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Depression

Depression has no precise definition but is generally considered to be a deep recession combined with a deflationary spiral.

Deflation is when prices decline because there are too many goods on the market, i.e. supply outstrips demand in a big way. This happens when consumers aren’t consuming. The reason they aren’t consuming is a mixture of reality and fear, –Reality because they could be deeply in debt and have no excess cash or they have lost their job; fear because they can see one or both of these things happening to them.

The spiral occurs because this lack of consumption creates more unsold goods. To get rid of the excess, producers lower prices and produce less. This means they cut jobs. The result is there are fewer consumers with money and they are more frightened. They spend less and this leads producers to cut back even more. So it goes back and forth between the two and the spiral is born.

Today the Bureau of Economic Analysis came out with a revised estimate that shows that there was a decline in real GDP in the 4th quarter of last year of 6.2%. That is a hefty contraction. As the report notes:

The slowdown in real GDP in 2008 primarily reflected a sharp deceleration in PCE [Personal Consumption Expenditures], a downturn in equipment and software, and decelerations in exports and in state and local government spending that were partly offset by a sharp downturn in imports, an acceleration in federal government spending, and a smaller decrease in private inventory investment.

Basically, what this is saying is that consumption is down worldwide. We are exporting less from others and importing less from them, and we are buying less generally. The states are broke and the only one still really spending is (Surprise!) the federal government.

Now to be fair, real GDP did increase by 1.1% over 2007 levels for all of 2008. Think of a hill with a long, gradual rise on one side and a short, steep drop off on the other. That was the US economy in 2008. Almost all of the gains of the first three quarters of the year were wiped out in the fourth quarter. This abrupt fall off coincides with the financial meltdown in September 2008 when Paulson let Lehman go bust in an uncontrolled fashion.

As job losses remain high, it is likely that the sharp contraction in the US economy will continue through the first half of 2009. Effects from the various Obama programs, especially the stimulus, may have some effect later in the year. But as I have said before, the Obama stimulus is half the size it needs to be and will produce only a third of the jobs it should (and most of these jobs will go away in 2011, early in 2011).

So for right now, we are in depression, recession plus deflation, and the Obama programs, unless they undergo major changes, will only keep us treading water without lifting us into recovery, and more importantly sustainable recovery.

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