Recession vs Depression: What’s the Difference?

What is a recession?

The younger and less mean sibling of a depression, a recession generally refers to any economic downturn that happens over the course of a few months, but can feasibly last for years. This is one of the reasons why a recession can be difficult to define, and gets confused with an economic depression sometimes.

Even still, we have some of the defining factors courtesy of the National Bureau of Economic Research:

Significant decline in employment: As the economy shrinks, businesses do too, causing high unemployment. We know this already sounds familiar, but let's stick to the definitions for the time being. In general, there will be less companies hiring and those that do will hire less, along with...

Lower wages: The scramble for cheap labor becomes all the more obvious in times of recession. People want or need money, and businesses are willing to make compromises if it means they'll have to pay less. Whichever way this crumbles, it results in lower wages across the board, all the more so down the "wealth class" you go.

Real estate bubbles: Less money to go around means less people are buying real estate, which brings prices of real estate down, often rapidly. That's why “housing bubble” is a very trendy term during severe economic downturns.

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Stock market crashes of different magnitude: As companies make less money, faith in them declines, and the stock market follows. Everyone panics even more about the general state of affairs.

Negative GDP: This can be a required factor for a recession, but doesn't necessarily have to be. As consumers spend less in general, the economy shrinks further. Like we said before, less money to go around.

2007 to 2009 was a classic example of a recession. In the middle of it was the infamous financial crisis of 2008. Still, there were plenty of people who didn't really feel as if the economic conditions changed that much.

Nowadays, even though we're only questioning whether a recession is here, we have almost everyone feeling some economic ill effects. But first, onto our depression definition.

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What is a depression?

One could argue that a depression is more difficult to define. One of the reasons for this is that we've only had one, or perhaps two that come to mind.

The first was the Great Depression between 1929 and 1939. This one is undoubtedly the poster child for bad economic conditions. People standing in lines for bread, worse yet, captured in black and white photographs... It was indeed a "classic" example.

A more unusual one happened during the lockdowns two and a half years ago. Many economists pointed out industrial production and overall economic activity has shrunk to the point of mimicking the Great Depression. And they weren't wrong. 

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However, this bout in full severity had debatable length. We can argue that the true point from which they drew comparisons to some kind of activity boosting was the span of only a few months. That's why depressions seem more elusive in their definition. Regardless, some of the hallmarks are:

Higher than usual unemployment: While we have somewhat high unemployment now, it's not exactly rivaling that perilous decade of the 1930s. During it, 25% of the people were unemployed or out of the labor force. However, what was the figure during the height of the lockdowns? Covid-19 pushed the unemployment rate to a high of 13% and caused many to leave the labor force. 

Much lower wages: Cheap labor is one thing, but wages falling by 42.5% as they did in the four-year span between 1929-1933 is another. Here's the kicker, though: back then, they had deflation. Prices of everything have risen by over 40% over the last three years, thereabouts. So as we'll soon expand upon, the argument that our conditions more closely resemble a depression strengthen.

Major declines in GDP: While it's made out that real GDP fell by 29% between 1929-1933, the truth is that the U.S. had something it doesn't right now, and that is a truly functional economy. With its $30 trillion of debt, the U.S. today has a debt-to-GDP ratio of 128%. So how comparable are the conditions and how relevant when describing present-day issues?

Widespread bank failures: Here's one we aren't likely to see, but are still hearing about it nonetheless. A third of the banking system collapsed between 1930 and 1933, amounting to some 7,000 banks. Did they learn the lesson? Well, not really. 

The mortgage crisis of 2007 and 2008 was going to cause the exact same thing, but the government bailed the banks out. The Dodd-Frank Act was established in 2010, with the Federal Deposit Insurance Corporation as the watchdog, to then avoid this from happening again, but... 

Now that we have both definitions under our belt, it's time to tackle what we all want to know...

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Are we in a recession or a depression right now? 

Or are things just dandy?

We opened the article saying how recessionary concerns are sky-high, and they are. Likewise, comparisons with the Great Depression linger. However, the current situation, as most analysts will agree, is unlike anything encountered in the past century.

