Inexact but telling comparisons to the Great Depression

For the majority of us, the credit crisis we are living through has come rather unexpectedly. And because it has been both a surprise to many and a traumatic experience to yet many more, we are all trying to contextualize it using past economic and historical periods. Unfortunately, this is a tricky exercise because it risks conflating the root causes and outcomes of the historical period with those of the present. But, we are going to still do it because the need to explain is so great (something I covered in The politics of economics in November).

For me, it is the Great Depression where I see the greatest lessons for us today, particularly given the parallels in complacency today and that witnessed in 1930 and 1931. So let me say a few words about where I think we are in this crisis and what this should mean to policy makers and citizens alike.

When I first wrote about what was then an impending credit crisis in March 2008, I spoke of its roots being in the accumulation of high private sector debt burdens due to easy money. What has become clear since that time is the level of fraud that also occurred due to the lax regulatory environment. So, in many ways, the pre-conditions of this crisis were very similar to those that created the great depression (low interest rates, high private sector debt, globalization, large current account imbalances, speculative mania, a financialized economy, lax regulation, cronyism and fraud).

What we are now being told is that the response in this particular downturn has been very aggressive and all-encompassing across the globe. The result, we are told is that we are out of the woods economically.

But, is that really true? I would agree that we have averted the worst. However, I would argue that the global economy is still so fragile that complacency still risks a catastrophic outcome. 

I’m sure most of you who are familiar with my economic forecasting know that I was fairly bullish in the Spring of 2009.

And I even had to defend myself pretty vigorously because everyone else was so bearish (Through a glass darkly: the economy and confirmation bias in the econoblogosphere). So I am definitely not a perma-bear. I agree that the economy has improved markedly.

However, this Spring I have a more downbeat view and this owes in very large part to the complacency I now see out there. But, the thing that precipitated this post was this:

Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive.  Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private sector debts to foreign banks, not to finance a domestic budget deficit as in Greece.

All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression. Now that real estate prices are plunging, trade deficits are no longer financed by an inflow of foreign-currency mortgage lending and property buyouts. There is no visible means of support to stabilize currencies (e.g., healthy economies). For the past year these countries have supported their exchange rates by borrowing from the EU and IMF. The terms of this borrowing are politically unsustainable: sharp public sector budget cuts, higher tax rates on already over-taxed labor, and austerity plans that shrink economies and drive more labor to emigrate.

Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that can’t (or won’t) pay may be their problem, not that of their debtors. No one wants to accept the fact that debts that can’t be paid, won’t be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies, but many legal experts find debt agreements calling for repayment in euros unenforceable. Every sovereign nation has the right to legislate its own debt terms, and the coming currency re-alignments and debt write-downs will be much more than mere "haircuts."

These are the first paragraphs of Michael Hudson’s latest missive "The Coming European Debt Wars." Quite frankly, I do not think his language is hyperbolic. The Europeans need to confront these issues. We are facing a sovereign debt crisis. There are many ticking debt bombs beyond Greece. And we are way too complacent about it.

I have been optimistic about the near-term prospects for the global economy in large part due to the myriad pro-cyclical effects of recovery. Longer-term, however, there are some serious obstacles to a sustainable recovery.  This is not a garden-variety recession and recovery. It is a recession within a longer-term depression.  And while we are in a technical recovery, I believe much of the fundamental problems which triggered this downturn are still there, lurking.

The bust in Dubai and exogenous shocks

The problems are indeed still there. This is true with euro-denominated debt in Eastern Europe. It is even more true with real estate in Canada. And it is true yet again with commodity prices in China.

Let me give you an example of the kind of complacency I am talking about from "Fixed income investors look to Africa" published today at Risk. While Greek bonds are imploding and spreads to German Bunds are skyrocketing, rates in Ghana reflect a relative calm.

An increasing number of international investors are turning to the developing markets of Africa, as risk premiums on traditional emerging market issuers dwindle. Ghana has been identified as an attractive prospect.

While returns on investments in African countries such as Nigeria and Kenya have declined, yields on Ghanaian bonds remain high.

