Monday, February 09, 2009

Latvia Enters A Depression

While a lot of countries around the world are experiencing economic contraction right now, some have a worse situation than others. Latvia today released numbers that suggests that their slump may be worse than a simple recession. It could more accurately be described as a depression.

The difference between a deep recession and a depression is somewhat vague, but one proposed definition of a depression is a decline in real GDP of more than 10%. Latvia's statistics bureau today reported that real GDP in Q4 2008 was down some 10.5% compared to last year, thus meeting the depression criteria. Latvia's slump is thus likely the deepest in Europe except for Iceland and perhaps also Ukraine.

The underlying cause behind this contraction can be traced to the massive monetary excesses of the preceding boom.The dramatic shift from that to the current situation where Latvia still has significant price inflation (9.8%), while money supply is actually shrinking, meaning that real money supply is contracting very rapidly, is why Latvia has experienced such a dramatic shift from 10% growth to 10% contraction.


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