What is an economic depression? It is an abrupt, prolonged and declining economic activity in one or several economies. It's a deeper economic depression than a mild recession, which is just a temporary slowdown on economic activity caused by changing economic conditions rather than a recession. An economy goes through depression when it experiences falling interest rates (cutting of interest rates means that lenders are no longer willing to lend money) and wages that fall substantially, creating a shortage of available employment opportunities. When this happens, businesses and consumers tend to liquidate their savings, putting them in danger of not being able to pay loans they already had.
So, why does an economic depression occur? There are two main theories on the matter, both of which have varying degrees of accuracy. The first theory says that an economic depression is caused by an event, like the Great Depression, that significantly reduced demand for goods and services (an effect triggered by a decline in global trade). The second theory states that it is caused by a decreasing rate of economic growth, typically stimulated by government spending or the intervention of central banks with large printing efforts. Of course, money can't be printed if there isn't any money to invest in, so some economists argue that a decline in growth rates is just as much of a depressed state as a drop in national income because there simply aren't enough resources to fund the deficit.
Since there are differing theories on what is an economic depression, it's important to understand how depression works. Usually, a depressed economy is characterized by low consumer spending and rising unemployment. In order for this to happen, the economy needs to have sufficient income from which to conduct business. When money isn't available to do that, businesses and consumers tend to default on their loans, leading to the loss of jobs and rising prices. Ultimately, when too many people are losing their jobs, they can't get another, so they resort to liquidating their investments and cutting loose on unneeded items. This process causes an economy-wide decline in overall spending, which leads to higher inflation rates, putting more strain on already overburdened consumers and increasing their need to borrow.
Usually, this process will take several years to reach its peak, and in the meantime, the unemployment rate will remain high. During this time, it's especially difficult for families to cover their needs, and when they try to apply for new loans, most lenders turn them down flat out because they don't meet lending criteria. With no money and no job, families are forced to try to live on whatever they can get their hands on, and this results in a cycle of ever-richer borrowing that compounds the problem even further. By the time it reaches this point, an economic depression has officially been fallen upon the nation.
Thankfully, an economic depression isn't likely to last more than a few years at most. In fact, we're currently in the early stages of what is called a depression, which usually lasts between two to five years. The difference between this and the normal economic cycles is that the length of time can differ greatly depending on certain factors, such as the state of the stock market, the health of the real estate market, and various other factors. A brief description of what an economic depression is may be best explained by comparing it to the infamous “Great Depression” of the 1930s, which took place during the worst recession since the Great Depression.
For example, during this time period, there were few options available for working class citizens, as most businesses had either closed or downsized due to lack of business. As a result, many people found themselves unemployed, and during this time period many turned to the Internet to find employment. As you can see, there are many similarities between what is an economic depression and the current state of the economy, and this makes it extremely important for each individual to be aware of the signs and symptoms of an economic depression. If this is discovered early enough on, there is often a chance that recovery can be pulled off.
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