Mike “Mish” Shedlock does a wonderful job of commenting on the the markets and economy. The included video is about an hour long, but well worth the watch.
I don’t normally completely republish posts, however I thought this one important enough to take such action. We know that history tends to repeat itself, well humans do the same things over and over.
What struck me were figures 4 and 5. If history does indeed repeat we are about to see a pull of liquidity, which will strengthen the dollar, while collapsing equity and commodity prices. However, we have helicopter Ben at the helm who has studied the Great Depression extensively. Regardless of his conclusions he knows that a reduction in liquidity will push us over the brink into a depression.
As I’ve said before he is threading the needle between depression and recession. While depression is possible, the increase in the money supply coupled with an increase in government deficit spending at alarming rates points to inflation. I have to keep an open mind as to the possibilities, which can be difficult when looking at exponential charts. Perhaps we will have a one two punch. Read on as it is a fascinating article…
A Tale of Two Depressions
|Barry Eichengreen Kevin H. O’Rourke
4 June 2009
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.)
- 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.
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.
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).
While perusing various blogs I stumbled up something a bit unsettling. As I’ve been chomping on what the IMF bonds issues mean talks about moving away from the dollar as the reserve currency continue…
There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully. The gathering is, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.”
It is the first formal step by our major trading partners to replace the dollar as the world’s reserve currency. If they succeed, the dollar will dramatically plummet in value, the cost of imports, including oil, will skyrocket, interest rates will climb and jobs will hemorrhage at a rate that will make the last few months look like boom times. State and federal services will be reduced or shut down for lack of funds. The United States will begin to resemble the Weimar Republic or Zimbabwe. Obama, endowed by many with the qualities of a savior, will suddenly look pitiful, inept and weak. And the rage that has kindled a handful of shootings and hate crimes in the past few weeks will engulf vast segments of a disenfranchised and bewildered working and middle class. The people of this class will demand vengeance, radical change, order and moral renewal, which an array of proto-fascists, from the Christian right to the goons who disseminate hate talk on Fox News, will assure the country they will impose.
… is exactly where the market was back in March when the S&P 500 hit 666. Everyone thought the world was coming unhinged, and well it was and still is. However, not everything comes tumbling down instantly.
With every play there are acts, and at some point the climax. Without the climax how can we have resolution? They are conditions dependant upon eachother unless we are speaking of the experimental genre. With our money supply and government expendatures into the stratosphere we may be in the experimental, however let’s stick to the traditional for our discussion.
As this drama plays out I think we will have the main plot divided by smaller and yet smaller sub-plots each with their own climax and resolution.
While the market tops and is due for a correction we are jumping for joy at watching green shoots emerge from the abyss. The media and figureheads talk about these shoots sprouting from here and there, but I don’t seem them. Withered shoots perhaps.
Let’s introduce the buildup to the climax, and considering the climax euphoric the buildup sets the stage for euphoria. In our case hope. Beyond oversold conditions that we reaached in March we also had hit a stage of dénouement (catastrophy). However, this was only a subplot as if it had been the true bottom we would not have seen a short rebound in prices that have taken us up over 35%. We needed complete disgust with the markets and an unwillingness to jump back in, which we didn’t see.
Instead will we go from Climax (the present) to catastrophe and back again I imagine a few more times before this is over. We are fairily resiliant beings and can stand being pushed, pulled, and battered a bit before we completely throw in the towel.
I don’t need to say anything more…
Link: Time will tell….
For Immediate Release
June 11, 2009
Audit the Fed Bill Reaches Crucial Benchmark
Washington, D.C. – Congressman Ron Paul’s Federal Reserve Transparency Act, HR 1207, has reached and surpassed the level of 218 cosponsors in the House of Representatives, which means it is now cosponsored by a majority of the members.
The 218th cosponsor was Dennis Kucinich (OH-10), and the bill has since received its 222nd cosponsor.
“The tremendous grass-roots and bipartisan support in Congress for HR 1207 is an indicator of how mainstream America is fed up with Fed secrecy,” said Congressman Paul. “I look forward to this issue receiving greater public exposure.”
