Skip to comments.Is This A Second Great Depression – Or Could It Become Something Worse?
Posted on 08/18/2011 10:26:58 AM PDT by blam
Is This A Second Great Depression Or Could It Become Something Worse?
By Simon Johnson
August 18, 2011
With the US and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?
The easy answer is no the main features of the Great Depression have not yet manifest themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the nineteenth century, particularly if presidential election-year politics continue to head in dangerous direction.
The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.
First, output dropped sharply after 1929, by over 25 percent in real terms in the US (using the Bureau of Economic Analysis data, from its website, for real GDP, using chained 1937 dollars). In contrast, in the U.S. we had a relatively small decline in GDP after the boom peaked. According to the BEAs latest online data, GDP peaked in the 2nd quarter of 2008 at 14.4155 trillion and bottomed out in the 2nd quarter of 2009 at 13.8541 trillion; a decline of about 4 percent.
Second, unemployment rose above 20 percent in the US during the 1930s and stayed there. We experienced record job losses for the post-war US, with around 8 million jobs lost. But unemployment only briefly touched 10 percent (in the 4th quarter of 2009; see the Bureau of Labor Statistics website). Even if we include the highest estimates which include people discouraged from looking for a job, thus not registered as unemployed the jobless rate reached around 16-17 percent. Its a jobs disaster, to be sure, but not the same scale as the Great Depression.
Third, in the 1930s the credit system shrank dramatically. In large part this is because banks failed in an uncontrolled manner largely as a part of panics that led to retail depositors running to take out their funds. The creation of the Federal Deposit Insurance Corporation (FDIC) put an end to that kind of run and, despite everything, the FDIC has continues to play a calming role. (Disclosure: Im on the FDICs newly created systemic resolution advisory committee, but I dont have anything to do with how they handle small and medium-sized banks.)
But experience at the end of the 19th century was also quite different from the 1930s not as dramatic, yet very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but rather agriculture a different play on real estate.
There were booming new technologies in that day, including the stories we know well around the rapid development of transportation, telephones, electricity, and steel. But falling agricultural prices kept getting in the way for many Americans. With large debt burdens, farmers were vulnerable to deflation (a lower price level in general or just for their products). And prior to the big migration into cities, farmers were a mainstay of consumption.
According to the NBER, falling from peak to trough in each cycle took 11 months in 1945-2009 but twice that amount of time during 1854-1919. The longest decline on record, according to this methodology, was not during the 1930s but rather during October 1873 to March 1879 more than 4 years of economic decline.
In this context, it is quite striking and deeply alarming to hear a prominent Republican presidential candidate attack Ben Bernanke for his efforts to prevent deflation. Specifically, Texas Governor Rick Perry said earlier this week, referring to Mr. Bernanke,
If this guy prints more money between now and the election, I dunno what yall would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion. In the nineteenth century the agricultural sector, particularly in the west of the country, favored higher prices and effectively looser monetary policy. This was the background for William Jennings Bryans famous cross of gold speech in 1896; the gold to which he referred was the gold standard, the bastion of hard money and tendency towards deflation favored by the east coast financial establishment.
Populism in the nineteenth century was, broadly speaking, from the left. But now the rising populists are from the right of the political spectrum and they seem intent on intimidating monetary policy makers into inaction. We see this push both on the campaign trail and on Capitol Hill for example in interactions between the House Financial Services Committee, where Ron Paul chairs the monetary policy subcommittee, and the Federal Reserve.
The relative decline of agriculture and the rise of industry and services over a century ago was long believed to make the economy more stable as we moved away from cycles based on the weather and global swings in supply and demand for commodities. But financial development creates its own vulnerability as more people have access to credit for their personal and business decisions. Add to that the rise of a financial sector that has proved brilliant at extracting subsidies that protect against downside risk and hence encourage excessive risk-taking. The result is an economy that is at least as prone to big boom-bust cycles as what existed at the end of the nineteenth century.
The rise of the tea party has taken fiscal policy off the table as a potential counter-cyclical instrument; the next fiscal moves will be contractionary (probably more spending cuts), irrespective of whether jobs start to come back or not. In this situation, monetary policy matters a great deal and Mr. Bernankes focus on avoiding deflation and hence limiting the problems for debtors does not seem inappropriate (for more on Mr. Bernanke, his motivations and actions, see David Wessels book, In Fed We Trust).
Mr. Bernanke has his flaws, to be sure. Under his leadership, the Fed has been reluctant to take on regulatory issues continuing to see the incentive distortions of too big to fail banks as somehow separate from monetary policy, its primary concern. And his team has consistently pushed for capital requirements that are too low relative to the shocks we now face.
And the Federal Reserve itself is to blame for some of the damage to its reputation although it did get a major assist from Treasury in 2008-09. There were too many bailouts rushed over weekends, with terms that were too generous to incumbent management and not sufficiently advantageous to the public purse.
But to accuse Mr. Bernanke of treason for worrying about deflation is worse than dangerous politics. It risks returning us to the long slump of the late 1870s.
More accurately (IMHO), the overuse and misuse of fiscal policy lead to the rise of the TEA party.
Fiscal policy has not been used as a “counter-cyclical instrument”, since the idea was first posited by Keynes. It's only been used to “stimulate”, by increasing spending — it's never been used to prevent bubbles, on the other side of the economic cycle.
What's really taken fiscal policy (of the “spend more now, and forever” sort) off the table are unsustainable debts, in most of the western world.
If we don't do this, then we are historically in for another seven years of deflation/depression - which will end with a major international war to reintroduce inflation back into the world economies.
Sound crazy? It's the story that history tells us...
It won't matter whether the Republicans, Democrats, or Republicrats are in charge. They will all seek to introduce more debt spending in an effort to cover all of the debt default occurring in our nation.
To not do this would be to make our deflationary spiral very visible to all - and in a worst case scenario could lead to anarchy in the streets.
A best case scenario would be a huge loss of jobs and an enormous number of bankruptcies - followed by war and further servitude to the international banks.
A depression can only exist with a downside followed by an upside. There is not going to be an upside. The Globalist Banksters are transforming America into a PERMANENT Third-world pit. The armed Middle-class is the only impediment to their One World Government and they are going to get rid of us through economic warfare.
Keynes was wrong ... John Adams was right.
The market will always adjust ... laissez faire.
But the fools in power now keep thinking their interventions will work — they definitely won’t now that all the magic bullets have been shot. QE ... well that will only make the worthless paper money even more worthless. We will now be forced to let the markets adjust on their own and it won’t be pretty.
Monetary and Fiscal intervention only kicked the can down the road, allowing things (unemployment, housing gluts) to worsen in the process.
Not choosing Door number Two --- a huge loss of jobs and an enormous number of bankruptcies - followed by war and further servitude to the international banks.
Thinking Door number Two will rule the day though.
You cannot "extract" subsidies from the government. They are given as governmental policy. The blame for "too big to fail" rests primarily with the federal government, not with "those evil, greedy people on Wall Street". The author also fails to consider how governmental policy eliminated downside risk under-capitalized for home buyers.
Never had a problem finding a job in my entire life.
Been ‘changed’ (emp. to unemp) for over 2 yrs now. Can’t find squat for work.
It’s more than a Great Depression, that’s only the economic situation. Because of the astronomical undfunded liabilities, we will be witnessing the collapse of the welfare state, doesn’t matter what the Keynesians say or do. That means a lot of angry people.
I am arguing that this is a new Civil War I, driven by debt bondage (slavery). It won’t be as bloody as CWI, and some of the territory is cyberspace, but it will last as long or longer and be just as earthshaking.
Economic Depression ensures a civil war (at least a Cold Civil War) that we don’t need to start or incite because we are already in it - progressives wanted an economic and social revolution and now they have it, it’s their baby. In fact, I wrote a whole book on this subject, Surviving Civil War II.
