Will the US Economy Suffer a Depression?

Intrade yesterday announced a new binary futures contract, which pays off 100 Intrade points ($10) if the US economy suffers a depression sometime during 2009, and 0 Intrade points ($0) if it doesn’t. “Depression” for purposes of this contract is defined as a total decline in GDP equal to or greater than 10%. See http://www.intrade.com/news/news_288.html for specifics on the contract rules. The ticker symbol for this contract is US.DEPRESSION.09. The “good” news is that so far, no trades have occurred; there is a bid price of 5, and an ask price of 15.

Perhaps the more meaningful contracts are the US.RECESSION.08 and US.RECESSION.09 contracts, which represent (100,0) bets that the US economy suffers a recession sometime during 2008 or 2009. Both contracts define recession as two successive quarters of negative real GDP growth. The last trade for US.RECESSION.08 occurred at 50 and at 80 for US.RECESSION.09, but compared with the political contracts, trading volume is quite low and bid-ask spreads are very wide, which implies these contracts are relatively illiquid. For example, for US.RECESSION.09, there currently are bid prices ranging from 10 to 75, and ask prices ranging from 80-99.9.

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