Hearings on Federal Reserve transparency are expected within the next month, as part of the Financial Services Committee’s series of hearings on regulatory reform.
Foreigners buying US Dollars?
I’m attempting to put a couple puzzle pieces together so here goes…
1) China has tons of US dollar and dollar denominated debt. Additionally I heard suspictions that China may be purchasing land, companies, etc… with the debt. Considering that we have no real access to their books, and they can really tell us anything they want I find this easy to believe. If they had long-term dollar denominated deals they could exchange their dollars for tangible assets, which protects them from a declining dollar. The US government will probably default on their debt via inflation so China goes and buyes an asset and says we will pay you in US dollars. China’s holdings of US debt pays interest, and has a principle payement at expiration. So, it seems plausible that they could use all their US holdings to buy up tangible assets.
2) BRICs (Brazil, Russia, India and China) are purchasing our debt. Why? What if they were willing to purchase dollars to placate the US only to use them to purchase raw materials, or IMF bonds (see #3). We know China has been stockpiling commodities. Oil has to be transacted in dollars. Are they paying for all the commodities with Yuan or dollars?
3) IMF Bonds… http://online.wsj.com/article/SB12441969…
China is thinking about purchasing $50b in IMF bonds. Since when has the IMF sold bonds? I didn’t see anything (see further down in my post) about which currencies would be used to purchase these bonds, but why can’t we make a leap and say that perhaps they would use US dollars. The IMF holds a multitude of currencies so they buy dollars to keep the dollar stable for a bit and then use the dollars to purchase assets, which may be partially valued in dollars, but not a 100% exposure. The dollars are then held at the IMF, which issues bonds based on a basket of currencies. This pulls dollars out of circulation (for now), helping to strengthen the dollar at least in the short term.
I don’t know if a scheme like this is even viable or makes sense, but it jumped into my head and I wondered if I’m completely off or there may be a bit of truth in it all.
Yet IMF is issuing bonds?
a) the move by the IMF to issue bonds, and
b) that nations are cashing in their US obligations / cash for these newly created bonds.
So, I did a bit of digging…
The International Monetary Fund is putting final touches on its plans to issue its first bonds. Russia has already said it would buy $10 billion of the bonds, which would be priced in the IMF’s quasi-currency, “special drawing rights.” SDRs are a basket of currencies consisting of the euro, yen, pound sterling and U.S. dollar. As of Friday, 1 SDR equals $1.55.
So these are the major players when it comes to currencies, but excludes the Yuan. All of these nations are in trouble. The UK is in worse shape than the US and Europe is fracturing. Perhaps this is an attempt to shore up some of the weaker currencies so they don’t collapse. If hard currencies were to skyrocket (as many predict) this is a nail in the coffin to fiat currencies.
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today welcoming Brazil’s intention to invest up to US$10 billion in notes to be issued by the IMF:
Same thing as with Brazil, but notice my bolded parts…
“This decision will be beneficial to all,” Mr. Strauss-Kahn added. On one hand, IMF members’ investment in Fund securities will boost the Fund’s capacity to help member countries—particularly developing and emerging market countries—cope with the crisis and thus benefit all members by facilitating an early recovery of the global economy. At the same time, the new notes will offer members a safe investment instrument with reasonable return.
Reading a bit into this I’d say that there is a huge and continued growing concern that the previously risk-free and safe investments are no longer considered so. IE: US treasuries. This is nothing new, but perhaps to prevent an all out run on our debt, by consolidating these first world countries many believe that it will shore up confidence in our debt.
Perhaps by backing these instruments by a basket of currencies priced in dollars foreign holders will feel better about holding dollar denominated assets backed by a multitude of nations.
What might be the effects of such actions?
Is this to shore up confidence with developing nations? They have the oil, the raw materials, and everything we need to produce the stuff that we buy. For now they need us as consumers, but that gig is about up if not over.
Unless I’m mistaken this look like a move away from the dollar as the reserve currency. As this unfolds I wonder how much transparency there will be as far as IMF holdings with regards to the backing of these bonds. I don’t know enough about the IMF to make any solid presumptions or predictions, except is this slowly a move to a global currency?
