FT: The recession tracks the Great Depression

[Sam2]

"Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us."

http://www.ft.com/cms/s/0/b31c06a2-5a7a ... abdc0.html

Sam

[uncleJohn]

this is not a personal attack on the poster---just an observation about the article:

-so let me get this straight---they picked a starting point that had as close a correlation to what they wanted to "prove" in their paper?

-and what are they trying to say/prove? are they trying to predict something?

My guess is that if they move the April 2008 starting point back about 9-12 months they look awfully silly and the stock market probably has already bottomed out. I certainly would NOT base ANY investment decisions on this article.

I can't believe that people actually get paid for this type of analysis.

[SamB]

I can't believe that people actually get paid for this type of analysis.

There is a whole industry that gets paid for this type of stuff. In hindsight, I definitely chose the wrong career.

The other Sam

[ziggy29]

I can't believe that people actually get paid for this type of analysis.

Sadly, when it comes to financial news and analysis, greed and fear -- emotional investing -- get attention. In fact, its when markets are most crazy and volatile when CNBC gets its highest ratings.

[Rodc]

They need to compare to other recessions as well, how do we know it does not track them all pretty well? (ie nothing all that special with this one?)

[bobcat2]

I do not understand the criticisms of this article by Martin Wolf. Here is a quote from the article.

Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words (see charts).* In their paper, Profs Eichengreen and O’Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted.

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event.”

Yet what gave the Great Depression its name was a brutal decline over three years. This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated.

Looking at global (not just US) economic and financial data for the first 12 months of the global Great Depression, starting in June 1929, and comparing the corresponding data for the first 12 months of the current global recession, starting in April 2008, the data on global output and trade are frighteningly similar. What is different is government monetary and fiscal policy globally has been much more responsive to the crisis this time.

Profs Eichengreen and O’Rourke describe the contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent. Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher.

The charts at the bottom of Wolf's article show all this pretty clearly.

And here is an earlier discussion at Diehards comparing the current US recession to the average of US post WWII recessions. Cutting to the chase, this recession is a lot worse than the average post WWII US recession.
http://www.bogleheads.org/forum/viewtop ... een#446443

What may be throwing many people off is that during the Great Depression the US economy was arguable the hardest hit in the world. This time around many national economies are doing far worse than the US economy.

Bob K
(Edited twice for grammar.)

[jimdigriztn]

I do not understand the criticisms of the article.

I think it is probably denial.

Jim

[preserve]

I can't believe that people actually get paid for this type of analysis.

There is a whole industry that gets paid for this type of stuff. In hindsight, I definitely chose the wrong career.

The other Sam

Funny. That is only type of analysis you get paid for!

Who gets paid to be honest?

[ziggy29]

I think it is probably denial.

I think you're wrong.

[jimdigriztn]

I think it is probably denial.

I think you're wrong.

OK. What other 20th or 21st century recession, in your view, is a closer parallel to the current one than the Depression?

[ziggy29]

OK. What other 20th or 21st century recession, in your view, is a closer parallel to the current one than the Depression?

Not the point, really. The point is that I have no clue where this is headed. Articles like this have scare value that helps make these predictions and gloomy comparisons more likely to repeat if enough people get spooked by them.

I don't think the previous events of 1929-32 -- with a sample size of ONE -- provide us any meaningful predictive ability when reading today's tea leaves.

I'm not saying it ain't gonna happen. I'm just saying I reject the presumed implications being made in the article that we are going to continue heading down Highway '29.

[uncleJohn]

I still believe the article adds absolutley zero value other than conversation/observation.

How do they know what the future holds based on the actions taken or not taken today, as they imply? As if there is a clear roadmap that says if x happens then do y.....

My best guess is the equity/fixed income markets have already incorporated this into current prices. And who knows what consequences lie ahead with the actions they are taking today?.....certainly not the authors.

Just another article telling us something that has already happened....in a supposedly more sophisticated way.

