Friday, October 10, 2008

Depression versus a recession

Greg Mankiw writes:

There is no official designation of depression. Traditionally, milder contractions are called recessions and more severe contractions are called depressions, but there is no official word on which is which.
A recession is an economic downturn caused by a substanial decrease in the expected rate of inflation. A depression is an economic downturn caused by a substantial contraction in the money supply where people's expected value of wealth decreases instantly due to the money multiplier effect going in reverse.

Unless the destruction of wealth can be quickly stopped and reversed, America is heading for a depression.

Chart of U.S. Money Supply Growth