What is a Depression or Recession

by Mark Buford on June 4, 2010

in How's The Market

I am by no means an economist and have a terrible retention when Depression or Recession is explained to me. The following is an explanation I finally get from John Williams. Hope this is clear to you also

Let me define what I mean by depression and great depression, because there’s no formal definition out there that matches the common expectation. Before World War II, economic downturns commonly were referred to as depressions. If you drew a graph of the level of activity in a depression over time, it would show a dip in the economy, and you’d go down and then up. The down part was referred to as recession and the up part as recovery. The Great Depression was one that was so severe that in the post-World War II era, those looking at economic cycles tried to come up with a euphemism for “depression.” They didn’t want to create the image of or remind people of the 1930s. Basically, they called economic downturns recessions, and most people think of a depression now as a severe recession.

Williams goes on to say:

The traditional definition of recession-that of two consecutive quarters of inflation-adjusted contraction in GDP-still is a solid one, despite recent refinements. Although there’s no official consensus on this, generally, a depression would be considered a recession where peak-to-trough contraction in the economy was more than 10%; a great depression would be a recession where the peak-to-trough contraction was more than 25%.

Alright, that’s the one that rolls right though my gray matter. So, just to have a basic, lifelong ’50,000 foot’ understanding, I stay with the first one.

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