We’ve seen in recent weeks a massive response by the global markets & governments to intervene with guarantees, interest rate cuts and massive liquidity. In the 1930s this didn’t occur and certainly not with the same coordination and depth

Access to information also changes a lot of the equation. Today we have access to information that is literally a century beyond what they had during the great depression. Likely we’ve seen & experienced through the extent of the market decline (40%+) what many in the depression experienced during the first years. The hieght of the VIX almost gives me that perception entirely.

I’m not discounting the serious effects that the credit bubble will have on the global economy – we’re most certainly looking at recession for a number of large industrialized economies – but I don’t think we’ll see a depression with unemployment above 15% and people living in the streets. A sustained period of recession for 2-3 quarters or back to back recessions in 2009 & 2010, but not depression.

There are many possible results in between my postulated worst-case and best-case scenarios. Stagflation is a definite possibility if monetary and fiscal stimuli are poorly applied and ends up boosting money supply without boosting productive assets. However, even stagflation is preferable to depression, where the economy shrinks outright by 20-30% and massive unemployment ensues.

As an aside, I am currently exploring if buying TIPs as an inflation hedge will be a good idea.

Depression might be too strong a word for my tastes, though we may sometimes feel like we are in one. I think we will have stagflation – a stagnant economy and inflation occurring at the same time.

I also believe the Fed will be forced to increase interest rates to combat inflation (this will happen in time, not overnight).