[jimdigriztn]

I don't think the previous events of 1929-32 -- with a sample size of ONE -- provide us any meaningful predictive ability when reading today's tea leaves.

On that we agree. There are other indicators which give us an idea where this is headed, though, but not with enough specificity for making profit-making portfolio changes. The only thing they tell us, in my view, is to batten down the hatches, because it looks like it will get really ugly.

[bobcat2]

The paper by Eichengreen and O’Rourke compares global economic output and trade for the first twelve months of the global Great Depression to the first twelve months of the current global recession. It finds the first 12 months of the two economic global economic declines are very similar in some major aspects. It also compares global monetary and fiscal responses over the first twelve months of both global economic declines. It finds that global monetary and fiscal policy is much more responsive this time around, so that there is good reason to think a second Global Depression will be averted, because global declines probably will not continue into a third year as happened during the Great Depression. The paper is not trying to time global stock market movements. It is not intended to help you make bond and equity portfolio decisions.

Bob K

[ziggy29]

The only thing they tell us, in my view, is to batten down the hatches, because it looks like it will get really ugly.

It could just as easily mean "prepare for the worst and hope for the best." Or at least "hope for better than the worst."

[jimdigriztn]

It also compares global monetary and fiscal responses over the first twelve months of both global economic declines. It finds that global monetary and fiscal policy is much more responsive this time around, so that there is good reason to think a second Global Depression will be averted, because global declines probably will not continue into a third year as happened during the Great Depression.

The fact that the policy responses are somewhat different does not imply that the result will be better this time. The policy responses may actually make things worse. So far, they appear to be ineffective, inasmuch as we continue to track the same downward trajectory.

[Rodc]

I do not understand the criticisms of the article.

I think it is probably denial.

Jim

Here is the problem in a nutshell for those that don't know how to spot data mining:

http://www.nytimes.com/interactive/2008 ... RKETS.html

or

http://www.ritholtz.com/blog/2009/02/be ... 1929-2009/

Those two links only show the stock market, but illustrate the problem nicely. The problem is many of these bear markets start out looking very similar. The primary difference between the one starting in 1929 and all the rest is that the one starting in 1929 is that it lasted much longer.

How long will this recession last? No one knows. But we do know that by and large it has not been the shape that mattered, but the length.

In the article in the OP, they completely fail to compare to any of the other recessions, so this important fact is completely missed.

But you do get to write a nice scary article with nice scary pictures.

Now, the conclusion that this will end up like the Great Depression could be true, but this analysis is still pretty much junk and not worthy of a couple of professors.

[jimdigriztn]

In the article in the OP, they completely fail to compare to any of the other recessions, so this important fact is completely missed.

I don't consider it a failure, possibly just a limitation of length or scope. Regardless, I've seen other analyses that contrast the current recession with other post-Depression recessions, and it appears pretty clear now that this one is closer in severity to the Depression than to the others. Even the news media is regularly calling it the worst post-War recession.

[Rodc]

In the article in the OP, they completely fail to compare to any of the other recessions, so this important fact is completely missed.

I don't consider it a failure, possibly just a limitation of length or scope. Regardless, I've seen other analyses that contrast the current recession with other post-Depression recessions, and it appears pretty clear now that this one is closer in severity to the Depression than to the others. Even the news media is regularly calling it the worst post-War recession.

Well, that is sort of a different issue you bring up. And a bit of comparison of apples and oranges, isn't it? This article is junk, but that does not mean this is a shallow recession or that other information is not better.

Lots of room between worst since the Great Depression and as bad as the Great Depression. I think the case for the latter (geeze, of course I mean the former) is much stronger than for the former (I mean latter).

As to length, other recession would go on the same graphs, and if this one clearly looked like the Great Depression and unlike the others, not much would need to be said. But, if they all looked similar in the first year, the article would completely fall apart. Which is it? Don't know as they did not do the work (or buried it).

[james22]

This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated.

Keynes AND Friedman??

I believe the policy response (siding with the former) makes disaster more likely.

