[OPE] World depression - worse than the last one

From: GERALD LEVY <gerald_a_levy@msn.com>
Date: Wed Jun 10 2009 - 16:45:03 EDT

cc list deleted. Apologies if you already received a copy.
In solidarity, Jerry

> Date: Wed, 10 Jun 2009 22:28:11 +0200
> From: pbond@mail.ngo.za
>> Subject: World depression - worse than the last one
> (Really interesting comparisons - especially graphs, attached - on the
> extent to which overaccumulation pressures have hit the productive
> sector, not just financial bubble bursts. The punchline: "Our Great
> Recession is every bit as global, earlier hopes for decoupling in Asia
> and Europe notwithstanding. Increasingly there is awareness that events
> have taken an even uglier turn outside the US, with even larger falls in
> manufacturing production, exports and equity prices.")
> http://www.voxeu.org/index.php?q=node/3421&ref=patrick.net
> A Tale of Two Depressions
> Barry Eichengreen Kevin H. O’Rourke
> 4 June 2009
> This is an update of the authors' 6 April 2009 column comparing today's
> global crisis to the Great Depression. World industrial production,
> trade, and stock markets are diving faster now than during 1929-30.
> Fortunately, the policy response to date is much better. The update
> shows that trade and stock markets have shown some improvement without
> reversing the overall conclusion -- today's crisis is at least as bad as
> the Great Depression.
> 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.
> The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are
> displayed below; note the rebound in Eastern Europe.
> Updated Figure 1. World Industrial Output, Now vs Then (updated)
> Updated Figure 2. World Stock Markets, Now vs Then (updated)
> Updated Figure 3. The Volume of World Trade, Now vs Then (updated)
> Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country
> average)
> New Figure 5. Industrial output, four big Europeans, then and now
> New Figure 6. Industrial output, four Non-Europeans, then and now.
> New Figure 7: Industrial output, four small Europeans, then and now.
> Start of original column (published 6 April 2009)
> The parallels between the Great Depression of the 1930s and our current
> Great Recession have been widely remarked upon. Paul Krugman has
> compared the fall in US industrial production from its mid-1929 and
> late-2007 peaks, showing that it has been milder this time. On this
> basis he refers to the current situation, with characteristic black
> humour, as only “half a Great Depression.” The “Four Bad Bears” graph
> comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had
> wide circulation (Short 2009). It shows the US stock market since late
> 2007 falling just about as fast as in 1929-30.
> Comparing the Great Depression to now for the world, not just the US
> This and most other commentary contrasting the two episodes compares
> America then and now. This, however, is a misleading picture. The Great
> Depression was a global phenomenon. Even if it originated, in some
> sense, in the US, it was transmitted internationally by trade flows,
> capital flows and commodity prices. That said, different countries were
> affected differently. The US is not representative of their experiences.
> Our Great Recession is every bit as global, earlier hopes for decoupling
> in Asia and Europe notwithstanding. Increasingly there is awareness that
> events have taken an even uglier turn outside the US, with even larger
> falls in manufacturing production, exports and equity prices.
> In fact, when we look globally, as in Figure 1, the decline in
> industrial production in the last nine months has been at least as
> severe as in the nine months following the 1929 peak. (All graphs in
> this column track behaviour after the peaks in world industrial
> production, which occurred in June 1929 and April 2008.) Here, then, is
> a first illustration of how the global picture provides a very different
> and, indeed, more disturbing perspective than the US case considered by
> Krugman, which as noted earlier shows a smaller decline in manufacturing
> production now than then.
> Figure 1. World Industrial Output, Now vs Then
> Source: Eichengreen and O’Rourke (2009) and IMF.
> Similarly, while the fall in US stock market has tracked 1929, global
> stock markets are falling even faster now than in the Great Depression
> (Figure 2). Again this is contrary to the impression left by those who,
> basing their comparison on the US market alone, suggest that the current
> crash is no more serious than that of 1929-30.
> Figure 2. World Stock Markets, Now vs Then
> Source: Global Financial Database.
> Another area where we are “surpassing” our forbearers is in destroying
> trade. World trade is falling much faster now than in 1929-30 (Figure
> 3). This is highly alarming given the prominence attached in the
> historical literature to trade destruction as a factor compounding the
> Great Depression.
> Figure 3. The Volume of World Trade, Now vs Then
> Sources: League of Nations Monthly Bulletin of Statistics,
> http://www.cpb.nl/eng/research/sector2/data/trademonitor.html
> It’s a Depression alright
> To sum up, globally we are tracking or doing even worse than the Great
> Depression, whether the metric is industrial production, exports or
> equity valuations. Focusing on the US causes one to minimise this
> alarming fact. The “Great Recession” label may turn out to be too
> optimistic. This is a Depression-sized event.
> That said, we are only one year into the current crisis, whereas after
> 1929 the world economy continued to shrink for three successive years.
> What matters now is that policy makers arrest the decline. We therefore
> turn to the policy response.
> Policy responses: Then and now
> Figure 4 shows a GDP-weighted average of central bank discount rates for
> 7 countries. As can be seen, in both crises there was a lag of five or
> six months before discount rates responded to the passing of the peak,
> although in the present crisis rates have been cut more rapidly and from
> a lower level. There is more at work here than simply the difference
> between George Harrison and Ben Bernanke. The central bank response has
> differed globally.
> Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
> Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan,
> St. Louis Fed, National Bank of Poland, Sveriges Riksbank.
> Figure 5 shows money supply for a GDP-weighted average of 19 countries
> accounting for more than half of world GDP in 2004. Clearly, monetary
> expansion was more rapid in the run-up to the 2008 crisis than during
> 1925-29, which is a reminder that the stage-setting events were not the
> same in the two cases. Moreover, the global money supply continued to
> grow rapidly in 2008, unlike in 1929 when it levelled off and then
> underwent a catastrophic decline.
> Figure 5. Money Supplies, 19 Countries, Now vs Then
> Source: Bordo et al. (2001), IMF International Financial Statistics,
> OECD Monthly Economic Indicators.
> Figure 6 is the analogous picture for fiscal policy, in this case for 24
> countries. The interwar measure is the fiscal surplus as a percentage of
> GDP. The current data include the IMF’s World Economic Outlook Update
> forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded
> after 1929 but only modestly. Clearly, willingness to run deficits today
> is considerably greater.
> Figure 6. Government Budget Surpluses, Now vs Then
> Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.
> Conclusion
> To summarise: the world is currently undergoing an economic shock every
> bit as big as the Great Depression shock of 1929-30. Looking just at the
> US leads one to overlook how alarming the current situation is even in
> comparison with 1929-30.
> The good news, of course, is that the policy response is very different.
> The question now is whether that policy response will work. For the
> answer, stay tuned for our next column.
> References
> Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In
> progress.
> Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and
> Monetary Contraction in the Great Depression: An Analysis by Simple
> Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton:
> Princeton University Press.
> Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria.
> 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.
> Paul Krugman, “The Great Recession versus the Great Depression,”
> Conscience of a Liberal (20 March 2009).
> Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20
> March 2009).
> This article may be reproduced with appropriate attribution. See
> Copyright (below).

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