For starters, the so-called recession might as well have a monitoring gauge. Because the U.S. printed trillions of dollars in a few months, or around 80% of all bills in circulation, the Federal Reserve embarked on a tightening schedule. It needs to do that to hope to preserve any credibility for the dollar.

The more the Fed raises interest rates, the more we get into recession territory. That's why it's called monetary tightening. Higher interest rates mean there's less money to borrow, interest payments are higher, so there's less money to go around. Sound familiar?

Why did the U.S. print that much money? Simply put, it was in a depression and wanted out of it. This brings us back to the whole debt-to-GDP thing and soundness of monetary policy. 80 years ago, the economy was meant to depend on... well, economic strength. If you were seeing a contraction, that was the "natural" state of things, and you had to soldier through it.

These days, the government wants none of that. When it sees trouble, it prints money, whether in the form of unprecedented bailouts of banks in 2008, of unprecedented monetary stimulus during the lockdowns, or whatever we might see happen down the road. It also borrows a lot, hence the $30 trillion figure.

The $30 trillion of debt is generally agreed to be unpayable. This is the first signal that we have a truly crumbling economy. After all, if what you have rests on untenable debt, aren't you just pretending? The fiscal deficit of over $1 trillion merely adds to that figure, but massively so. The government is spending more, while having less and less money to go around. So it's not just the private sector that's unsustainable, but the official one, too.

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The economic conditions of today...

We've went over what conditions look like during a recession and during a depression. So let's list some of the hallmarks of the U.S. economy today:

Massive inflation: The U.S. is facing the largest inflation since the 1970s, as it appears ready to enter double-digit territory. This, for all intents and purposes, simulates lower wages during a depression. You have less money to spend either way. There are many good arguments why lower wages are actually less problematic than high inflation, and we'll cover some soon.

Deceptively low unemployment: The unemployment figure of today, around 3.5%, seems nowhere near the 25% figure seen during the Great Depression. But what was welfare like back then?

How many Americans had the option to not work and receive a government subsidy? So with Americans ‘excluded from the labor force,’ honest unemployment figures become less valid and more difficult to assess.

Ballooned stock market: Inflation and a lack of real economic strength have played right into the stock market's woes. The stock market, like any other market, operates in bull and bear cycles.

The stock market is well over its longest bull run in history, posting gains for more than a decade. Everyone knows it's ripe for a downturn, but the next stock market crash is so great we don't really want it coming around.

Questionable importance of GDP: Because the debt-to-GDP ratio is as it is, we might question how relevant GDP is in the first place. It's meant to show economic strength, but what does it matter if that economy only exists due to borrowed money we can't pay back?

The more we go over these factors, the more we understand that an argument can be made that we are already in a new kind of recession, and possibly a depression too. However, this time, denial is becoming a prominent hallmark, which brings us to...

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Private and central banks run the show, again

If we entered a recession, would the Federal Reserve openly admit it? Many private-sector analysts say we already are in one. How about a depression? To the Federal Reserve, that sounds an awful lot like a concession.

We've entered deeply into the territory of denial and postponing. This really started going when the banks that shouldn't have been bailed out were bailed out. Every pundit, or close to, agrees that this harmed the nation's long-term prospects. But it gave a short-term fix that everyone could feel good about.

Then, as we entered a depression, the Federal Reserve said: nuh-uh. More dollars were printed to stave off real economic conditions. The long-term prospects got even worse.

You'll hear various other things about recessions and economic depressions, such as that they're natural parts of a business cycle. Not really, and definitely not the case now. You'll also hear that deflation is a baddie and responsible for depressions.

As Mark Mobius explains in some detail, deflation is good, manageable and something that actually creates a sustainable long-term economic picture. We don't have the latter right now, and we haven't for a long time.

The simplest answer is that we are in a state of pretense. Our ways of shoving things under the rug compared to 1929 or post World War II have improved in a truly futuristic manner. But if an economic reckoning does come, most agree that the next economic crisis could be the worst one in American history.