Are We Reliving The 1930s?

At the close of last week’s G20 Summit, U.K. Prime Minister David Cameron warned that we’re on the verge of another global recession, citing problems like looming deflation, falling prices, and rising protectionist sentiment. This list evokes a sense of déjà vu: not about the Great Recession, but the Great Depression. That was the last time we ever seriously worried about disinflation, along with every practically other aspect of economic performance raising alarm bells today: low interest rates, weak investment, slow productivity growth, and chronic labor force detachment.

To be sure, this isn’t an easy comparison to swallow. The Great Depression is the ultimate measuring rod of economic catastrophe to which every other downturn is compared. But as time goes by and forecasts of full recovery keep getting deferred like an ever-fading mirage, it’s one worth examining. How does the Great Depression of the 1930s compare with the Great Recession of the 2010s? Let’s look at the GDPs of the U.S., U.K., and continental Western Europe from 1929 on and from 2007 on, using the base year as an index.

“For sure, the government WAS spending money it didn’t have - roads, bridges, public works - tangible infrastructure and jobs ala the likes of CCC and WPA. Just not injecting it into the banks and brokers’ pockets like QE.”

People would probably be surprised at how little the government was spending then compared to what we now think of as ‘normal’. In the years after WWII the government has typically spent around 18% of the GNP. Obama’s socialism-lite is spending around 24%. Dubya’s last year was also 24%.

In the years before the Depression the government was spending maybe 8% of the GNP. Sometimes 6%. During the Depression gov’t spending ‘spiked’ up to 12%. When we entered WWII spending really did soar, to nearly 45% of GNP, but it fell to below 20% when the war ended.

“The stock market seems oblivious to nearly any commonly felt indicator.”

What’s driving it are extremely low interest rates and the Fed providing plenty of money to the much larger bond market. When they finally turn off that spigot and interest rates begin to climb the party should be over.

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