The U.S. GDP dropped 32.9% in the second quarter of 2020, with numbers out this morning. There were already many issues in the economy, like the Repo Market seize up in September 2019, before the second quarter came around. But it was the Covid-19/coronavirus pandemic shutdown that was the "black swan event" that really sent things downhill. For those not up on economics, the GDP is the Gross Domestic Product, basically all goods and services bought in the U.S. the second quarter, April, May, and June, of 2020. The next biggest drop was about 28%... back in 1921. Even in The Great Depression of the 1930's, no single quarter's economy dropped this much.
I love how the CNBC hosts say, "It wasn't as bad as the 34.7% drop expected." That's a lot like saying, "Today I expected to catch Covid-19, have a car accident, get mauled by a grizzly bear, get hit by an asteroid, and be in a plane crash. And I ONLY got in a plane crash, caught Covid-19, and got attacked by a small bear, so it wasn't as bad as expected." It's that ridiculous.
If you look at the "definitions" section for an economic depression on this Wikipedia page, you'll see one of two things define an economic "depression." Either there's a recession that lasts for 2 years or more (Investopedia and the traditional definition is 3 years), OR there's a 10% decline in GDP. Today's numbers tripled that level. Again, we had a 32.9% drop in GDP. So, like it or not, this economic downturn is OFFICIALLY a depression. When this time is written about in history, it will be called a depression, or a maybe great depression, if it lasts more than five years.
I'll be fair, this depression would have happened if anyone was president. Donald Trump didn't cause the depression. But the Trump administration did do things that made it worse. The completely inept reaction to the pandemic when it first hit U.S. shores has not only killed thousands more Americans than it would have, but it is making the economic situation far worse, in the long term. The Trump tax cuts were a windfall for the uber-rich and major corporations, and that helped prop up a weak economy for many more months. Because the recession that should have started in 2017 or 2018 was held off, markets went much higher, and financial bubbles got much bigger. Because of that, the economy had (and still has) much farther to drop.
Also, when Fed chair Jerome Powell started raising interest rates in late 2016, and into 2017, pressure was put on him to reverse course, because higher interest rates were freaking out the stock market. At that time, Powell was trying to get interest rates from a historical low position, to a more "normal" level, which would give The Fed more ways to deal with the next recession. But he suddenly reversed course, apparently under heavy pressure from the White House and others, and eventually lowered rates, to help prop up stocks and other financial markets. This also propped up a weak economy that desperately needed a serious correction, a recession. So when a crash did finally come, it was a much worse one than it would have been if it hit in 2017 or 2018.
So why does it make a difference if we're in a recession or a depression? A depression is simply more intense, and will likely last quite a bit longer. Simply acknowledging that we're in a "depression," should make people think more intensely about how to survive and work out of it. It should also get us to look at this as a longer term, serious issue, not just something that will work itself out in six months. The downside is that a lot of people freak out when they hear "depression." And people are freaked out already.
My personal opinion is that it's better to state it clearly, accept that this is a major deal, and then get to work looking for solutions in all the issues facing us, like 28 million people on the verge of eviction. We don't need millions more people on the streets or living in cars suddenly. But our jacked up political system likes to spin things, even serious things, hoping the problems will go away if they can convince enough people it's not that bad. Politicians can call this whatever they want, but if you get an eviction notice, shit gets serious... real quick.
This is a serious economic crisis. It's not being handled well, though the trillions of dollars The Fed has created have helped big business, wealthy people, and many recently unemployed people... for a while. But this help comes at a huge cost later on, in the form of heavy inflation, possibly full blown hyper-inflation. We need to put on our Big Boy and Big Girl pants and work out some really big solutions soon to some really big problems, and get a handle on keeping struggling people housed, finding new jobs, saving small businesses, and everything else we're dealing with.
Here's my recent blog post explaining why I started calling this economic downturn The Phoenix Great Depression several months ago. There are a lot of really long term trends and cycles converging, making this much more than a typical recession.
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