Prediction Markets Not Betting On A Depression
Though the US Economy has officially slipped into a recession, it remains uncertain whether the economy will worsen and transform into a full blown depression.
Though there is no universally agreed-upon definition, a depression is typically described as a sustained downturn in one or more economies that lasts for an extended period of time, often several years. It is more severe than a recession, which is seen as a normal downturn in the business cycle.
Depressions typically exhibit abnormal increases in unemployment, limited availability of credit, shrinking output and investment, a large and increasing number of bankruptcies, reduced amounts of trade and consumer spending, and volatile currency fluctuations. Price deflation or hyperinflation are also common elements of a depression.
Myriad factors will play into whether or not this happens to the current US economy, but people are already taking bets. Though news programs may speculate that the current recession will actually become a depression, our economies future is actually far from certain. On the political prediction betting site Intrade, more people are betting that the Economy actually won’t slip into a depression (at least in 2009). The site calculates that, based on predictions, there is a 23.1% chance of a depression.
Intrade has been known for its extremely high accuracy in predicting political events. In the 2004 presidential elections, the Intrade market favorite won the electoral votes of every single state. In 2006, for the midterm elections, the Intrade market favorite won every since Senate seat up for election.
The accuracy of the betting markets comes from the idea that the wisdom and intuition of many is more able to predict an outcome than even the most knowledgeable experts. The people in the crowd that are betting give the best information possible to the market because their own financial reward depends on it.
So if we are to trust the prediction markets to tell us how the economic markets will turn up, hope is alive.