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Economic Depression

Understanding Depression

There lacks a clear, stipulated definition of an economic depression, but a projected definition for an economic depression is a continued recessionary period whereby the populations of the economy affected are forced to dispose off touchable assets to be able to fund their daily living. Depression is therefore said to be used to explain a severe and deeper recession.

According to pundits therefore, it is long downturn, therefore making it more severe than a recession. A recession is simply a usual general downturn in an economic activity over a period of time, or a contraction of a business cycle. All the macro economic indicators vary in the same way during recession. Thus, a sustained excessive and rare recession, or downturn, is referred to as an economic depression.

An economic depression is typified by price deflation, credit restrictions from the Federal Reserves, abnormal escalations of unemployment, hyperinflation, contracting investments and outputs, a lot of banks in an economy running bankruptcy, a notable decline in the amounts of trade and commerce of an economy and a very high unstable relative currency value fluctuations, in most causes fluctuations that devalue the currency.

When an economy is said to be in depression, it is marked by a considerable and continued shortfall of the capabilities to purchase goods and services relative to its potential output – the amount that can be created using the economy’s current resources and technology. A clear cut line is drawn between a depression and a recession when the Gross Domestic Product is said to dwindle to exceed a 10% mark, and when a notable recession lasts for over 3 years.

Causes of economic depression

The first major cause of economic depression is the concentration of wealth. Over time, the world’s wealth has multiplied considerably, it is a pity however to know that almost all that accrued wealth is hoarded by the richest individuals in the world. For instance, recent findings indicate that when the wealth of the world’s top 200 richest guys is combined, it can only be equaled to the total value of combined annual earnings of half of the world’s population.

A blockage in money circulation is another cause of economic depression. For instance, fixed long term investments can be termed as a more or less productive thing for an economy to do. On the other hand, when new companies start up, they will employ the unemployed, pay more salaries and produce more goods, thus, there would be a flow of money through many hands which will definitely end up benefiting a majority in a country. In other words, great wealth should be circulated and not left to concentrate in the hands of a few individuals, since it will decrease the purchasing power of people.

The other major cause of economic depression is monetary devaluation. This consequently results in the incapability of the monetary unit to be used as the unit for economic stability. Today, you will find more money is printed by economies since the real value of currencies is no longer based on real wealth such as gold reserves. When the “essential money” is created, in the form of government bonds, securities, shares, stocks and credit creation, consumers are encouraged to buy on credit.

The most notable depressions in history are; The Great Depression, the Long Depression and the panic of 1837. There was a notable catastrophic pain, and today, governments and economies have put in place measures to prevent an occurrence of the same. The Central banks across the globe are basing their premise on the impact a monetary policy can have in regulating an economy.

Tags: bank, credit, government, money, policy, price

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