Great Depression II averted?

image Kevin H. O’Rourke of Trinity College, Dublin and Barry Eichengreen of Berkely, California have updated their running score – “A Tale of Two Depressions”. Encouragingly the global economy is showing some signs of recovery, but more importantly what we’re not seeing is a 1930-31 style collapse.

  • kensei

    The difference being, of course, the vast amount of money pumped via government through both fiscal and monetary channels.

    Though that graph has a bit to go yet, and there’s always the Japan-style flat option.

  • Mack

    Yep – and vastly lower interest rates (depending on whether you mean only QE by monetary channels), and the aversion of systemic bank failures (note to Fianna Fail – not every bank poses systemic risk if it fails).

  • joeCanuck

    Too soon to tell. Look at the rise between 20 and 24 months back in the 30s. Very similar to the present rise.

  • shorty

    The graph in the main post refers to the level of world industrial production which is difficult to compare given the amount of industrialisation that has occured in many countries, especially post-WW2 and even in recent recent years with the various Asian tiger economies, China being a prime example.

  • Pigeon Toes

    . “Encouragingly the global economy is showing some signs of recovery, but more importantly what we’re not seeing is a 1930-31 style collapse.”

    Say it often enough and loud enough…

  • greenflag

    I would’nt hatchet any counts yet at least until they’ve chickened 😉
    There’s a fascinating documentary coming out re the beginning of this crisis and how the refusal to bail out Lehman’s finally unearthed the rotten core of the shadow banking/mortgage world of sub prime mass fraud and legalised as well as non legalised thievery 🙁 I’ll post the name when my subconcious recovers 😉

    It looks like the Germans & French are recovering faster than what was otherwise expected – seemingly due to the lack of a property melt down in both those countries . On RTE there was an interview with former Swedish finance minister Lundgren who was offering sound advice . Why did’nt Mr Lenihan have a word with the Swedes before he started the mass bail out and started shackling irish taxpayers with the bill for bank and mortgage company malfeasance ?

    Any eejit should know that if banks realise that they will be in extremis be bailed out by the Government then they will continue to give out loans to people who can’t afford them and particularly so when those loans are not being carried by said bank but sold off as guaranteed ‘investment ‘ bonds to Norwegian municiplaities and small towns in the Midwest of the USA ?

    We now hear that Bernard Madoff was considered as a possible Secretary of the Treasury under the Bush regime but then so also was Ken Lay . I’m sure it won;t be long before we read that top Pfizer executives were considered for the Health Secretary position 🙁

    While the situation is improving there is little sign of a major resumption of consumer demand in either the UK or USA . And as their economies are very dependent on that demand to resume growth there is still an iffiness about the present so called recovery . The Stock market in October should prove ‘exciting’ .

  • Way too soon to tell. As has been said before there is the possibility of a Japanese 1990s style steady state situation or, even worse, a dead cat bounce. Another point we need to factor in is the sectoral breakdown of the various major economies. In the 1930s it was the case that industry made up the majority of GDP growth in major economies such as the US, the UK and Germany. In the US and the UK services, and in particular financial services, now contribute the lion’s share of overall GDP growth because of their predominance as a sector.
    It is telling that Germany and Japan are now out of recession and they are also major exporters of manufactured commodities. Countries like Spain and Ireland that relied on property bubbles to drive their growth rates are in an absolutely dire state because they have a large gaping hole in their economies. For the UK, financial services in the City of London was one of the major engines of growth and we all know how that worked out. It appears, therefore, that economies that drove their growth by inflating speculative bubbles in property or finance to cover for an absence of any sustainable means of generating economic growth are in deep, deep trouble. They relied for too long on ever-increasing asset values and now the assets are worth a whole lot less.
    This is symptomatic of a wider trend in many advanced capitalist economies. Ever since the 1970s the rate of profit in traditional industries in the UK and the US has been falling so there has been a marked decline in industry relative to services. Deindustrialisation has created economies reliant on finance and other systems based not on the production of real and measurable quantities of commodities for profit but on generating profit from speculating on assets (houses for example) and more abstract asset-based securities (CDOs and the like). This has blown bubbles that have inevitably popped; the overheated UK economy in the late 80s and early 90s, Asia in 1998, the dotcom boom, the recent housing boom and the subprime bonanza. It remains to be seen how the system will get out of this current mess. My guess is that the search will be on for the next bubble to blow, perhaps carbon trading or something like that. Then we’ll get another inevitable bust and we’ll be back to square one.

  • Greenflag

    nineteen sixty seven,

    Can’t disagree with your overall historical scenario above apart from your final comment ‘back to square one ‘.

