An economic depression is a period of serious decline in economic activity. It is the phase of the economic cycle in which the economy is at the bottom.
The economic depression is the phase after the economic recession . It usually brings a significant decrease in GDP , bankruptcy of companies and banks, high unemployment rates and the freezing of credit in the economy. In addition, economic depressions are accompanied by collapse in the exchanges, which cause alarming losses of value and panic among investors.
The consequences and characteristics of a depression are similar to those of a recession but of greater magnitude. Both in time, as in economic decline. Thus, as in recessions prices tend to fall, in depressions it is common for hyperinflation or deflation situations to occur . However, everything is said, there may also be inflation. This state of inflation and depression is known as stagflation .
When are we in economic depression?
We usually talk about depression when the recession is accentuated over time and when economic activity shows no signs of improvement in some of its main aspects. However, there is no consensus on when an economic crisis goes from being a recession to being considered a depression. Just as the recession occurs when there are two consecutive quarters with negative rates of GDP variation, there is no measure to determine when there is a depression. There are economists who have tried to fix it as a decrease in GDP greater than 10% or a prolonged recession for more than three years.
One of the harshest criticisms of the capitalist system is the rise of depressions. Each stream of thought sees it in a different way:
- Capitalist theory:Talk about them as one of the worst phases of an economic cycle ,
- Marxism: Defend that depressions are a sign of the unfeasibility of the capitalist system.
- Economic liberalism: They propose to reduce the magnitude of economic cycles through Hayek’s rule .
The economic depression as part of the business cycle
The economic depression is the phase of the economic cycle in which the economic activity is stagnant or decreases and shows no signs of improvement. It proceeds to the economic recession. When it ends, a recovery period usually begins before economic expansion begins.
Example of serious economic depressions in history
Throughout history the world has seen several economic depressions:
- Greece during the financial crisis 2008-2013.
- Argentina between 1999 and 2003 (4 years of recession, exceeding negative rates of 10% per year).
- Crack of 1929: It begins in the US where the GDP of 1933 became 27% lower than that of 1929. This depression ended up affecting the entire planet.
- Long Depression or great depression between 1873 and 1896.
- Panic of 1837 in the USA.