Two points: first the classic defenition of recession and depression are 2 back to back quarters of negative GDP and 4 back to back quarters of negative GDP. In 1990~91 we did (at least Canada did) touch a depression. Depression does not necessarily mean soup lines. It is as natural to the economy as lightening is to weather. For almost 70 years in the 19th century, the world was in a depression. Businesses were completely concerned on how to avoid falling prices, in the same way that we've been concerned with inflation for the past 30 years. I think we may be headed towards a 19th century style depression, not a 1930s type. Also, the classic defenition of recession and depression just tells you how to recognize them and not what causes them. I submit again that the reason depressions last longer than recessions, is that they are caused by considerable excess in production capacity as oppose to inventory correction.
The second point in your message is that if no one sells, we'll all be fine. I've studied game theory and the point your making is one of the classic problems in games theory (kind of like the prisoners' dilemma). It boils down to trust, or rather lack of it. Most of us don't trust each other enough on such matters. The thinking goes like this: if I sell now, I take my money and lose potential profits which I can make again if the market goes up again. But if the market goes down, then not only I've prevented my loss, but I can buy the stock at much lower levels. And when enough people start thinking this, the market goes down until there is no one left to sell. Markets mostly run on sentiments and unfortunately, it is the marginal buying and selling that determines the trend and the sentiment.
Sun Tzu |
