes fair market investing.
The main goal of all these programs was to lessen economic decline both at the time and in the future.
Does a recession follow a depression?
Not necessarily. Depressions are rare, and if they do occur, they typically only happen after a long recession. The economy is dynamic, and booms and busts are a regular occurrence. Regardless, the market usually sorts itself out sooner or later.
The current financial landscape
Depressions cause serious and dramatic changes to the economic landscape of a nation. Recessions, however, occur more frequently. The COVID-19 pandemic has led to an economic downturn that many are still working through today.
Banks and governments are more prepared for depression than they were back in the 1930s, and are even better prepared after the economic crash and resulting recession of 2008. Even though some sectors of the economy may be presenting less than favorable conditions to both businesses and consumers, we aren’t in a depression right now.
Only time will tell what the future has in store.
Point's contributions
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