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Depression unlikely but can't be ruled out completely

Comments on Adam Carr “Depression drivel”, 18/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/SCOREBOARD-Depression-drivel-pd20090618-T4TR3?OpenDocument&src=sph

History will or will not repeat itself is an interesting question, but there are no automatically fixed answers.

Clearly there are very different institutions now as compared to back then in the great depression. It should suggest that we may not repeat the great depression. However, the financial and banking crisis a few months earlier was a stark reminder that history could repeat itself even under quite different circumstances. Also the lost decade in Japan may lend further support to that.

Expectations work in strange ways. Different sorts of expectations, adaptive, rational you name it, may co-exist and work together. If expectations of most people are that we are likely to have a quasi great depression in a different form, then it is likely that we will have one.

The problem is that we don’t know for sure how people form their expectations all the time. We have herd behaviours in the share market, housing market and some other market. We have bubble and bursting of bubbles. There are hardly perfect things in expectations.

So while I am confident that the world authorities should be able to deal with the current economic crisis, I cannot rule out completely the recurrence of another depression. I am not as confident as Carr is on this and I don’t want to be either. History is not necessarily always rational. Neither is the economy, and definitely the equity and housing market!

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