A cure cannot be forthcoming unless there is an awareness of the problem. Right now most commentators refer to the current economic contraction as “a recession,” and some say “a great recession.”
Let’s face it: we are not in any kind of recession, but a depression. Acknowledgement of that will help to determine the steps we now should take.
Proof that we are in a depression can be seen when one notes that, although interest rates have gone almost to zero, there is no real revival in credit-sensitive spending.
Another litmus test is the action of banks, which have hoards of cash but they are not lending to the private sector as they have been doing traditionally.
The famous economist, John Maynard Keynes, referred to that as a “liquidity trap.” We might expect that at very low interest rates people would be willing to exchange money-cash for bonds or for investment. Yet, in a “liquidity trap” nobody is willing to do so. This precisely is the current situation.
Heretofore, in the post-war world, our business slowdowns were caused by inflation and a consequent over-extension of inventories in fear of ever-rising prices. Interest rates were raised to curb inflation, and that led to dis-investment in inventories.
The correction took place as a result, and when interest rates were cut, housing, which is particularly sensitive to interest rates, picked up, inventories returned to normal levels, and business activity reappeared at its usual, upward path. None of that is applicable nowadays.
In the United States, approximately half of the unemployed have been out of work for at least six months. That is unique, not seen since the 1930s, and is not typical of the usual recessions we have experienced since the end of the Second World War.
In a depression, attitudes change radically. Taking on debt no longer is accepted by the average consumer, with home ownership not viewed as a key to accumulated wealth. Hence, the housing slump is deep-seated with inventories of unsold houses at peak levels.
Despite our recent business cutbacks, this time we are experiencing only a very modest response to government stimulus programs. They have been unprecedented in size, but there has not been a sharp recovery in business activity.
Some observers point to the slight increase in GDP growth in recent quarters. In the l930s, there were many instances of quarterly bounces in GDP.
In fact, in early 1930 U.S. President Herbert Hoover turned away a group of business leaders who were pleading for financial assistance, replying that it was too late as the depression was over.
Despite superficial signs, now the North American economy is not really recovering.