The Odds of a Depression? 40 Percent

The Intrade betting market assigns a 38 pecent chance the U.S. economy will shrink 10 pecent or more from peak to trough. Let's call that a depression. Moreover, the market assigns a 20 percent chance the economy will shrink 15 percent or more. Let's call that Great Depression 2.0. For context, GDP fell by just 3 percent during the terrible 1981-82 recession. Economist Robert Barro puts the odds for a "minor depression" at 20 percent in a new paper:

Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events—the Great Depression 1929-33 and the post-WWI years 1917-21, likely driven by the Great Influenza Epidemic. 45% of the matched cases are associated with war, and the two world wars are prominent. Conditional on a stock-market crash, the probability of a minor depression (macroeconomic decline of at least 10%) is 30% and of a major depression (at least 25%) is 11%. In a non-war environment, these probabilities are lower but still substantial—20% for a minor depression and 3% for a major depression. Thus, the stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression.