Managed Depression


Things aren’t going well and many people would rather hide under the covers for a day than go out and confront the realities of the world. That is the image that comes to people’s minds when I insist on using the word “Depression” rather than “Recession” to describe the economic situation we’re in. The picture is one of personal depression, rather than economic or social. As flawed as that image is it can actually work if we think of this as a “Managed Depression,” a big downer we’re trying to get through without a ton of pain. It’s not impossible, we just need a bit of help. Can we look at it that way?

I started using the term Managed Depression to fit everything into historical context. The USofA has been through depressions before and will go through them again. The Great Depression of 1929 is the one most commonly associated with the term, but we also have the Long Depression of 1893. Some historians also call the Panic of 1857 a depression, and I think it qualifies – though much of the nation wasn’t industrialized yet. The situation in 1812, where a mercantile economy first profited from Napoleon’s ongoing wars and then found itself flat, might also qualify. That gets us to five if you count like I do, but at least three counting this Managed Depression.

The biggest problem with that terrible word, depression, is that it scares people. It shouldn’t. What makes it possible to have a Managed Depression is that we’ve been through it before and each time learned a little bit about what it takes to make the whole situation better. Many will argue that the Great Depression was also heavily managed, first by the blunderings of Hoover and later by the New Deal. That’s certainly true, but what makes this depression unique is how heavily it’s been managed from the very start.

The federal Zoloft has come to us in the form of a lot of paper. The US public debt (total debt less social security trust fund) stood at about 4 trillion dollars when airplanes hit the World Trade Center on 9/11. As the economy spent a week with everyone more or less standing around staring at each other, the delicate parts of the bubble started popping.  The government swung into action, continuing to spend money as if we had it. We even started a couple of wars. All of this increased the net public debt to about 8 trillion in less than 9 years. Combining it with zero interest rates from the Federal Reserve and we have a Managed Depression – a depression that was never allowed to really blossom in the way previous ones did.

The real question is – did it work? Can we really have a Managed Depression?

I happen to think that the answer is yes, we can. When I call this a Managed Depression I don’t mean to scare people or cause panic. I simply mean that we have to handle this a bit differently than what we’re used to. Maybe we shut off our phone for a few hours, rent a few really sad movies, and get a big tub of chocolate ice cream. But if we know what the problem is we can get through it – and deal with it the way we know we have to.

The biggest problem with a Managed Depression is that economists fuel our denial. They tell us that we can’t read how we’re really doing at any one time and can only look backward. That’s simply not true. A very good operating definition of a depression is when the Federal Reserve’s Fed Funds Rate target, by their own calculation, goes negative. It’s called the Taylor Rule, and like any good treat for depression it has a lot of fudge. But when the Fed got an answer that tells them they should be charging negative interest rates – which they cannot – they swung into action doing strange things like buying government debt. The Taylor Rule has been calling the Fed Funds Rate target negative since at least 2008. That tells you, right off the bat, that we’re in a different situation.

Drastic action is one thing in a Managed Depression. Understanding that the old rules may not work is the hard part.

For all that, the situation is not as dire as we think it is if we’re just willing to stop for a moment and do what we know we have to in order to get over it. Yes, it’s bad. But we’ve been through it before. It means that we’ll have to do a lot of things differently than we have been and we’ll have to challenge ourselves a bit when we start to get over it. That’s OK.  A Managed Depression is about a lot more than the drug of a lot of cash dulling our senses – it’s about positive action to make things better in the end. Can we talk?