great depression 2.1

A follow up to a post I wrote after Intrade put the chances of a depression occurring at some point in 2009 at 51%: In a post on his blog, Nate Silver of FiveThirtyEight explains why Intrade's numbers might be so high even while most economists are much less pessimistic. He explains that:

...a lot of the money that is to be made there comes from people who are trying to anticipate future price movements rather than the ultimate resolution of the contract. Say that I think the true chance of a depression is 4 percent, not 40 percent -- I should still buy depression contracts at 40 percent if I think I can sell them for 50 percent when the new jobs report comes out on Friday.

I started following the numbers at Intrade during the presidential primaries and still find it interesting to look at what's being traded there (though I'm yet to put any money down), but in this case, I'm not disappointed at all to find reasons why it isn't a flawless system.

Great Depression 2.0

Intrade, the online prediction market is now giving the statement: "the US Economy to go into a Depression in 2009," a 51% chance of occurring.

Prediction markets trade shares in future events. The price for each share is determined by normal market mechanisms and turns out to be a reliable predictor. Intrade, for example, apparently has an uncanny record at predicting the outcome of elections.

Before you stuff all your money under your mattress, you should know that Intrade has a fairly unorthodox definition of "depression." I'm not clear on the details, not being an economist (if you read this post, maybe you can help me out on that Munir), but from what I gather a "depression" by Intrade's standards would be just a severe recession for most everyone else.

But Intrade isn't the only one throwing around the "D" word. Paul Krugman has been doomsaying for a while, and I wish this guy hadn't been so precient about the housing market crash so we wouldn't have to take him seriously.

This idea of a new Great Depression seems so bizarre to me. Imagine if the Joad family in The Grapes of Wrath could have googled "wages for fruit pickers in California," before they started off across the country. If would have made for a much less interesting book. I just can't imagine depression era conditions in todays world, but I suppose the people of the 20's couldn't either. If the worst does happen, will we have to put aside our computers, iphones, google maps, blogs, and wait 10 years for it to be over? Hard to imagine.