Wednesday, November 26, 2008

You betcha depression 

Mark Perry makes an excellent point: The proper frames of reference, if all you want to answer is "how bad is this recession?" are the recessions of 1981-81 and 1974-75 (my addition to his comparison.) Each has a different genesis than the present one, of course -- incomes policies in both cases, financial panic in neither -- but the common feature I point out is the severity (1-2% decline in real GDP) and length. Both of those recessions were 16 months. For gambling types, do you bet the current contraction* over or under 16 months? C'mon, InTrade! We need this contract.

Instead, you can get from InTrade a "depression contract".
This contract will settle (expire) at 100 ($10.00) if quarterly GDP figures show the US economy has gone into a depression in 2009.

The contract will settle (expire) at 0 ($0.00) if quarterly GDP figures DO NOT show the US economy has gone into a depression in 2009.

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters.
That is not an official definition of a depression, not that there is one. What intrigues me is that trading on that contract has been fairly active, much of it in the last 24 hours. The 2008 recession contract -- using the two-consecutive-negative-quarters definition rather than waiting for NBER -- last traded at 95. With the third quarter number revised down yesterday and today's continued weakness in real consumer spending, that looks like pretty easy money. Worth noting: a huge upswing in personal savings, to $260 billion in October versus $110 in September. Remember when personal savings was negative?

*"no! there's no contraction!" you say? Fine, take the under.