What Is A Depression?

What Is A Recession Depression?

First Published: ADawnJournal.com March 23, 2010

When we talk about depression, we are not talking about a psychological condition. Instead, we are talking about an economic condition and it is a very serious one that has done a lot of damage in the past to the world’s economies. Naturally, the most famous is The Great Depression, but there have actually been several depressions, which we will cover.

What Is It?

A depression is a long-term downturn in economic activity of a country, or several countries. In contrast to a recession, a depression is much more severe and has long-term effects that go for longer than a recession. Depressions will typically last for several years, there will be very high levels of unemployment and the availability of credit will be much smaller. As well, there is usually a reduction in trading between countries, bankruptcies increase, and the currency of the countries affected typically becomes more volatile.

What Makes A Depression?

The National Bureau of Economic Research has stated that a depression is a period of time where there is a substantial and sustained fall in the ability of people and governments to purchase goods. As well, the GDP of a country needs to fall at least 10 percent and have a recession that lasts longer than two or more years, to qualify as being in a depression.

Depressions in The Past

There are several examples of depressions in the past, both recent and over a century ago. The degree of severity ranges, but the effects are felt by millions all over the planet.

The Great Depression

The most famous of all depressions is The Great Depression. During this depression, economies around the planet were affected greatly during the 1930s, and it is generally accepted that the catalyst for this depression was the Wall Street Crash of 1929. In the United States, the unemployment rate rose to 25 percent and the GDP of the country fell by 33 percent.

The Long Depression

Not as severe as the Great Depression, the Long Depression lasted for 23 years, or over twice as long as The Great Depression. One interesting point is that before The Great Depression, The Long Depression was called The Great Depression.

Depression of 1837

One interesting depression was one that lasted for five years, and many historians see this as the first Depression in recent history. It was The Panic of 1837, which was caused by the bursting of the real estate bubble in the United States on May 10, 1837, when banks stopped making payments in gold and silver. The Panic was short, but the depression it caused lasted for five years and was marked by banks failing and very high unemployment levels.

Regional Depressions

While the United States is generally seen as the place where depressions start or stop, many countries have had depressions of their own, including in the past 30 years. Some examples of these include:

·   In the 1980s, Argentina, Brazil, Chile and Mexico went through severe depressions in the 1980s when their GDPs fell by over 20 percent.

·   Argentina suffered a second depression that lasted from 1998 to 2002.

·   New Zealand suffered a long depression that lasted from 1974 to 1992.

·   Switzerland is currently in a depression that has lasted since 1973, but the qualification of this time as a depression is not accepted by all economists.

·   From 1980 to 2000, much of Sub-Sahara Africa suffered through a long and difficult depression.

·   The Soviet Union went through a depression that was seen as twice as severe as The Great Depression during most of the 1990s.

·   Finland went through a depression from 1989 to 1994 after the breakup of the Soviet Union. Norway and Sweden also had troubled economic times during this period.

Depressions are not something you want to go through. They are very difficult to deal with on a personal level, and for countries it can have disastrous results on a wide variety of industries. In a depression, there is less money to be spent on infrastructure and that means roads will decay at a faster rate. There is also less money to spend on police officers, which can cause crime to increase. In general, depressions are something every country wants to avoid, and thankfully, most are able to depending on how they react to poor economic times.

What Is Deflation?

Definition and Causes of Deflation 

First Published: ADawnJournal.com April 3, 2010

Deflation is the opposite of inflation, and that naturally means that it is a good thing for the economy. Deflation represents a decrease in the price level of goods and services. It happens when inflation falls below zero percent, which causes an increase in the value of money, which allows you to buy more goods with the small amount of money.

While deflation can be good because we can buy more things with the same amount of money, but deflation is not always a good thing. In fact, deflation is linked with recessions and even the Great Depression. Deflation also prevents a government from being able to stabilize its economy. This doesn’t mean that deflation is only about poor economic times though.

What Causes It?

Deflation is caused when the supply and demand of goods goes up, and the supply and demand of money, goes down. So, when there is an increase in production on goods and services, it causes there to be a greater supply of goods, without increasing the supply of money to buy those goods. When the money supply goes down, typically the demand for goods goes down as well. This doesn’t happen with deflation. A rise in production, with a lack of supply in money, creates that unique combination for deflation.