Now, think about the bad boys in Bologna University who are going to go big time with LENR devices in late October.
If true you will see 100% of the current energy industry which employs millions of people going into a fall over a long period of time due primarily to improved technology.
You can even make the argument that industrial production declined in the late 1920s into the 1930s primarily due to the installation of electric motor in place of pully power in factories ~ it took a good long while to do that putting the entire pully power sector into a long slow decline.
This time, though, if LENR is for real you'll see a boom in SPACE related industry as the Oort Cloud turns into mineable property!
I didn’t write a book on the subject, but I agree with your take, that the “entitlement mentality” of today means whatever happens will be “worse” in many ways. Erosion of the work and honesty ethic results in situations worse than being poor; e.g., being beset by thugs who believe they are entitled.
I didn’t think Bernanke was being “accused of treason” for worrying about deflation, but for the actions he took that led to a worry about deflation, among other things.
True. It's impossible to separate monetary policy from politics.
"From 1987 to the end of his term, Greenspan inflated the money supply nonstop. Interest rates, while occasionally moved slightly upward by Greenspan's Fed, fell again and again with Greenspan always claiming that there was neither a stock market bubble (as he did in 1999) nor a housing bubble (as he did in 2006)."
The biggest part of the 1930’s Depression, after the Stock Markets collapse, was an AGRICULTURE Depression, brought on by years of midwest drought.
Remember the Dust Bowl?
Today, Ag is about the only stable sector we have left, even if it is being buoyed by largely-subsidized Corn Ethanol production, and 47 million on Food Stamps.
People gotta eat, no matter the economy.
One hand washes the other.
Indeed, I would not be surprised that it will be agriculture that leads the way out of the recession.
That would be my guess as well.
Why would those that hold the claims on our future labor want things to fall into anarchy. It would be better to perform an economic reset by seeking to keep people with a tiny glimmer of hope.
Or could it become something worse? Like Obamageddon?
History has shown us many times that inflation will be reintroduced back into the economy at some point through the best inflation-causing agent there is: world war.
Patriotism will prevail as the citizens don't stop to realize that the international banks are funding all sides of the war effort.
Hitler was a nobody until money sources became available for his cause.
Has anyone stopped to wonder why there are all of these flare-ups in Northern Africa right now? Who's funding those that previously couldn't affort to fight? Why are those tensions being stoked?
My glass is half empty.
This will be far worse..... and it may never end.
People of those days, so long ago, were not as educated, but they were very resilient folks. They suffered, but they knew how to get by with sacrifice and working together, over time, to get out of the mess they were in.
For the most part, we are a much different people, not all, but most.
Leading up to the Great Depression, my great grandfather was a multi-millionaire.
He made the bulk of his wealth in cotton. While he did lose much due to the Depression, he used what money he had left to help his employees survive those years.....they in turn brought him back to wealth. I don’t think we will see that kind of thing this time around.
Unlike those days, we won’t be trying to help each other, we’ll be trying to kill each other.
Of course, I do believe that conservatives, collectively and individually, are strong willed people and will fair the best in the dark times coming, but we will also suffer.
I hope I am wrong and that we can last until 2013.... and be pulled from the Obama ashes by a true conservitive leader that we can help to straighten out this mess.
I tend to prepare as best I can for the worst...... and then celebrate when I am proven to be wrong. ;>)
What was the size of nongovernmental GDP in 2008 compared to the size of nongovernmental GDP in 2011?
So this fellow thinks printing large amounts of money with nothing to back it is the way to go. Otherwise we will have deflation. Ok.
The first depression was an accident brought about by a perfect storm of circumstances and flawed monetary policies. This one is completely deliberate.
When/if she does go she will go down fast and big. Way too much debt to even hope to stop runaway inflation because you know if the Dems or a Rino is in power they will just print more money until it is just useless paper.