“International investors are moving down the risk curve, and capital is reaching African shores,” says Antoon de Klerk, an emerging markets analyst at Investec Asset Management in Cape Town. “Ghana looks attractive, especially against Nigeria where rates are extremely low. We’re seeing big positions being taken in Ghanaian sovereign bonds.”

Africa deserves a better look from investors. 100%. But this is nuts. The 10-year in Ghana is trading at 6.3%.  I guarantee you this is a bad deal.

According to Gadio, yields will likely decline further, leaving a rapidly closing “window of opportunity” for investors. “In Ghana inflation was extremely high in 2009, so the yields went up as far as 25%. The three-year bond issued in January 2010 drew substantial international demand. But now that inflation is going down, rates have started to fall rapidly. There’s probably a three- or four-month window for international investors to buy Ghanaian bonds, but after that, the quality might be gone. Yields are decreasing by 50bp or so at the short end of the curve during each auction. Accordingly, it makes sense to buy Ghanaian securities as soon as possible.”

It’s liquidity seeking return, folks. Ich sehe Schwarz.  But, this is the environment we are living in.  Compare what Hudson is saying and what’s going on in Greece to the buy now happy talk for Ghanaian bonds. Clearly, someone is wrong and I’m guessing it’s the complacent ones.

Then, you have David Rosenberg out today, doing his best to imitate "News from 1930" blog. He runs a spate of quotes from the 1930 press:

A good friend of ours at UBS, Robert Procaccianti, periodically emails us his pithy market thoughts, and yesterday he sent us the following. Great digging into some now infamous quotes after the 1929-30 bear market and the widespread view at the time that the worst was over because, of course, Mr. Market said so … erroneously as it turned out.

“[1930 will be] a splendid employment year.” — U.S. Department of Labor, New Year’s Forecast, December 1929

“I am convinced that through these measures, we have reestablished confidence.” — Herbert Hoover, U.S. President, December 1929.

“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” — Herbert Hoover, U.S. President, May 1930.

“This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan … that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.” — R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

“The Wall Street crash doesn’t mean that there will be any general or serious business depression … For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game … Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.” — BusinessWeek, November 2, 1929

“…despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation…” — Harvard Economic Society (HES), November 2, 1929

“The end of the decline of the Stock Market will probably not be long, only a few more days at most.” — Irving Fisher, Professor of Economics at Yale University, November 14, 1929

“For the immediate future, at least, the outlook (stocks) is bright.” — Irving Fisher, Ph.D. in Economics, in early 1930

“… the outlook continues favorable…” – Harvard Economic Society Mar 29, 1930

If that doesn’t hit home, I hope yesterday’s post from News from 1930 does:

Canada’s banking system offers interesting comparison with the recent epidemic of bank failures here. From 1900 to the present there have been only 4 chartered bank failures in Canada in which depositors were not eventually paid in full. Three of these were before the war, the fourth since; total deposits were $17.5M. In the US there have been 7,000 bank failures since 1914 involving liabilities of about $3B; in the last year alone, 1,345 with total deposits of $865M.

Tuesday, April 7, 1931: Dow 169.72 -2.71 (1.6%)

That doesn’t mean all is well and fine in Canada anymore than it did in 1931, does it? Everyone thinks Canada is protected because 20% down is required for a conventional mortgage. Please read the last paragraphs of my post "Lehman chief warns of more big bank failures" and it should be evident that some mortgages are very leveraged in Canada.

The point is not that doom is coming but rather that complacency is high and this makes a calamitous outcome all the more likely. The Europeans are complacent about their sovereign debt problems. The Americans are complacent about their private sector debt problems. Investors are complacent about the medium-term outlook for stocks and bonds. And policy makers are complacent about how quickly politicized rhetoric escalates. And when [people are complacent they don’t do anything to address underlying problems – issues which often re-appear in a more critical state.

So, returning to the Great Depression comparisons, I am concerned we are on the brink of another credit crisis with the situation in Greece as the trigger. I think of 1931 or 1937 as two specific periods in which complacency ensured a sub-optimal outcome.  Let this not be another.


