Over 80% of the world’s nations were in recession at the same time during the Great Depression in the early 1930s. The figure reached 60% right after the Second World War, as war industries demobilised, but domestic consumption had not yet ramped up. The 2008 global financial crisis put just over 60% of the world’s nations in recession at once.
Today the figure is 92%, the highest reading ever. That’s worse than both world wars, the Great Depression, and the 2008 crisis. And, that’s 92% of a much larger global economy that existed in the prior episodes. Not only is this horrific in terms of absolute damage, it means there is no strong economic bloc to pull the world out of recession. There is no source of demand to help producing countries get off the mat. This is one more reason why the current state of affairs is not just a technical recession; it’s a world historic depression that will persist for years to come.
The shape of things to come for the US economy
The depth of the new depression is clear. What is unclear to most observers is the nature and timing of the recovery. The answer is that high unemployment will persist for years; the US will not regain 2019 output levels until 2022; and growth going forward will be even worse than the weakest ever growth of the 2009–20 recovery. This may not be the end of the world, yet it is far worse than the most downbeat forecasts.
Some sixth grade math is a good place to begin the analysis.
Make 2019 economic output 100 (the actual figure is $21 trillion; ‘100’ means 100% of that number; a convenient way to measure ups and downs). Assume output drops 40% in the second and third quarters of 2020. (Many estimates project larger drops; 40% is a plausible if conservative estimate.) A 40% drop for six months equals a 20% drop for the full year, assuming the first and fourth quarters are flat on net. A 20% drop from 100 = 80 (or $4.2 trillion of lost output). Now, let’s see what happens if we estimate back to back growth years of 10% in 2021 and 2022… (Keep in mind: Since 1948, US annual real growth in GDP has never exceeded 10%. In fact, since 1984, growth has never exceeded 5%. So, this is a very optimistic forecast to begin with.) If our new base is 80 (compared with 100 in 2019) and we increase output by 10% in 2021, this brings total output to 88. If we enter 2021 with a new base of 88 and add another 10% to that, we come to 96.8 in total output by the end of 2022.
That illustrates the nature of the problem.
The (lack of) recovery makes the depression
This is the reality of this depression. It’s not about continuously declining GDP. A depression is an initial collapse so large that even years of high growth won’t dig the economy out of its hole.
Analysts and talking heads debate the recovery’s strength using letters that mimic the shape of a growth curve as shown on a graph.
A ‘V’-shaped recovery goes down steeply and back up steeply to get output back where it started in a relatively brief time.
A ‘U’-shaped recovery goes down steeply, does not grow materially right away and then makes a sharp recovery.
An ‘L’-shaped recovery goes down steeply, followed by low growth for an indefinite period.
Finally, the ‘W’-shaped recovery goes down steeply, bounces back quickly, then falters for a second time before finally recovering and getting back to earlier levels of output and growth. So, which shape will we see? Well, is 10% growth even a possibility?
History says no. In fact, we haven’t even recovered from 2008 yet. Post-1980 recoveries averaged 3.2% growth. The post-2009 recovery produced only 2.2% growth. It was an L-shaped recovery. It was a real recovery, yet the output gap between the former trend and the new trend was never closed.
The US economy suffered over $4 trillion of lost wealth based on the difference between the former strong trend and the new weaker trend. That lost wealth was a serious problem for the US in terms of income inequality and the national debt-to-GDP ratio before the New Great Depression.
Now, the prospect is for even lower growth than the weak post-2009 recovery. The new recovery, far from the 10% growth discussed in the example above, may only produce 1.8% growth, even worse than the 2.2% growth before the pandemic. It’s another L-shaped recovery, the second in a row. Now the bottom of the L is even closer to a flatline and the output gap compared to the long-term trend is even greater
