What's the Difference Between a Recession and a Depression?

Last March, a London-based Financial Services Company Executive I know quite well used the term "depression" to describe the extent of the economic crisis he saw ahead. At the time, I was quite shocked at his use of that term and told him so. We ended the conversation in polite disagreement, and I wrote a blog on this site to see what readers thought about the scale of the coming financial crisis. The popular view then was that we were all talking ourselves into a financial crisis and that my "depression" blog was an example of the kind of unhelpful negative behaviour that was undermining confidence!

Well, six months have passed and I called him again this week fully expecting to get the "I told you so!" treatment. He well remembered how shocked I had been at his previous "doomsday" forecast, and used words like "turmoil," "massive consolidation," and "never the same again" to describe the disruption going on all around us in London financial circles. But I am pleased to say that his forecast of a 1930s-style crisis ahead has been downgraded (or is that upgraded?) to an "official recession." I was again somewhat surprised—to put it mildly!

I wanted to share this more optimistic prognosis again on this site, and to say that for me at least, this person is a highly credible source on this subject. If the remorseless barrage of negative economic news and harrowing expert comments that we have to endure these days undermine people's confidence, and bankers, Prime Ministers, and Presidents are among those people, then maybe more positive talk may have the reverse effect. Could it make the economic outlook better than it would otherwise be? Maybe in this current financial mess, created by whomever we prefer to blame, and whoever's job we think it is to sort out, the only difference between a depression and a recession ahead may turn out to be a big intangible one, i.e., confidence.

Richard King posted this on October 8, 2008, in Markets.
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