[Valuethinker]

"Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us."

http://www.ft.com/cms/s/0/b31c06a2-5a7a ... abdc0.html

Sam

I haven't analyzed the piece yet, but Martin Wolf is about the best newspaper macroeconomic columnist out there.

Reading his column is de rigeur.

[Valuethinker]

This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated.

Keynes AND Friedman??

I believe the policy response (siding with the former) makes disaster more likely.

You are incorrect, or unaware, of what Friedman said about the Great Depression.

That is was caused by incorrect monetary policy.

On the Keynes point, no one, yet, has adopted a wildly Keynesian solution.

The rise in government deficits is primarily the result of the fall in government revenues (and increase in spending in automatic stabilizers).

Even the US, about the largest net fiscal impulse, has limited it to c. 4% of GDP (over 3 years), which on the scale of the collapse of private demand, is neither here nor there.

[james22]

April 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

http://www.bloomberg.com/apps/news?pid= ... tjEzB.d.kU&

[Valuethinker]

April 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

http://www.bloomberg.com/apps/news?pid= ... tjEzB.d.kU&

The article doesn't say that, and yet it doesn't actually demonstrate the point.

Friedman and Anna Schwarz, in their book on the Monetary History of the US, say the downturn was turned into a Depression by the aggressive actions of the Federal Reserve to shrink the banking system. In particular the liquidation of the Bank of the US.

[bmb]

Here we go again.
Such shallow analogies ignore the fact that many economic conditions and reactions to them, both domestic and international on the part of individuals, businesses and governments, are completely different than they were in the 1930s. They also mistake correlation for cause. Yes, we can learn from history, but anybody who thinks they can predict the future based on an uncontrolled sample of 1 is confused. We are likely to correct our actions and/or make different mistakes. The analogical approach is hardly scientific or even rational.

[Jack]

April 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

http://www.bloomberg.com/apps/news?pid= ... tjEzB.d.kU&

The article doesn't say that, and yet it doesn't actually demonstrate the point.

Friedman and Anna Schwarz, in their book on the Monetary History of the US, say the downturn was turned into a Depression by the aggressive actions of the Federal Reserve to shrink the banking system. In particular the liquidation of the Bank of the US.

That article is a muddled mess. I think Valuethinker misspoke: He meant to say "The article does say that and yet it doesn't actually demonstrate the point." The author of the article obviously is quite ignorant of both economic history and the positions of both Friedman and Bernanke.

You can read Bernanke's homage to Friedman on the occasion of Friedman's ninetieth birthday here:

http://www.federalreserve.gov/BOARDDOCS ... efault.htm

The most basic point of Friedman and Schwartz's A Monetary History of the United States was that the Great Depression was caused by a monetary contraction and the failure of the Fed to respond to that contraction to increase the monetary supply. Bernanke is a great admirer of Friedman's policies. In fact he concluded his speech with this:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Best wishes for your next ninety years.

In other words, Bernanke and Friedman agree that the Fed made the Great Depression worse by contracting the money supply when it should have been expanding it. Bernanke is a great admirer of Friedman and is following his prescription. He is determined not to repeat the mistakes of the Fed during the Great Depression which contracted the money supply. There can obviously be disagreements about the degree of monetary liquidity and its timing but to say that Bernanke opposes Friedman is factually incorrect. The author of the Bloomberg article deserves ten lashes for his lead paragraph.

And to say that Bernanke sides with Keynes is also an egregious error. The Fed controls monetary policy and is following Friedman's ideas for avoiding another depression. Keynes is mostly about fiscal policy and that is not under the Fed's control -- it is controlled by Congress and the Treasury. So the statement doesn't even make logical sense. The author does not seem to understand the difference between monetary and fiscal policies and who controls them. Another ten lashes to the Bloomberg author.

Because fiscal policy and monetary policy are two different mechanisms for achieving the same goal of avoiding a depression, there is no contradiction in saying the both Keynes' and Friedman's principles are being applied at the same time.