Some economists are talking about recession, while others are suggesting we could be in for depression. Recessions are not all that rare. The most recent recession began on or about December 2007 and lasted some 18 months. The 1973-75 and 1981-82 recessions both lasted about the same length of time. Depressions, on the other hand, are as rare as hens’ teeth. If we did have a depression it would be only the second in living memory. The last one – the so-called ‘Great Depression’ – lasted from 1929 to at least 1933, if not longer depending on what expert you believe. During that time unemployment in Australia hit a high of 20% and GDP fell by as much as 10%.
A classic recession/depression is triggered by a loss of business or consumer confidence. Without confidence in the future, we stop buying, businesses stop hiring and/or will lay off workers creating a downward economic spiral of unemployment, businesses failures, and bankruptcies. They bring a significant decline in economic activity spread across the whole economy including reductions in real household income, higher unemployment, lower industrial production, and declining wholesale/retail sales. In a nutshell, a recession is generally considered to be a widespread economic decline that lasts for at least six months while a depression is more severe and lasts much longer.
There is no doubt we are now in the middle of a significant decline in economic activity across the whole economy. Real income has been declining for a number of years; we are now facing a significant increase in unemployment; a slow down in industrial production; and wholesale/retail sales are plummeting through the floor.
But while these are all the classic signs of an impending recession or depression it’s time to throw out the history books and look to what is happening right now.
In comparison to other recessionary periods, interest rates are at an all-time low and the government is throwing money around like it was going out of fashion. We are being encouraged to draw from our superannuation savings and defer our mortgage payments. We are piling debt upon more debt and flooding the financial markets with extraordinary amounts of electronic currency. The stock market is now awash with liquidity from years of money-printing and garnishing the superannuation contributions of millions of Australians. As a result, it is so divorced from reality that news that the real economy is being placed on life support is a signal to pile in and drive the market higher in a classic effort to mortgage the income of future generations with no resuscitation plan. The tools of economic expansion have been traded for economic survival.
While a recession seems to be accepted as a foregone conclusion, in a desperate effort to stave off a depression, many of our economic fraternity are wasting their time looking to the past, while our latter-day policy and investment ‘goo-roos’ are adding ‘hibernation’ to the already overburdened body of nonsensical economic theory. You can’t ‘hibernate’ an economy and expect to wake it up to an unchanged world and keep going as it was before. And maybe that’s not all bad given that it was already on life-support anyway.
No matter what happens from here, the world as we know it has changed forever. This is not a time for historical reflection or reliance on outdated theories, or indeed on the newly minted ‘hibernation’ theory. It is a time to focus on the future opportunities that will come about because of what will likely be the biggest economic upheaval the world has ever seen.
Dr John Cronin is a lawyer and business advisor. In addition to his legal qualifications, he holds a master’s degree in Business Management, a PHD in socially responsible investment, and is currently pursuing a further PhD in the field of superannuation law. In his earlier engineering and business career, Dr John led numerous large-scale equipment design and infrastructure development projects, owned and ran a manufacturing company, was a partner in a successful business advisory firm and set up a renewable energy design and construction company. A former financial and investment advisor, Dr John has a wealth of experience across business, banking, finance and investment.