Many of us have lived through financial downturns that economists call recessions. But there’s a more serious kind of downturn that the experts call a depression.
So, what’s the difference between the two?
Economists often disagree on exact definitions. But there is an old joke they like to tell: A recession is when your neighbor loses his job; a depression is when you lose your job.1
Most economists will tell you that a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.2 A depression is generally defined as a more severe recession, both in terms of economic contraction and the length of the slump.
But all economists agree that the catastrophic downturn of 1929 – 1939 is accurately named the Great Depression. Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, during the Great Recession of 2008 – 2009, worldwide GDP fell less than 1%.3
The Great Depression’s effect on regular Americans was devastating. Crop prices fell by 60%, causing many farmers to default on their loans and lose their land. Unemployment in the U.S. reached 23%, leaving many people with no way to feed their families.
Living day-after-day and year-after-year with scarcity taught our grandparents and great grandparents enduring lessons about how to live with less.
Jeff Somers, a financial writer for Lifehacker, argues that we have much to learn from their resilience. He writes, “Those who survived (the Great Depression) had to go beyond simply saving more and spending less.”4
Rather than giving in to despair, they developed the skills and were willing to take the actions necessary to ensure their financial survival. Many of which we could benefit from today.
Somers lists a few:
Watching every penny—saving a little whenever you can helps allow you to spend on the things you really need. Conversely, small expenditures quickly add up.
Fixing things instead of discarding them—much of what we buy is designed to be thrown away, but a lot of things can be repaired with a little work (and perhaps help from a few YouTube videos).
Learning to cook—preparing your own meals can drastically reduce the cost of eating.
Being willing to move—sometimes the only way to get a better job or lower your cost of living is to relocate.
As illustrated in the joke above, the economic downturn that concerns us most (and that we have most control over) is the one that happens to us. But as our grandparents and great grandparents demonstrated, a financial setback, even a severe one, is not the end of everything. You can get through it. And when you come out the other side, you will have a greater appreciation for financial stability—and all the things money can’t buy.
Your financial plan should include the steps you can take when faced with a financial setback. If you haven’t yet, talk with your trusted financial advisor about making a Plan B. Knowing ahead of time what you can do when faced with this kind of situation will do a lot to ease your anxiety.
If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.
Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc.
11576 S State Street, Bldg. 1002
Draper, UT 84020
Sources:
1. http://go.pardot.com/e/91522/sion-or-a-recession-end-22544-/92x8sn/1847097376?h=kh1BxsDFo1n72ispsm2Nhvqm2RYSBmtY1SAG2R_8T14
2. http://go.pardot.com/e/91522/cession-depression-difference-/92x8sr/1847097376?h=kh1BxsDFo1n72ispsm2Nhvqm2RYSBmtY1SAG2R_8T14
3.http://go.pardot.com/e/91522/wiki-Great-Depression/92x8sv/1847097376?h=kh1BxsDFo1n72ispsm2Nhvqm2RYSBmtY1SAG2R_8T14
4. http://go.pardot.com/e/91522/pression-we-can-all-1849450829/92x8sy/1847097376?h=kh1BxsDFo1n72ispsm2Nhvqm2RYSBmtY1SAG2R_8T14
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