The Recession Tracks the Great Depression

From yesterday’s Financial Times:

The recession tracks the Great Depression

By Martin Wolf | June 16 2009

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. 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?

Read the rest of the article.

Published by

Chris Sturr

Chris Sturr is co-editor of Dollars & Sense magazine.

0 thoughts on “The Recession Tracks the Great Depression”

  1. Only us Americans can solve this problem. We must stop living for ourselves, and live for each other. If we all do our part to make the American economy better, instead of making our own personal lives more full of crap we don’t need. We can do it, but we must stop being selfish and greedy. It’s that simple.

  2. Unfortunately, those who live by the above creed will, in the end, be the suckers, for in this country no good deed goes unpunished, and the rich and the greedy prey on the unselfish like pirranahs. No, now is not the time to be unselfish. Now is the time for the working class to be very selfish and insist that the government disgorge the wealthy of the their ill gotten gains over the last 12 years or so. People will argue that this will be bad for the economy, to which I ask, “whose economy are you referring to?”

  3. Good blog. Things were bad, real bad in the 20s and 30s. There’s a book just out that identifies an individual that sacrificed everything to support the laboring class in Louisiana and across America. He took on the Roosevelt administration and fought the Banckhead act and called for the removal of Hugh Johnson as the head of the NRA. Read more about the man at Names such as Long, Roosevelt, Farley and Lech are found throughout the writing.

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