In January I published How Long Will It Last, v.1.0 and discussed some new research on the results of studies of past depressions. You may wish to review that article. Professors Rogoff and Reinhart show that the historical average of banking crises have the following characteristics:

Housing prices declined an average of 35% over six years;

Equity prices declined an average of 55% over 3.5 years;

Unemployment rises to an average of 7% over four years;

GDP declines an average of 9% for over two years;

Government debt increases an average of 86%.

Here is an update on that information. Robert Barro, another Harvard professor and an associate introduced a new study that showed depressions don’t occur without a stock market crash.

In the end, we learned two things. Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat. The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.

If you are seeking comfort, he said that the economy will likely recover despite the policies of the Obama Administration. But he said, “On the other hand, the 59 nonwar depressions in our sample have an average duration of nearly four years, which, if we have one here, means that it is likely recovery would not be substantial until 2012.”

What can we take from all this?

… Continue reading How Long Will It Last v.2.0