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Monday, April 19, 2021

The Great Depression is still here

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The changeover to the next phase of the economic recovery — phase four — is going to be rocky. And it will involve Britain-style pay falls for everyone, longer hours for everybody, cutbacks at companies in the fast lane and unemployment like never before.

On Thursday, the U.S. Department of Labor reported that the economy added 94,000 jobs last month, and the unemployment rate fell to 3.7 percent.

But the party will never be quite over. At this point, the stock market is not rallying or even entering a bear market, although it should. The Dow Jones Industrial Average is higher than it was in the trough of the recession and the Dow Jones Industrial Average, by the size of this week’s 100-point move, is higher than it was in November 2007.

The problem is that although the recession may be over, the depression may not be.

That is not just because the present phase of the recovery, like the last, has been long — 8-1/2 years and counting. This week’s numbers are still above trend; economists are not forecasting any big downturn or recession.

What’s changed is that there is still a long way to go before the upturn is back to normal. And we’re taking a long time to get there.

The U.S. economy has had four phases in the long, hard road back from the depths of the Great Recession — the first recession in almost 25 years.

One of those phases — i.e., job growth and a rising stock market — seems to be over. The next phase — deflation and contraction — is about to begin.

There will be a lot of drama and heightened anxiety this winter as the nation and businesses adjust to the new reality. In Britain, the Great Recession is also well underway. It will be no different here.

The unemployment rate fell to 4.1 percent last month, as the U.S. economy added an impressive 19,000 jobs in construction. Outlays on food stamps have continued to grow.

What is new is that growth is still this strong — but still so weak. The U.S. is still coming out of the depression; it is just that we are currently in the “pre-Depression.”

In the fullness of time — maybe as early as 2017 — the economy will reach its pre-depression level. (Some say that the mood of the last week could be the real beginning of the Depression, as everyone figures they can’t win; that is the kind of economic mindset that gives rise to a depression.)

But no one, including the Trump administration, is predicting anything but the slowest recovery in half a century.

And, according to economists, it is not likely to get any slower. A rough rule of thumb is that post-1929 recessions are followed by 2.8-3.5 percent growth, 1.3 percent lower than pre-1929 recessions. And for the “new normal” we are using, real GDP is now in a range from $16 trillion to $16.3 trillion.

The first warning sign in phase four will be the flattening of the yield curve — the difference between the 10-year and the 30-year Treasury yields. A normal curve is about one-half of a percentage point. This one is just a shade above zero — meaning that this economy will have to rely on money from overseas to keep going.

In phase four, a collapse in the yield curve will mean that money will be tight. In phase three, we could easily get into the vicinity of an Argentine real-estate crash; all that money pouring out of emerging markets and moving here is bound to precipitate something like that.

What will this economy look like? We are headed for a version of Depression II, thanks to slow growth and high unemployment. That will be the new normal — not Depression I, not 1929, not 2007, but Depression II.

That will be something everyone has to get used to.

The writer is a senior writer for The New York Times.

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