'Depression' back in the mainstream lexicon

Last Updated: Sat, Oct 08, 2011 18:50 hrs

You know it's grim when the prevailing debate among economists and historians is whether the world economy faces the "Great" depression of the 1930s or the "Long" depression of the 1870s.

Listening to commentary surrounding the seemingly intractable sovereign debt and banking crisis in Europe, the stimulus/austerity battle in the United States and even hard-landing risks in China, gloom is fast becoming the consensus. Only the shade of gloom, it seems, is in question.

It's got so that, depending on your view of big or small government, you can pick your version of the pending depression.

Harvard professor and economic historian Niall Ferguson, a fan of the British government's austerity drive and sceptic of further stimulus, reckons the world is facing a "slight depression" and favours comparison with the late 19th century rather than 1930s.

Speaking on Monday at private bank Kleinwort Benson, where he is on the advisory board, Ferguson restated his critique of the fiscal and monetary stimuli from western governments over the past four years and said their modest impact questioned the key lessons most economists took from the Great Depression.

"They may have stopped another 'Great' depression but not a depression and what for many was the most profound lesson of economic history may turn out to be wrong," he said, adding the fact that government debts and obligations were already so high before the crisis pump priming meant they now risked backfiring.

Quite what a "slight depression" would look like, however, is not all that clear -- most likely years of low to zero economic growth and deflation across several countries, structurally higher unemployment, periodic bursts of banking shocks and crises and possibly rumblings of social unrest.

Some call that a "Japanisation" of the western economies to mirror Japan's recent decade of lost growth and deflation. Others, like giant US bond fund investors Pimco, talk of the "new normal" of several years of low, sluggish growth.

But however bad it has been for households there, Japan's permafunk can hardly be equated with the Great Depression.

Long-term market bear Albert Edwards at Societe Generale has talked more apocalyptically for years of an economic "Ice Age" dominated by household deleveraging, low growth and deflation.

But now "depression" is very much back in the mainstream lexicon as the small economic bounce from the deep global recession of 2008/09 fades rapidly after little more than two years and Europe's bank and sovereign debt crisis intensifies.

Economist and doomsayer Nouriel Roubini now says there's a "huge" risk of 1930s-style depression and, on the other side of the political spectrum to Ferguson, advocates further government spending to offset it.

HSBC chief economist Stephen King, who wrote earlier this year of a "new economic permafrost", warned last week that the systemic financial threat of a euro zone collapse and breakup risked another "Great Depression".

"Depression" in economics is a big word. To most people, it conjures up images of large scale bank and business failures, mass unemployment, homelessness, soup kitchens and forced migration.

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