It's as if a surreal, perfect storm of bad judgement with regard to our economy has enveloped Washington over the past few days. Reaffirming this, over the last 72 hours, the headlines have been popping up in the financial news websites, then disappearing, only to reappear again this morning--all at once. A clear picture of both what's about to be announced this week and next in Washington, as well as what's unfolding, worldwide, is quickly coming into view. And,
many respected economic pundits, from Nobel laureate Paul Krugman, in today's NY Times (See: "
Stay The Course"), to noted Nouriel Roubini minion Edward Harrison (See: "
Is 2009 tracking a 1930 Great Depression scenario?") last night at Naked Capitalism, to Barry Eichengreen and Kevin O'Rourke at Europe's Centre for Economic Policy Research (CEPR) (See: "
A Tale of Two Depressions") are virtually and concurrently reaching similar conclusions, and they're all pretty damn scary.
Here in the U.S., as Paul Krugman reminds us today, we're talking capitulation to the status quo, all dressed-up in spin about yet-to-be-legislated, "better regulatory oversight"--and we're becoming all too familiar with that semi-spineless end result demonstrated by our legislative branch in D.C.. As Krugman points out in this morning's "
Stay The Course," 'It's 1930, all over again.'
(BTW, I don't know if it's just me, but I really don't think I've sensed Krugman being more upset than he is this morning.)
New York Times
Op-Ed Columnist
Stay the Course
By PAUL KRUGMAN
Published: June 14, 2009 Print Edition: June 15, 2009
The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it's déjà vu all over again -- literally.
Krugman reminds us that "...for the third time in history a major economy has found itself in a liquidity trap." He points out the traditional solutions, such as interest rate cuts, have reached their limit. So, the natural thing to do is to seek out and implement unconventional measures.
Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we'll do the same thing this time.
We then get a two-sentence history lesson from him, reminding us of how the economy grew rapidly from 1933 to 1937, hand-in-hand with FDR's New Deal policies. But, as Krugman reminds us, unemployment was still very severe. (A clear reference to what's occurring and projected, now and over the next couple of years, respectively.)
Krugman reminds us of the mistakes our government made at the time, when they "stopped worrying about depression and started worrying about inflation." F.D.R. sought to balance our budget, and the Fed turned the screws on monetary policy. But, the economy experienced a double-dip Depression at the time as a result. Full recovery wasn't attained until World War II.
Krugman then points out similar events relating to Japan in the 1990's, where they saw a partial recovery, but the leadership there made the same mistake of shifting their focus to mounting deficits, increased taxes and spending cuts; and, once again, Japan slipped back into a recession.
He points out that the exact same thing is happening now in the U.S.
On one side, the inflation worriers are harassing the Fed. The latest example: Arthur Laffer, he of the curve, warns that the Fed's policies will cause devastating inflation. He recommends, among other things, possibly raising banks' reserve requirements, which happens to be exactly what the Fed did in 1936 and 1937 -- a move that none other than Milton Friedman condemned as helping to strangle economic recovery.
Krugman reminds us that there are demands from many quarters to cancel the stimulus plans, both here in the U.S. and abroad. One need not look any farther than this morning's economic news news headlines for reiteration of that scary concept: "G-8 Plans to Reverse Stimulus as Rebound Signs Grow."
G-8 Plans to Reverse Stimulus as Rebound Signs Grow
By Simon Kennedy and Rainer Buergin
June 15 (Bloomberg) -- Group of Eight finance ministers began drawing up contingency plans for rolling back budget deficits and bank bailouts as the economy shows signs of recovery and investors start worrying about inflation.
Officials meeting in Lecce, Italy, over the weekend said it's prudent to consider what exit strategies to deploy once global growth is secured and asked the International Monetary Fund to examine how to do so without reigniting the two-year crisis. At the same time, they said it's premature to rein back more than $2 trillion in stimulus packages.
"Growth should remain the principal focus of policy," U.S. Treasury Secretary Timothy Geithner said after the meeting ended on June 13. "It is too early to shift toward policy restraint."