Types of Deflation

There are four different types of deflation that can happen.

1.   Cash Building Deflation: This is caused when people are saving more money, which decreases the use of money but increases the demand for money.

2.   Growth Deflation: This is when there is a decrease in the Consumer Price Index and an increase in the supply of goods.

3.   Bank Credit Deflation: This is when there is a decrease in the credit supply of the bank, caused by bankruptcies, and a contraction of the money supply from a nation’s central bank.

4.   Confiscatory Deflation: This is the freezing of bank deposits and a decrease of the money supply.

Times of Deflation

In modern times, there have been several instances of deflation in several industrialized countries. Some examples include:

·   During the First World War, the British Pound was removed from the gold standard to finance the war. This caused a rise in gold prices and rapid inflation, while decreasing the exchange rate of the pound. When the pound was retuned as the gold standard when the war ended, it was done so at the pre-war gold price, which caused prices to fall.

·   In the United States, there have been three times of major deflation. The first was in 1836 when the currency of the country contracted by one-third. The second was during the Civil War, which was caused by the retiring of paper money during the Civil War, as well as the return of the gold standard. The third was between 1930 and 1933 when the deflation rate was 10 percent per year because so many banks were failing. There may be a fourth deflation crisis going on right now according to some economists, but only time will tell if they are right.

What Is The Consumer Price Index (CPI)?

Definition of Consumer Price Index (CPI)

First Published: AdawnJournal.com April 7, 2010

Something that is very important for the economy, but which a lot of people do not understand, nor know about, is the Consumer Price Index. The Consumer Price Index is important because it provides a measure of the average price of consumer goods and services from one period to a next within a city, region or country.

As can be expected, this gives an indication of how much people are paying for goods and services. The more people have to pay for goods and services, the worse the economy is generally doing because of the rate of inflation. Inflation is typically higher when the economy is doing poor, which influences the Consumer Price Index.

The Consumer Price Index is determined by measuring the price of a group of goods, which would represent the typical purchases of a consumer. In addition, the Consumer Price Index can be used to index things like wages, pensions and salaries. For economists, watching the Consumer Price Index along with the census of the country is very important for determining national economic statistics.

In the past, the Consumer Price Index of the United States has provided a good indication of the strength of the economy. From 1971 to 1977, the Consumer Price Index of the United States increased by an astounding 47 percent, showing the rapid inflation that was happening at the time. In 2009, the Consumer Price Index actually fell for the first time in over 50 years, dating back to 1955.

In Canada, prices are measured against a base year to find the Consumer Price Index. Currently, the base year is 2002 and the value for the 2002 basket of goods is 100.  In 2008, the Consumer Price Index had reached 114.1 – this simply means that what would cost $100 in 2002 cost $114.10 in 2008.

Two pieces of data are needed to create the Consumer Price Index; price data and weighting data. Price data is the collection of the goods and services from a few retail stores at a certain time and in various locations. So, this could be getting the price of bananas from four different grocery stores in three different cities in the American Northeast. Weighting data is the estimate of the shares of different types of expense data as a fraction of total expenses covered by the index. This information usually comes from sample decades and sample homes.

Of course, there are limitations to the Consumer Price Index. For one, consumer expenses done in foreign countries are not done, as well rural populations are often not included. As well, the very rich and very poor are often excluded as sample groups. Something that is always excluded is savings and investments, but the cost of financial services is included, as is insurance.

Everything will be weighted differently within the Consumer Price Index as well. For example, on 100,000 items from 20,000 stores and 30,000 rental outlets will be brought together and averaged out so that Housing accounts for 41.4 percent, Food and Beverages at 17.4 percent, Transport at 17 percent, Medical Care at 6.9 percent, Misc. at 6.9 percent, Apparel at six percent and Entertainment at 4.4 percent.

The Consumer Price Index is not something most people will think about, but it gives them a good indication of how their country’s economy is doing.

How the Loonie Affects the Canadian Economy

How Strong Canadian Dollar Affects Economy

First Published: ADawnJournal.com April 11, 2010

If you ask a Canadian what the dollar is at, they will probably tell you that it is near the American dollar in value. Most Canadians know where the dollar sits, and that when the dollar is good, so is the economy. However, many citizens do not truly understand just how important the Canadian dollar, or Loonie, is to our economy. So, let’s learn about the Canadian dollar and its effect on the Canadian economy.