    It’s accepted now that of all the major economies i.e the USA, Germany, Japan, France , and the UK the UK will be the ‘last ‘ to climb out of those recession . There are essentially three reasons for this ‘last place ‘ status – one stemming from the de industrialisation of the UK which progressed further and faster than Germany and France over the past several decades, second the UK’s over reliance on financial services and services generally picking up the slack from the loss in manufacturing and the third was the property bust bubble .

    On top of the above is the fact Britons and even more Americans are in consumer debt up to their eyeballs while this is much less the case in Japan, France or Germany .

    What we are seeing in the anglophone west (Ireland included ) is a rapid emisseration -relative impoverishment – asset depreciation by large sections of the lower middle and working classes and this is now even extending into the middle class whose ‘asset’ value is dependent on the asset and savings values of those below them in the economic pyramid not falling any further .

    I read now that in the USA almost one third of foreclosures are now no longer due to subprime mortgages but to those who were ‘prime ‘ i.e had good credit -decent paying jobs and are now out of work . As most of these people’s assets were tied up in property (their house ) and retirement savings they are now the new face of the American recession .While unemployment is ‘officially at almost 10% because of the way statistics are compiled according to some researchers the unemployment rate is actually closer to 15% just 10% below the 1930’s Depression .

    So there may be no square one to go back to or more accurately a very much changed one . The lost jobs of the past couple of decades are not coming back and the new jobs (if any) being created are lower paid -non unionised and many are not even full time .

    For the bottom third of western societies what lies ahead is economic and social emisseration over the next decade and further ahead . How long the political structure can be maintained as is under such circumstances is and will be an issue .

  • Mack

    Greenflag –

    So there may be no square one to go back to or more accurately a very much changed one . The lost jobs of the past couple of decades are not coming back and the new jobs (if any) being created are lower paid -non unionised and many are not even full time .

    Ronan Lyons had a good article the other day about domestic demand and export growth in the Irish economy. The last 7 or 8 years were all about increased domestic demand (fuelled by cheap borrowed money), exports in Ireland have held up pretty well (we actually grew exports while Japan and Germany collapsed). But exports have a much smaller impact on the economy than domestic demand.

    Unfortunately, because that demand is gone / unsustainable (we can’t keep borrowing, the consumer is maxed out) – we’re back to export growth. Those will be well paid jobs, and they really do need to be high skilled jobs. It’s just the days of separating fools from their newly borrowed cash with rip-off republic prices and ludicrous union negogiated wage levels are gone. If we want money in the aggregate – we have to earn it, not borrow it.

  • Mack

    Incidentally, only 21% of private sector workers are Union members..

  • Mack
  • Driftwood

    A foretaste of what was to come:
    http://www.amazon.co.uk/Enron-Smartest-Guys-Room-DVD/dp/B000GJ0NT8/ref=sr_1_1?ie=UTF8&s=dvd&qid=1252074145&sr=1-1

    All those students in the UK and Ireland graduating with their media studies degrees should be a wee bit worried methinks.

  • Dewi

    My favourite leading indicators

    Wobbling at best – Steel scrap prices.

  • joeCanuck

    All those students in the UK and Ireland graduating with their media studies degrees should be a wee bit worried methinks.

    No they can improve their communication skills.

    “Will you have fries with that?”

  • Greenflag

    Mack ,

    ‘If we want money in the aggregate – we have to earn it, not borrow it. ‘

    I don’t disagree but I was looking at more than just the Irish picture . We are a ‘special ‘ case given our recent rapid growth and our first (hopefully last ) property bubble .

    As for the Irish consumer being maxed out this is no different for the USA or the UK but the impact on the world economy of the latter two being maxed out is critical for recovery . Which is why the British are a bit upset at the Germans /French for not printing more stimulus money . The Germans of course have their own ‘demons’ to deal with when it comes to printing paper money.

    No I’m thinking along the lines that the entire system particularly the Anglophone economies bar Canada is maxed out and a new as of now unseen paradigm is on it’s way hastened along by the rise of the East Asian economies and capital flight to those parts of the world where labour can be just as skilled for half or quarter the price .

    I’ve no doubt there will be a recovery or at least that’s what it will be called . Whether it will be sustainable is another question.

  • Greenflag,

    Sorry, that was a rather careless comment of me. I agree with you totally; there can never be an exact replication of what went before, especially given the profound nature of this crisis. What I meant was that the system of capitalist accumulation would be back to square one ie. trying to find profitable arenas in which to invest and produce. As for the rest of us it will be very difficult to create decent jobs with good pensions in the future, there has just been so much economic decay.