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What is a depression?

Feb 09, 2009 | | Comments Comments Off

The head of the International Monetary Fund says the U.S., Western Europe and Japan are already in one, yet there’s no standard definition of what comprises a depression.

My MSN colleague Jon Markman says it’s two back-to-back recessions, which would technically make the recessions of the early 1980s a depression.

Others believe it’s when the economy contracts for a more extended period, with five years being a commonly-cited length of time—which means the economic decline Japan experienced in the 1990s counts as a depression.

In the U.S., however, whenever we hear “depression,” we think “Great Depression,” the contraction that started after the 1929 crash and lasted until World War II.

At this point, it’s stretching credibility to imagine we could return to those days of 25% unemployment and one third of the nation “ill-housed, ill-clad and ill-nourished,” in FDR’s famous assessment. Especially in its early years, the Great Depression was a terrifying period of widespread want and uncertainty.

As I’ve said before, many of the safety nets that will prevent such widespread poverty were put into place during the Great Depression, including:

  • Unemployment benefits
  • FDIC insurance
  • Social Security
  • Food stamps

But millions of people are already experiencing a sharp drop into their standard of living as layoffs and foreclosures mount. So even if we don’t face the next Great Depression as a nation, many people are already experiencing a depression their personal finances.

Which is why it’s so important to get a handle on your finances now if you’re among the vast majority that still have homes and jobs. Build up that emergency fund, pay off that toxic debt, and protect your credit score. But don’t give in to panic and despair, because those who do are likely to miss some amazing opportunities.

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