Breakfast with Dave, 8 Apr 2010 – David Rosenberg, Gluskin Sheff

  1. earnyermoney says


    To this day, I can remember the childhood stories my grandfather told of his experience through the Great Depression. Relatively tough times for all. Surely, there were certain portions of the population that “prospered” during this time. Do you know of any books that shed some light on how people prospered during this difficult time?

  2. cyberseer says

    good post Ed,

    few things to say:

    1) the crisis was very obvious as early as Oct 2007 when all big banks posted crazy losses and the stock market started tanking. People who had been watching closely could see it coming from 2006 at least. People of economic persuasions other than capitalist, like communist and anarchist had been predicting this crisis for decades.

    2) you say you’re afraid another credit crisis might come. I say it is coming for sure. My questions though, is it fair to call it another crisis? Isn’t it the exact same one that the officials have been sweeping under the rug for over a decade and as a result it’s just been growing bigger and bigger and bigger.

    What was done between Oct 2007 and April 2010 is the biggest con ever. The reason the economy seems better is that the gov put more than 10 trillion dollars on the tax payer tab. On top of that the biggest nationalizations as fraction of GDP, the world had ever seen happened with Freddie and Fannie, AIG etc.

    They call it the Great Recession and they say it’s over, but how can it be over when unemployment is still worsening? The BLS is doing all kinds of charades to hide that, but it is obvious.
    Also the production capacity of the country hasn’t been restored. The household wealth hasn’t been restored.

    All that we have is higher GDP number as a result of tax payer money being directly injected into it. What kind of recovery can that possibly be?

    America can only recover if its population gets educated, starts working hard and produces competitive goods.

    None of this is happening. Education levels are plummeting, less and less people work and American goods are known as trash all around the world.

    It’s much more fair to call it the Great Depression 2.0 than saying 1 crisis was overcome, but another one is about to start.

  3. Element says

    Lots of lessons in here for USA, China and EU;

    As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. There were three options – or a combination of three options-available to the Soviet leadership.

    First, dissolve the Eastern European empire and effectively stop barter trade in oil and gas with the Socialist bloc countries, and start charging hard currency for the hydrocarbons. This choice, however, involved convincing the Soviet leadership in 1985 to negate completely the results of World War II. In reality, the leader who proposed this idea at the CPSU Central Committee meeting at that time risked losing his position as general secretary. Second, drastically reduce Soviet food imports by $20 billion, the amount the Soviet Union lost when oil prices collapsed. But in practical terms, this option meant the introduction of food rationing at rates similar to those used during World War II. The Soviet leadership understood the consequences: the Soviet system would not survive for even one month. This idea was never seriously discussed.

    Third, implement radical cuts in the military-industrial complex. With this option, however, the Soviet leadership risked serious conflict with regional and industrial elites, since a large number of Soviet cities depended solely on the military-industrial complex. This choice was also never seriously considered. Unable to realize any of the above solutions, the Soviet leadership decided to adopt a policy of effectively disregarding the problem in hopes that it would somehow wither away. Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely.

    The Search for Loans – The money was suddenly gone. The Soviet Union tried to create a consortium of 300 banks to provide a large loan for the Soviet Union in 1989, but was informed that only five of them would participate and, as a result, the loan would be twenty times smaller than needed. The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources.

    Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits. In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy. …

    … On August 22, 1991, the story of the Soviet Union came to an end. A state that does not control its borders or military forces and has no revenue simply cannot exist. The document which effectively concluded the history of the Soviet Union was a letter from the Vneshekonombank in November 1991 to the Soviet leadership, informing them that the Soviet state had not a cent in its coffers. …

    … One more lesson that is relevant for Russian politics today is that authoritarian regimes, although displaying a façade of strength, are fragile in crisis. In conditions of relative stability, society is prepared to tolerate the lack of real elections. People are prepared to come to terms with this situation as an inevitable and habitual evil. But they will do so only until the country encounters a serious challenge, requiring decisive and tough measures in order to adapt to unfavorable conditions. …

    Source: The Soviet Collapse: Grain and Oil, By Yegor Gaidar (former Acting Prime Minister of Russia, Minister of Economy, and First Deputy Prime Minister of Russia, 1993 to 2003), at American Enterprise Institute for Public Policy Research, April 2007. (.PDF at

    What appears to be a very strong superstate can be gone in five years, when you don’t address root causes of systemic failure, but simply sweep it under the carpet, then debase the currency and borrow what you can’t realistically payback.