For much of the 1990s, the Canadian dollar was well below the American dollar, often hovering around 65 cents. Things were at their worst on January 21, 2002, when the Canadian dollar hit 61.79 cents. From there, things began to improve and the Canadian dollar began to gain immense value, roughly 70 percent, within a few years. By September 20, 2007, the Canadian dollar did something it had not done in 31 years; it reached parity with the American dollar.

During the 1970s, the Canadian dollar was worth more than the American dollar, specifically in the years 1972, 1974 and 1976. On April 25, 1974, the Canadian dollar was actually worth four cents more than the American dollar. In August of 1957, the dollar was worth six cents more than the American dollar.

Typically the Canadian dollar will do better when commodity prices are higher. We have many resources, so when resources are more expensive, we make more money. Some of the resources that we have which are the most valuable are oil, copper, gold and wheat. When the price for goods and services increases, the value of the dollar also goes up, along with the Canadian economy. What does this mean for the Canadian economy then?

Well, when our dollar is at par with the American dollar, which means that goods in the United States are 60 percent cheaper than they were in 2002. This means that we can buy items in the United States for much less, and the government can then import items from the United States for less. For Canadian investors, things are not as good because the gains in the Canadian dollar wipe out the gains they have enjoyed. For example, when the Canadian dollar rose to par with the American dollar, the Dow Jones had enjoyed an 11 percent increase since the beginning of the year. In contrast, the Canadian dollar went up 23 percent in that same time period, thereby eliminating the gains felt by Canadian investors.

While it is cheaper to import goods from the United States, it is much more expensive to export goods, which makes Canadian exporters hurt. American companies are not coming up here as much because it is now more expensive to do business. Between 2002 and 2007, 250,000 manufacturing jobs were lost as a result of this surging dollar.

As we can see, there is a flip side to all of this. When the Canadian dollar is down, it costs more to import but more American businesses are funneling money into Canada because it is cheaper. In contrast, when the Canadian dollar is up, it is cheaper to buy from the states but exportation of our goods is more expensive which means less American companies buying from Canada.

Is It Our Last Chance To Avoid Getting Hit By High Interest Mortgage Rates?

High Interest Rates And How To Avoid Getting Hit By Them

First Published: April 15, 2010 ADawnJournal.com

The biggest concern for anyone currently looking for a mortgage to buy residential property is the volatility of the market. In the last couple of years, interest rates have fallen not just in Canada but all over the world as the financial situation leads to predictions of dire hardship. However, the measures in place to prevent a total and catastrophic meltdown (and however bad things are at the moment, the word “catastrophic” must be saved for situations that require a completely fresh start rather than a shifting of the boundaries) mean that, after a period of negative financial performance of the kind which we have seen recently, there will inevitably be a period of stabilization and then a recovery of sorts.

The outcome of this is that there is a narrow window, which is getting narrower as time passes, for anyone who has found themselves “recession-proof” to take advantage of the cuts in interest rates before the period of recovery kicks in and, inevitably, interest rates begin to rise again. The lessons of the past years have had the effect of encouraging us all to be a bit more careful, and any rise in rates will be gradual. But there seems to be very little doubt among market experts at the present time as to the feeling that rates will rise, and in five years’ time they will be higher than they currently are. Anyone hanging on to see how far the present rates drop may be disappointed.

High interest rates are used as an economic tool by governments and banks to control excessive market optimism. A few years ago the world in general was in a period of “boom” which was largely the mirror image of the “bust” in which it now finds itself. At that point, interest rates were rising and individuals hoping to get involved in real estate felt that they were being frozen out by “prohibitive” interest rates. Without the factual data, taken over a period of time, to prove a substantive change in the way the world sees economic issues, it is impossible to say how high interest rates may one day rise. If you are in a sound borrowing position, and if you are likely to be in a good situation to maintain your repayments going forward, now is the time to borrow for a house purchase. There may never be a better one.

Those who believe that there is scope for a further drop in interest rates would not currently be well served by waiting for it. It may come, it may not. More likely it will not, but if you like the odds it would at least be worth borrowing on a variable rate mortgage which will drop its rate as the banks drop theirs and rise when the banks do likewise. After five years, the terms of the mortgage can be renegotiated, and people with a good variable rate mortgage will be in the best position to do so.