The recession tracks the Great Depression

Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us. It is one of the guides we have to our present predicament. Fortunately, we do have the data. Unfortunately, the story they tell is an unhappy one.

Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words (see charts).* In their paper, Profs Eichengreen and O’Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted.

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event.”

Yet what gave the Great Depression its name was a brutal decline over three years. This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated.

Profs Eichengreen and O’Rourke describe this contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent. Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher. In the US, the general government deficit is expected to be almost 14 per cent of GDP.

All this is consistent with the conclusions of an already classic paper by Carmen Reinhart of the university of Maryland and Kenneth Rogoff of Harvard.** Financial crises cause deep economic crises. The impact of a global financial crisis should be particularly severe. Moreover, “the real value of government debt tends to explode, rising an average of 86 per cent in the major post–World War II episodes”. The chief reason is not the “bail-outs” of banks but the recessions. After the fact, runaway private lending turns into public spending and mountains of debt. Creditworthy governments will not accept the alternative of a big slump.

The question is whether today’s unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression. If the latter wins, we will not. What everybody hopes is clear. But what should we expect?

We are seeing a race between the repair of private balance sheets and global rebalancing of demand, on the one hand, and the sustainability of stimulus, on the other.

Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process. Meanwhile, the federal government has become the only significant borrower. Similarly, the Chinese government can swiftly expand investment. But it is harder for policy to raise levels of consumption.

The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers – and investors – nervous.

Two opposing dangers arise. One is that the stimulus is withdrawn too soon, as happened in the 1930s and in Japan in the late 1990s. There will then be a relapse into recession, because the private sector is still unable, or unwilling, to spend. The other danger is that stimulus is withdrawn too late. That would lead to a loss of confidence in monetary stability worsened by concerns over the sustainability of public debt, particularly in the US, the provider of the world’s key currency. At the limit, soaring dollar prices of commodities and rising long-term interest rates on government bonds might put the US – and world economies – into a malign stagflation. Contrary to some alarmists, I see no signs of such a panic today. But it might happen.

Last year the world economy tipped over into a slump. The policy response has been massive. But those sure we are at the beginning of a robust private sector-led recovery are almost certainly deluded. The race to full recovery is likely to be long, hard and uncertain.

Your analogy is apt.

The “elites” /spit such as zero /SPIT think these two forces can be balanced to cancel out. Idiots. The world economy is far too chaotic for that. What will happen is huge swings back and forth. We’ll get the worst of both worlds, hyperinflation and deflation at the same time. (Remember stagflation under Carter? Before that moron wrecked the US economy, economic doctrine was that you couldn’t have both at the same time. Carter - a weak socialist/fascist compared to zero - proved that wrong.)

The end result will be that fiat money will be too hard to value, rendering it meaningless. Without meaningful currency, the world’s economies will have to shift to barter or the like, a far more inefficient means of exchange. The global economy will contract massively.

Productive countries (that won’t include the US, it might include TX if she goes her own way) will push a big reset button and issue hard currencies as a matter of necessity. By “hard,” I mean backed by something tangible and measurable (could be gold, other precious or industrial metals, oil, energy, just about anything). China sees this coming, which is why they are using (soon to be meaningless) dollars to buy up Africa’s means of production of industrial and semi-precious metals. This is also why they are trying to build a military capable of real force projection. It’s not to fight the US, but to slaughter any countries stupid enough to try to nationalize their assets. The muslims in the Middle East are probably on the target list, too - they’re too destabilizing (making trouble in China already), China has 30,000,000 “excess” men coming to military age, China will need or at least want all that oil, the US will be too weak (and frankly happy not to be in China’s crosshairs) to counter them, and there won’t be any concern for the muslims’ “rights.” Chinese versions of Shehag, KOSucks, and DUmmies wannabes won’t last long, either.

China will probably leave the US alone simply because we will be continuing our leftist/socialist driven self destruction, we will have nothing China really needs, and the remnants of our military will making taking us on directly just too costly. China will become the superpower, one more than willing to use any means to protect its interests worldwide. We will become a backwater.

As for Russia, they have a lot of resources just off China’s left shoulder. They could be in the firing line, too.

Europe already is largely meaningless. With us crippled, they won’t fare very well. They’ll either revert to old ways fighting each other or be easy pickings for islamization - after which they’ll fight each other. (The only thing muslims seem to like killing more than infidels, Christians, and Jews is other muslims.)

Depending on how China still feels about Japan - and how good the JDF really is and if Japan “nukes up” - Japan will either be squished/glassed or will continue doing business with the new superpower. This one is hard to predict because it involves balancing raw emotion vs Japan’s possible usefulness and another economic force in China’s sphere of direct control.

The Norks will have outlived their usefulness and be butchered wholesale and then annexed outright. South Korea? Who knows.

So back to your analogy: Yup, its the triggering mechanism to a nuclear bomb in the form of a complete and probably very violent realignment of world power...

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