The Difference Between Recessions and Depressions

GDP goes up and down. It goes down during recessions, and otherwise up. The behavior of debt is similar but more severe: Debt goes down during depressions, and otherwise up.

You can look at the changes in accumulated debt to determine whether a slowdown is a recession or a depression. During recessions, GDP goes down while debt continues to go up (though more slowly than usual). During depressions, GDP and debt both go down.

The units on the graphs below are "change in billions". On these two graphs, the lines always go up and down. But GDP is going down only when the lines are below zero. This occurs at the gray bars that indicate recessions:

Graph #1: Quarterly Change in Real GDP

Debt is also going down only when the lines are below zero, but this only occurs at the rightmost gray bar. Other than that, debt is always going up -- faster or slower, but always up:

Graph #2: Quarterly Change in All Sectors Debt

It's not the easiest thing to see, but debt goes up more slowly near the gray bars than elsewhere; perhaps not in every case, but often.

On the first graph, GDP, the lines go below zero at the gray bars or very near them. On both graphs, the upward trend seems to slow before the gray bars, often well before. The "up slower" starts before the recessions because the central bank is increasing interest rates before recessions, in order to slow the economy.


I notice that in a recent post, David Glasner refers to the Great Recession as the "Little Depression". He's right.