So, we have a shallow reassurance from Treasury Secretary Geithner on the world stage that it's too early to pull the rug out from under Main Street. But, one just has to re-read the headline of this story--"G-8 Plans to Reverse Stimulus as Rebound Signs Grow"--to be reminded that pressures from both outside of the U.S., not to mention from the G.O.P. here at home, may end up trumping the well being of Anytown, U.S.A., once again.
And, of course, we all know where Wall Street stands on all of this, now that their bank accounts are flush with taxpayer's trillions:
"Markets aren't looking for specific exit strategies now, but want governments to start thinking about them," said Bill Witherell, chief global economist at Cumberland Advisors Inc. in Vineland, New Jersey, which oversees $1 billion in assets. "They worry that inflation is going to build up if nothing is done to withdraw the stimulus."
Getting back to today's Krugman column (and, come to think of it, my own rants of late, too), Krugman reminds us of how all the 'happy newsers' from Wall Street are now pointing to all of those make-believe "green shoots," while conveniently ignoring the fact that unemployment is breaking records and still rising for the foreseeable future. (Sound familiar?) And, perhaps more importantly, he notes: "...we're not even experiencing the kind of growth that led to the big mistakes of 1937 and 1997. It's way too soon to declare victory."
Stating the obvious, in his conclusion, he points out that our critics are now demanding that we just call the whole thing off.
Of course, Krugman concludes that this is pretty much craziness...but, sanity frequently has little to do with what's decided in D.C., no matter who's in the White House. And, when it comes to our economy, we all now pretty much admit the sad fact that Wall Street owns the place. (Do I really have to provide those links--again--to substantiate that truth?)
But, Krugman's just the warm-up for the serious, analytical information that's just coming to the fore now, which verifies the all-too-hidden truth that the world's economies are very, very closely tracking--or even seeing results worse than--the 1930-31 period's economic history.
And, IMHO, this is the scariest news of all...
Edward Harrison, publisher of the Credit Writedowns blog and frequent contributor to both Naked Capitalism and Nouriel Roubini's RGE Monitor websites, bring this sadly illuminating story to our attention Sunday night in: "Is 2009 tracking a 1930 Great Depression scenario?" at Naked Capitalism.
Harrison focuses upon the recent writings of two economists, Barry Eichengreen and Kevin O'Rourke, whose works of late have been published over at the European think tank's Centre for Economic Policy Research (CEPR) (See: "A Tale of Two Depressions"). They have come across new, statistically-supported findings which are, for lack of a better word, shocking, in terms of how current worldwide economic events are parallelling (or worse than) similar realities from the 1930-31 period. Among their new findings, Harrison points out:
2009 tracking a 1930 Great Depression scenario?
Naked Capitalism
Edward Harrison
June 14, 2009
(Eichengreen's and O'Rourke's) 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.
As Harrison notes it, the statistical information these guys provide in their graphics are nothing short of "amazing." I totally concur. Again, here's the link: "A Tale of Two Depressions." CHECK IT OUT!
A Tale of Two Depressions
Barry Eichengreen and Kevin O'Rourke
VoxEU
June 4, 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.
Editor's note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O'Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)
New findings:
(Diarist's note: Yes, I'm posting their findings twice, on purpose, for emphasis.)
* 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.
(CHARTS FOLLOW AND MAY BE REFERENCED IN THE LINK, ABOVE.)
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.
(Diarist's Note: YOU SIMPLY MUST CHECKOUT THEIR STATISTICAL GRAPHICS at the link, above. Their work is nothing short of profound.)
--SNIP--
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
--SNIP--
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.
Above reprinted with premission of, and attribution to, Barry Eichengreen and Kevin O'Rourke. © voxEU.org.
And, to summarize the intent of this diary, just review Krugman's, Harrison's, Eichengreen's, and O'Rourke's (all virtually concurrent) words and statistics to understand just how truly close we are to the abyss--despite all of those MSM "happy news" stories to the contrary--even as I write this.
Collectively, considering the timing of these qualitative (Krugman and Harrison) and quantitative (Eichengreen and O'Rourke) pieces, I truly believe these folks are presenting us with breaking news analysis of the first order.