    In 1985, the Soviets had just finished assembling an estimated 40,000 tactical and strategic nuclear warheads. This was about 10,000 more than the US had at any one time. Then only 4-years later they were begging food for oil from the West. So much for assured strategic military and geopolitical power, and the suppression, removal or reversal of Human Rights to attain and maintain that power.

    The combination does not last.

    The current superstates are no different and the parallels above with regard to the USA, China and the EU are evident. Each of these superstates is drifting in its own way and at its own pace towards economic and political failure, and dissolution of national and block power. The soviets found their giant fleets and fighters didn’t amount to super state power, when you can’t afford to start their power plants anymore. In the end the inert subs, cruisers and missiles looked pathetic. US, China and EU are all some distance from this outcome, but each is accelerating toward it.

    We may not see any orderly ‘debt Jubilee’, but I think we will see a disorderly equivalent, global mass-default in an effectively synchronous manner. The mass zeroing of most balance sheets.

    It will become clear the global system is failing-not just single countries. Not that I think the global system is necessarily flawed or that the USD or any other currency is somehow intrinsically stuffed beyond future utility. It’s all just been radically misused and abused beyond the point of normal recovery processes short of a complete collapse and reboot. I don’t buy the idea that market capitalism is dead, or even going to change much, or fiat currency is finished, or that gold will preserve wealth and value (blah blah).

    This mass defaulting will become ‘preferable’ (no matter what anyone thinks), and indeed the only ‘acceptable’ way out of a deepening global debt crisis. The risk of a major war is going to be high as this occurs, and boy, did we earn that risk. The quicker the fix the less the risk.

    We know from history, and particularly from the Soviet history example, that what’s currently politically impossible or unthinkable, quickly becomes actual, when choosing a viable course of action doesn’t work anymore, because all the available options are worse than doing nothing. Doing nothing was exactly what the Soviets chose, and is exactly what many countries, facing the same bad choices, are choosing right now.

    It doesn’t take long from here.

    Hence global political paralysis, with smiles and handshakes to cameras, and ineffective inconclusive meetings with swelling statements, whilst continually sweeping everything back under an increasingly rambunctious carpet.

    For example; the recent German 1.18 billion Euro fund to finance future German Bank emergencies. Convert 1.18 billion Euro into $USD, then ask yourself, how long you think it would take the US FDIC to blow through that trifling amount?

    This is political window dressing and is happening everywhere, and when the defaults do come the scale of the inadequacy will be seen for what it was, a bluff, a confidence boosting delay tactic.

    So either the taxpayer is put on the hook (unacceptable) or the entire developed world defaults (the best bad choice), because banks actually can not bail themselves out. And many taxpayers would rather destroy both the banks and the politicians than to sustain either. They will withdraw their labour for their bank accounts will no longer be accessible, and they will storm banks Govt departments and Parliaments. We saw it yesterday in central Asia, a bolt of lightning in what we thought was blue sky. Do you think their balance sheets effectively went to zero?

    There will come a need for suppression of unruly civil elements for orderly constitutional government to allow emergency rationing. But you won’t be alarmed because it’s in Greece. But when it happens in a US state?

    When this happened to the Soviets I remember seeing video of supermarkets where there was absolutely nothing on shelves and they couldn’t bake enough bread most days, and there was often no electricity or gas. They were heading for famine, and in parts of the military, soldiers were skin and bone and forced to steal food and electricity.

    There really is no backstop no safety net, so do we want order or disorder to prevail, as this unfolds?

