This is not a 1930s style Depression – Ben Bernanke vs Ray Dalio
1. The debate over "recession vs depression" or "V shaped vs U shaped recovery" is somewhat academic. All that matters to internationally mobile entrepreneurs, expats and investors is that the economic contraction will be "bad"
2. We need to prepare by answering questions that include -
- Relatively speaking, which sectors and geographies will thrive vs which will struggle or disappear?
- Which residencies and citizenship should be in our portfolio as we seek to avoid unrest, protect our families and protect our wealth?
- Should we be unable to access our onshore / offshore assets due to travel restrictions, do we have power of attorney, logistics and IT structures in place to manage and access our assets?
Recession: Most experts agree that a recession happens when the economy shrinks for at least two fiscal quarters in a row -- in other words, six months. This is measured by gross national product, or GDP, which is a number that represents the total value of goods and services produced within a country. However, in the US, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Depression: A depression is far more uncommon and longer lasting. For example, in the last 166 years, there have been 33 recessions and only one depression. Think of a depression as two or more recessions linked together with no economic recovery in between. The Great Depression of the 1930s is the most recent and well-known example. Economic depressions last years as opposed to months.
-A depression is really dramatic. The downturn in economic activity is combined with a sharp fall in growth, employment, and production.
- Economists disagree on the duration of depressions. Some believe a depression encompasses only the period plagued by declining economic activity. Other economists argue that the depression continues up until the point that most economic activity has returned to normal.
- Substantial increases in unemployment - in the U.S., unemployment climbed to nearly 25 percent in 1933, remaining in the double-digits until 1941, when it finally receded to 9.66 percent.
- A drop in available credit
- Diminishing output and productivity - wages slid 42 percent, real estate prices declined 25 percent, total U.S. economic output nearly halved to $55 billion and many investors' portfolios became completely worthless.
- Consistent negative GDP growth
- Sovereign debt defaults
- Reduced trade and global commerce
- Bear market in stocks - The United States was already in a recession, and the following Tuesday, on Oct. 29, 1929, the Dow Jones Industrial Average fell 12 percent in another mass sell-off, triggering the start of the Great Depression.
- Low to no inflation, or even deflation
- Increased savings rate (among those who can save)
Depression vs. Recession
A recession is a normal part of the business cycle that generally occurs when GDP contracts for at least two quarters. A depression, on the other hand, is an extreme fall in economic activity that lasts for years, rather than just several quarters. This makes recessions much more common: since 1854, there have been 33 recessions and just one depression. Moreover, a recession is marked by economists as two consecutive quarters of negative GDP growth, even if those periods of contraction are relatively mild. A depression, on the other hand, is marked by a drop in a year's GDP over 10% or more.
The take-home lesson here is that a recession can't be defined until at least half a year has passed, and a depression can almost never be identified until after it's happened.
Ex-Fed Chairman Ben Bernanke
Ex-Fed Chairman Ben Bernanke said, on a March CNBC interview, that the coronavirus economic halt is more like a natural disaster than an economic depression. The Great Depression lasted for 12 years, and it came from human problems.
Bernanke is on the record as saying that he does expect a “very sharp” U.S. recession, but also a “fairly quick” recovery. Bernanke’s comments echoed what current St. Louis Fed President James Bullard has said. Bullard believes the economy is facing a huge shock to the system over the near term, but it will then bounce back strongly after the worst of the outbreak passes.
The St. Louis Fed president and his fellow central bankers have taken extraordinary steps during the pandemic, pushing short-term borrowing rates to near zero and pledging asset purchases with no limit to support markets.
Ray Dalio of Bridgewater Associates
Bridgewater Associates is the world’s largest hedge fund. Dalio sees the coming economic downturn as resembling the effects of the Great Depression. He foresees double-digit unemployment and a more than 10% decline in the economy, with effects potentially lasting years rather than months.
“I think you could look at this like a tsunami that’s hit — the virus itself and the social distancing — and then what are the consequences in terms of the wreckage [from that],” Dalio said in the interview. He sees the “wreckage” as the long-term effects on businesses’ balance sheets and individuals’ incomes that are taking “tremendous” hits in cases where workers have been laid off.
Goldman Sachs has predicted that U.S. unemployment could hit 15% and a GDP decline of 34% in the second quarter of 2020. Dalio also estimated that global losses could be anywhere from $12 trillion to $20 trillion from a global economy that’s worth over $85 trillion.
Dalio is not alone in bracing for the worst at the moment, as Democratic presidential candidate Joe Bidenhas said that the economic recovery from this pandemic could be the “biggest challenge in modern history” and that it could “eclipse” what the country faced during the Great Depression.
Kristalina Georgieva, IMF Managing Director
Kristalina Georgieva calls this “A Crisis Like No Other” in a speech made in April 2020. She does not take sides however and sees the impact as worse than a recession but not quite an economic depression. Global growth is expected to turn sharply negative in 2020 and it could be the worst economic fallout since the Great Depression. Over 170 countries will experience negative per capita income growth in 2020.
The bleak outlook applies to advanced and developing economies alike. Given the necessary containment measures to slow the spread of the virus, the world economy is taking a substantial hit. This is especially true for retail, hospitality, transport, and tourism. In most countries, the majority of workers are either self-employed or employed by small and medium-sized enterprises. These businesses and workers are especially exposed. And just as the health crisis hits vulnerable people hardest, the economic crisis is expected to hit vulnerable countries hardest.
Emerging markets and low-income nations—across Africa, Latin America, and much of Asia—are at high risk. With weaker health systems to begin with, many face the dreadful challenge of fighting the virus in densely populated cities and poverty-stricken slums—where social distancing is hardly an option. With fewer resources to begin with, they are dangerously exposed to the ongoing demand and supply shocks, drastic tightening in financial conditions, and some may face an unsustainable debt burden.
They are also exposed to massive external pressure. In February and March 2020, portfolio outflows from emerging markets were about $100 billion—more than three times larger than for the same period of the 2008 global financial crisis. Commodity exporters are taking a double blow from the collapse in commodity prices. And remittances—the lifeblood of so many poor people—are expected to decline.
There is no question that 2020 will be exceptionally difficult. Assuming a gradual lifting of containment measures and reopening of the economy, a partial recovery is expected in 2021.