Recession: unavoidable. Depression:avoidable

You can find plenty of articles in the media and on the web with charts comparing the speed of the stock market selloff after the Great Crash of 1929 with what we have seen in the past few weeks.  The pace of the decline right now is much more severe than it was in 1929; therefore, some people are arguing, the fate of the economy must be worse than it was back then.

There are some good reasons to think this is wrong.  The Great Crash seemingly came out of nowhere and had no obvious single cause, so it was impossible to forecast how long it would last. By contrast the Coronavirus Crash, while quite sudden, has happened in response to a single event, and the world has enough experience with virus epidemics to have a good idea of how long this one is likely to last.

Then there's the policy response. Back in 1929 just about everything the authorities tried in the US and around the world was flat out wrong, starting with the immediate move to raise tariffs. It was only with FDR's New Deal after 1933 that policy began to move hesitantly in the right direction, and it was only the advent of World War II that finally triggered the appropriate amount of stimulus.

By contrast, governments and central banks today have moved quickly to provide massive support and stimulus, in surprising and innovative ways. The steps taken are not designed to prevent economies from slipping into recession, which is almost certainly not possible.  Rather the idea seems to be to implement a kind of economic stasis, with wages protected and businesses judiciously supported while the epidemic itself is dealt with. This provides a level of certainty to business and consumers alike that should both prevent a spiral into depression and allow the economy to recover smartly when the crisis passes.  Indeed, as and when we reach that point, it may become necessary to act quickly to remove the stimulus, in order to forestall the possibility of a sharp rise in inflation.

What can still go wrong here?  The biggest mistake that policymakers could make would be to start allowing the economy to return to normal before the virus is under control*.  This would risk triggering a fresh and potentially even more serious wave of the virus, leading to an entirely avoidable surge in deaths and greatly heightening the risk that recession turns into depression.

The redoubtable Dr Anthony Fauci has assured the world that Donald Trump's talk of reopening the US economy by Easter is "aspirational".  He says the decision will be based on the evidence to hand at the time. America, and the world, had better hope so.   

* Dr Doom himself makes this point here.