Quantitative Characteristics of Epic Recession

Chapter 1 and Chapter 2 that follows together provide a preliminary definition of 'Epic Recession.' These chapters identify and describe static characteristics that differentiate Epic Recessions from 'normal' recessions or a depression. Chapter 3 will describe dynamic characteristics that further distinguish Epic Recessions from normal recessions or depression.

Static characteristics may be either quantitative or qualitative. If quantitative, the question arises, what is the magnitude of a characteristic necessary to qualify as 'Epic'— in contrast to a lesser magnitude in the case of a normal recession or greater magnitude in the case of a depression? And if qualitative, what are the characteristics that are unique to Epic Recessions that are not present in cases of normal recessions, or are absent in cases of Epic Recession but occur in depressions? Differences in both magnitude (quantitative) and/or uniqueness (qualitative) therefore serve as essential starting points for distinguishing Epic Recessions from normal recessions and depressions.

THREEFOLD CHARACTERISTICS OF EPIC RECESSION

This chapter considers five important quantitative characteristics that differentiate Epic Recessions from normal recessions. They include the depth of the economic decline, its duration, and levels or degrees of debt, deflation, and default.

The qualitative characteristics addressed in Chapter 2 include financial instability and fragility, a large shadow banking system, consumption fragility, a shift to speculative investing relative to traditional forms of investing, and global synchronization of the crisis.

Dynamic characteristics of Epic Recession discussed in Chapter 3 include several sets of particular relationships that are complex and interdependent. These include relationships and interdependencies between speculative and non-speculative forms of investing; between speculative investing and debt; between debt, deflation, and default; between defaults and financial and consumption fragility; and, finally, between government fiscal and monetary policies and the key processes of debt–deflation–default and fragility. The dynamic characteristics thus focus heavily on the processes by which quantitative and qualitative characteristics mutually determine each other in various causal relationships, transmission mechanisms, and feedback processes.

Of the five quantitative characteristics addressed in this chapter, the first two — depth and duration — are primarily descriptive. They describe the degree to which Epic Recessions differ from normal recessions. That is, Epic Recessions are more severe in terms of both their depth of decline and their duration than are normal recessions. More severe as well are the remaining three quantitative characteristics: debt, deflation, and default. However, these latter three are important to Epic Recession in more than just degree of severity. They are central, and distinguish Epic Recession for more fundamental reasons as well. Epic Recessions are set in motion by financial instability and crisis. As will be shown, this is quite unlike normal recessions, which are not precipitated by financial instability and crisis. It is the accumulation of debt and price inflation that create the financial fragility that leads to the financial crisis event. Moreover, once the financial crisis erupts and evolves, it is once again debt and price that play a key role. Specifically, it is now the reversal — i.e. the unwinding of debt and now price deflation — that results in the deepening and spread of default — bank, non-bank business, and consumer alike — that subsequently drives the real economy into Epic Recession. Thus, it is not simply that debt–deflation–default are more severe in terms of level or degree in the case of Epic Recession compared to normal recession. The three characteristics are also critical elements that, along with other key elements described shortly, drive a transition to Epic Recession. In a sense, therefore, it is debt, deflation and default that in turn produce the more severe depth and duration characteristics associated with Epic Recession.

Of course, even more fundamental are those forces that produce the excessive debt accumulation and price inflation in the first place, creating a condition of financial fragility that ultimately provokes the financial crisis. As will be discussed in more detail in the next two chapters, the key to the more fundamental forces is the major shift to speculative forms of investing and the growing weight and mix of those forms compared to non-speculative forms of investment in the economy. Understanding what underlies that speculative shift takes analysis even deeper. And once the financial crisis has erupted and the transition to Epic Recession has begun, on the 'downside' or the 'bust phase' of decline yet more forces begin to play a contributing role to the transition to Epic Recession as well. But more on all that subsequently. For the remainder of this chapter, it is necessary first to understand simply in a static sense how debt–deflation–default, and depth and duration, are characteristics of Epic Recession.

QUANTITATIVE CHARACTERISTICS OF EPIC RECESSION

The characteristics of depth are measurable in several possible ways. This chapter identifies five such ways or indicators by which to distinguish depth in an Epic Recession: gross domestic product (GDP), employment, industrial production, exports, and the stock market.

The duration characteristics are measured in terms of what is called the 'peak to trough' of an economic decline — i.e. how long in months or quarters that the decline continues from its immediate pre-recession high point to its recession lowest point, and thereafter how long it takes from the low point to return to the previous high point. The 'peak to trough' to recovery may describe a recession either as a 'V', an 'L', a 'U', or a 'W' in duration terms. 'V' represents a sharp decline and just as sharp a recovery; 'L' a long-term stagnation following the initial decline; 'U' a decline followed by a lengthy period before recovery; and 'W' a double-dip decline, followed by recovery, followed by another decline and recovery.

The debt characteristic is defined as total debt, which includes public debt (federal, state, and local government), consumer debt, and business debt — the latter of which can be segmented in turn into bank and non-bank business debt. Whether the debt is short term or long term in its payment structure is also a factor, as is the...