Tags: barro | depression | odds

Harvard Prof: Depression Chances One in Five

By Greg Brown   |   Wednesday, 04 Mar 2009 12:09 PM

Predictions of a recovery are a dime a dozen these days, but a Harvard researcher who has closely examined economies around the world back to the time of Lincoln has this sobering viewpoint:

There’s a decent chance we’re in for a real, out-and-out depression.

“There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10 percent or more, something not seen since the early 1930s,” reports Robert Barro, a professor of economics at Harvard and a fellow at Stanford University's Hoover Institution, writing in The Wall Street Journal.

There have been just two such events in recent U.S. history, the Great Depression we all know, which was a 25 percent decline in output, and a decline prior to that, just after World War I, when the economy fell by 16 percent.

Looking at 251 market crashes worldwide, Barro and a colleague found that depressions were linked to them in 71 cases. In 30 of those cases, wars were also a factor.

Contrary to what some pundits say, Barro says, the stock market crash we are witnessing now is actually a fairly good indicator of trouble in the economy.

“In fact, knowing that a stock-market crash has occurred sharply raises the odds of depression,” Barro notes.

The result of the study of 34 countries found that in cases of a stock crash, there is a 28 percent chance of a depression (the economy slips by 10 percent or more) and a nine percent chance of a major depression (a decline of 25 percent or more).

The 20 percent prediction Barro makes hinges on the notion that the United States — Iraq and Afghanistan notwithstanding — is not involved now in a “major” war.

“In the end, we learned two things. Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat,” Barro says.

Put another way, that 20 percent chance also means that there is an 80 percent chance we can avoid a depression, Barro suggests. We have seen big stock slides before, in 2000-2002 and 1973-1974, accompanied by only mild recessions, he notes.

“If we are lucky, the current downturn will also be moderate, though likely worse than the other U.S. post-World War II recessions, including 1982,” Barro says.

Barro is less than sure, however, that the Obama administration’s response to the crisis has been correct.

“I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them,” Barro says.

Commodities guru Jim Rogers agrees with Barro’s assessment of the Obama response so far. He blasted the government this week for not letting enough business simply go bankrupt.

"None of [this] does much for the economy down the road. It's trying to postpone some pain we're going to have to take," Rogers told Reuters in an interview.

"I don't think the bottom is here, maybe 'a' bottom, but not 'the' bottom. The economy is going to get worse. You can't have a good stock market without a good economy," Rogers said.

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Predictions of a recovery are a dime a dozen these days, but a Harvard researcher who has closely examined economies around the world back to the time of Lincoln has this sobering viewpoint: There’s a decent chance we’re in for a real, out-and-out depression. “There is a...
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2009-09-04
 

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