Economic Knots

The Great Depression was a period of economic slowdown that lasted from 1929 until the outbreak of WWII.  By 1933 there were about 25,000 banks in this country.  11,000 of them had failed.  People stopped spending, causing businesses to fail and unemployment to hit 25 percent.

At the moment our country is weathering what the Obama administration has dubbed "The Great Recession."  390 banks have failed since 2008.  The government reports unemployment to be 8.9 percent but real unemployment is around 22 percent.  So what is the difference between a depression and a recession? 

There is an old joke among economists that states: A recession is when
your neighbor loses his job. A depression is when you lose your job.  Honestly if you ask 100 economists the difference between the two, you're going to get more than 100 answers. 

One easy way to tell is that if the Real GDP Growth Rate drops more than 10 percent, it's a depression.  How close were we to another depression?  A difference of only 1.1 percent in Real GDP.  How did we narrowly escape?  By spending more money. 

Now, however, economists fear The Great Recession II is heading our way.  How is the government going to fight this one?   Afterall, congress just passed a bill that forces a reduction of spending over the next ten years. 

The answer is returning our economy to one that's based on real production and then paying close attention to this equation:

production - consumption = saving + investment