Is 2009 tracking a 1930 Great Depression scenario?

With more and more major economists predicting recovery sometime later this year, many have forgotten that downside risks remain.  Berner, Roubini, Volcker, Krugman and Bernanke have all come out essentially saying they would not be surprised to see a ‘technical’ recovery at some point later this year.  Robert Gordon has gone as far as to suggest we could be in recovery already – at least in the United States. I too have called for a Q4 or Q1 recovery.  So, is it off to the races?

Hardly.  I don’t have to convince many readers at Credit Writedowns or Naked Capitalism that there is a darker scenario which threatens recovery.  Many of you see this according to preliminary results from a recent poll I conducted. Nevertheless, let me use this post as a reminder of that downside scenario with some commentary from economists.  David Rosenberg is not the only major bearish economist that sees a very troubling economic outlook.

First, a post by Wolfgang Munchau in the FT reveals that much of the economic data of late has actually been disappointing despite the rally in shares and corporate bonds.

Last week, the green shoots shrivelled. In South Korea, China and Germany, exports were declining once again. In the US, the Federal Reserve’s Beige Book said “economic conditions remained weak or deteriorated further during the period from mid-April through May”.

The March signs of revival turned out to be little more than a technical inventory correction, with no change in the underlying trend. The world economy is still contracting, though perhaps not quite as fast as at the start of the year.

As an analysis by economists Barry Eichengreen and Kevin O’Rourke* shows, global industrial output is still on the same trajectory as it was during 1930. The only question is whether we can avoid 1931 and 1932.

Munchau argues we can avoid a 1931 and 1932 scenario only if we see a marked change in the present policy response in major economies.  But, Munchau’s analysis makes one wonder why he finds the situation so dire for the global economy.  Why does Wolfgang Munchau think 2009 is tracking 1930?  The answer comes in the Eichengreen – O’Rourke data he references.  It is truly stunning: when one looks at statistics like industrial production, this downturn is looking as bad as the Great Depression. Here is how it is summarized at the economic site Vox.

The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

Now I happened to listen to Barry Eichengreen make his case on Tom Keene’s show at Bloomberg Radio this past Thursday.  The interview makes for interesting listening and it gives you greater granularity on his view for the global economy. I have provided the podcast clip below.  (By the way, if you don’t already subscribe to Keene’s podcast, Bloomberg on the Economy, do it.  They have great guests.  Here is the link.)

I recommend you read the Eichengreen – O’Rourke article (the graphs are amazing). With that as background, the Munchau piece will be more powerful.  Afterwards, have a go and  listen to the Bloomberg podcast.  The combination will leave you with a very good understanding of the downside risk for the global economy.


A Tale of Two Depressions – Vox
Optimism is not enough for a global recovery – Wolfgang Munchau, FT
Depression Dynamic Ensues as Markets Revisit 1930s – Eichengreen (March), Bloomberg

  1. Adam Sharp says

    Other than similarities in the timeline of events (we could see similarly-timed crashes), I don’t see many similarities between now and 1930s America. If anything, our current situation is much worse. Early in the depression, they were actually letting big things fail and raising taxes. We’re doing the opposite.

    The whole thing is an interesting experiment involving countless factors and players… Too many for me to judge concretely. I’m betting on inflation though, cause it seems much more politically doable and likely than the alternatives.

    1. Edward Harrison says

      Adam, I agree that there are many differences. Nevertheless, you do point out that there is a lot of downside risk despite the belief that the reflation trade has gained traction. This is certainly what Munchau is pointing out.

  2. d s a says

    a wonderful and illuminating post, Ed [even if disturbing] – glad yours was recommended by a favorite blogger of mine over at kos –
    Did I see a recommendation of The Great Depression: An International Disaster of Perverse Economic Policies (Paperback) here?

    I cannot find this rec if it was here earlier.
    Follow up Q –
    on that volume’s summary blurb [over at Amazon] that I find odd:
    “As for the New Deal, Hall and Ferguson argue that except for deposit insurance and gold policy, most of it was irrelevant or counterproductive and contributed only to slowing the recovery after 1933.”

    Can you comment on those authors’ apparent view that job creation and a safety net apparently had no measurable value for the economy [as well as for morale] during the G D? my parents – both musicians – were children and teenagers of that era, and had many stories to tell about jobs among their elder siblings’ and teachers’ generation – that were entirely due to WPA…

    I realize that I am asking you to comment on writings of other authors but hope you can help parse this out for me. thanks, ed

    1. Edward Harrison says

      d s a,

      Thanks for stopping by the site. I agree the Eichengreen stuff is very disturbing given how aggressive the policy response has been post-Lehman. I am not familiar with the Hall-Ferguson book, but I did look at it over at Amazon. It might be something to read for later.

      I think its nonsense to say that the job creation and social safety net creation were irrelevant. This is obviously the work of someone with an ideological agenda. For the record, I am not a fan of FDR and do not view the New Deal as an unmitigated success. Nevertheless, a balanced view would admit that the creation of infrastructure jobs was a huge boon to those economies (Think Tennesse Valley Authority) Even the Hoover Dam, started under Hoover can be seen in the same light.

      This is what China is doing today and one reason their economy has not fallen off a cliff despite a huge decline in exports to the west.

  3. Justin Case says

    Everyone forgot the credit write downs and unemployment. It looks like the politicians just want to say it’s a recovery. They want
    to burry the bad stuff and look at only the good stuff. Real jerks. There
    are a lot of people out there hurting. Some people have loss jobs, homes and assets. It’s be going on since at least 2006 or 2005.

    The jerks are saying it’s a recovery, it’s a recovery.-All I can see is a recovery.

    Meanwhile there are no jobs today and no jobs in the near future.

    The reason why we are here today is that politicians believe they
    where blind sided. Everyone was trying to them them the truth
    but they where in denial. Personal bankruptcy spike in 2005. Home
    foreclosures in 2006, 2007, 2008, 2009. Company and retail forecloses
    2008 and 2009. Many did not wake up until October 2008. It’s
    the same thing all over again. Politicians and government officials
    asleep at the switch and in denial. They won’t wake up until
    they are swimming in mass poverty in 2010. A major portion of the
    population is headed toward destitution. Educated people included.
    Although the decline has slowed the trend in doward.

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