    If we want things to be orderly (and you definitely do) what are we prepared to accept to maintain orderliness through a multi-year global debt default crisis? If politicians wield power by decree and rifle butts, for civil suppression, I think we are in for a very disorderly deleveraging.

    The only thing I see that is compatible with maintaining civil order and constitutional continuity is an MMT-style “Job Guarantee”, as described by Bill Mitchell. If something a lot like that does not emerge rather quickly, once mass defaults snowball, I think we will see a lot of chaotic predicaments that can’t be resolved, and are not reversible.

    Some things are reversible and some things are not, and the big things that are not reversible we must try to avoid, else what does eventuate from irreversible processes will be a totally different and unfamiliar critter from before, and you’re along for the ride.

    It took the Russians about 15 years to get back on their feet, but I think things will not be as bad, and most countries can recover faster. But the longer it takes the greater the risk of wars, and we know there are many groups just itching to disburse a dose of warfare and take advantage. The other question is, how long will it take before there are new banks issuing loans again?

    In peace or war or in macro-economics or geopolitics those that can take, do, and generally always do.

    The “can take” part within that sentence is what divides us from order and disorder.

    If a Govt can manage the “can take” part, that society will tend to remain orderly. The easiest way to achieve sustained order is by removing the need to “take” in the first place. Most of the posting and comment on econo-blogs today is due to the systemic failure of Govt’s to prevent the “can take”, and a realisation that disorder will probably result. This “can take” part has in many ways already failed, and the total failure to prosecute it means it continues.

    That’s disorder spreading.

    Is it reversible?

    If you looked at the rampaging tale of disorder recorded within a graph of the US Federal Reserve Balance Sheet for the past three years … ?

    One of many reasons to expect a disorderly ‘debt Jubilee’.

  4. Mihai Radu says


    great post, but the credit markets are showing us a different story that what you and your cited authors are trying to paint. If you want to make a ccomparison with the Great Depression, by all means: but is not the most accurate. As a matter of fact there have been no more no less then 5 other instances that will be a closer match o what happened in the last 3 years: 36-38, 68-70, 73-74, 76-80, 00-02. Anyway, a comparison with the Great Depression still has its own merit, but, based on what the credit markets and the global economies indicators are showing us, we are somwhere like in Q2 1933, which is giving us a bit different story than being in 1930 or 1931. I wrote to David Rosenberg a year ago trying to explain him that the credit markets are telling a different sotry than what he was paiting back then – he didn’t buy into my arguments and continue to remain bearish. Only after 9 months he realized that my suggestion (to play at least a leveraged postion on high yiekld market) was a good advice and he just started recommending junk bonds. Conclusion? I will let you think for yourself

    1. Edward Harrison says

      Comparisons to the Great Depression are always going to be flawed as I said at the outset. You’re right about now being different than 1931 in substantive ways, one reason we are now in a technical recovery.

      I disagree, however, that those latter periods are ‘better’ matches because none of hem were credit crises with debt deflationary implications like we see today. My view is that we are poised for a cyclical upturn predicated on asset price reflation at best. This is another exercise in kicking the can down the road. Eventually, the debt loads are going to force themselves into the limelight. Unfortunately that worse is coming.

      1. Mihai Radu says

        Ed – I think we are on the same boat. Myself too I think we are in a technical recovery that will not last too long (maybe 2-3 years from now). I also think like you, that we are in a LONGER deflationary enverinoment. But being LONGER it should take another alomost 10 years. So, yes – I agree with most of what you said. Is just that you have to remember that on every episode that I mentioned (those 5 crisis) was acompanied by a credit deflation – at a little bit smaler scale but for sure it was there. And our current credit deflationary cycle still looks more similar to the one in 73-74 than the one in 29-32. IS not only the credit markes – but also the FED and other central banks and governements policies are extremelly different than in 29-32.
        I do believe that we still have in front of us (within the next 8-9 years) another 2 cyclical bear markets (within a secular bear market). And, probably the next one might be bigger then the one we just seen. But for the time being we should just dance.

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