Defining terms - recession or depression

From the FT Alphaville, this week's "Brunch with Dave", Dave Rosenberg of Gluskin Sheff:

Now what makes a depression different than a recession is that depressions follow a period of wild credit excess, and when the bubble bursts and the wheels begin to move in reverse, we are in a depression. A recession is a correction in real GDP in the context of a secular expansion, which is what all prior nine of them were, back to 1945.

But this was not a mere blip in real GDP — it is a post-bubble credit collapse. This is not a garden-variety recession at all, which an economic downturn triggered by an inflation-fighting Fed and excessive manufacturing inventories. A depression is all about deflating asset values and contracting private sector credit. In a recession, monetary and fiscal policy works, even if the lags can be long. In a depression, they do not work. And this is what we see today.

This is more than an interesting distinction but important for defining what we should expect for 2010. Some countries may be in a recession while others where in depression. Call it the Great Recession, credit crisis, or a depression there is a difference in what policies will work and not work.

We are not looking at a over-production and inventory adjustment problem. This crisis has been focused on solving a deep seated adjustment in credit expansion and over consumption. We have taken rates down to zero and added over a trillion in stimulus between the Bush plan in 2008 and the Obama plan in 2009. Of course, there has been some effect on minimizing the down-side, but that policy of stopping the worst downside is also different than creating a sustained recovery.

Simply put, the headwinds of higher delevering and adjusting balance sheets cannot be solved by increasing the opportunity for more credit and borrowing more money in the public debt markets. With the real economy trying to adjust balance sheets and delever, we will see some asset markets inflate from all of this stimulus money. Who will that help? Wall Street.

We have to accept that this process is going to take time and require more savings to pay-down debt. The savings is not going to new investments but to pay-down debt or maintain a safety net. Asking people to spend more through this process will not be productive. The problem for 2010 is that as private balance sheets are fixed through a pay-down in debt, the government is increasing public debt so the economy is still in dissavings.

There is no easy solution. We can try another stimulus package but that just shifts consumption forward. We can try to increase exports to capture the growth in other parts of the world but that requires a lower dollar, but other countries are trying the same thing. All developed countries are in the same process so all are competing for the same markets and savings. This is a gloomy forecast, but one that has to be accepted. we are not in the same old recession.