What I really want to know is if countries are buying US debt, yet are in serious talks about purchasing IMF bonds… something isn’t adding up here. Say they purchase the bonds in US dollars then the IMF will have a bunch of dollars. Unless the Fed reigns in the money supply somebody has to hold our dollars unless they dump them on the market causing a crash in the dollar, which doesn’t make sense unless they have found a way around this.
I know this is a lot of fragmented thoughts, but something is going on… Will someone please help fill in the missing pieces.
As gas prices rise, people lose their jobs, and business cut back on travel airlines suffer. Many have gone in and out of bankruptcy (remember 9/11?), and employees have made many concessions to keep their jobs.
However, what happens when you have poorly paid pilots, working too many hours, and cash strapped airlines?
WASHINGTON – Pilot training and fatigue are expected to be the focus of an unusual public hearing on Tuesday into safety issues raised by the February crash of an airliner near Buffalo, N.Y., that killed 50 people.
A recent experience of mine is also cause for concern:
Touch and Go
I had a couple firsts on my trip to Bonaire, one seeing a slipper lobster. Reminded me of some prehistoric creature crawling along the ocean floor. Quite amazing.
The other first is one I’d rather not have again, but alas life is unpredictable. So, yes a touch and go. A what? We hear about them when people are first learning to fly an airplane to practice takeoffs and landings. However, common it may be I’ve never done one on a commercial airliner before, more specifically a 737.
We took-off from Bonaire, and I had an empty seat next to me until… Until the pilot came and sat down. From time to time I’ve seen members of the flight crew leave the cockpit to use the facilities are stretch, but he sat and slept. The pilot was sleeping next to me, while we flew on autopilot. I wasn’t really concerned because there were two other people up front. What did concern me a bit was that our pilot was exhausted.
Our airplane had just arrived from Houston, and was now going back. It had arrived at around 5:30 am, which made it a red-eye. All in all this crew was having a very long day. I figured after we arrived they were looking at around 14-16 hours maybe more. And they were piloting a metal airship. Great!
The flight was pretty uneventful, a few bumps here and there, but that was it until the landing. About 30 prior to landing our pilot was summoned to the cockpit to presumably land the craft. So far so good. My windows seat provided me with a nice view of our approach and I looked over Texas checking out the landscape as it grew nearer and nearer.
A couple minutes before touchdown I was noticing that the pilots kept throttling the engines up and down and weren’t very consistent about or speed or approach altitude. My heart was pitter pattering at an accelerated rate, but landing is essentially a controlled crash anyways.
The ground was oddly close, and there was no sign of a runway. Sure I can’t see straight out so I figured it was just in front of us. For a short runway I might expect this as they need all the room they can get, but we in a 737 going into Houston, not a tiny airport.
I kept waiting for the flare or the moment where we glide over the runway and the read wheels touch and then the front. Instead … BANG the front wheel slams into the runway. Last time I checked it isn’t wise to put the front wheel down prior to the rear. Next thing we know full thrust and the pilots pull back on the yolk.
Quite disconcerted I look around and everyone is a bit freaked out wondering what just happened. What happened is that we had a lovely touch and go due to the fact that we landed incorrectly. After a bit as we are circling around listening to the landing gear going up and down (did we break something?) the pilot announces that we bounced and they thought it prudent to go around and do it again.
And as Mish points out airlines are slashing left and right to stay afloat. I’d personally rather pay a bit more to ensure my safety and travel less. What will the travel industry look like in the coming years?
With the advent of Central Banks printing their way out of this mess the probabilities continue to point toward inflation. While the rate of expansion of the money supply has lessened it is no less continuing to rise. Should the Fed decide to sell some of its assets I can only imagine a depression ensuing. As some have said they are threading the needle between inflation and depression, but at some point I think the hole will close and we will be stuck on the side of inflation.
The rebound in commodity prices is staggering. Many factors influence commodities, among them currency valuations, supply and demand, forecasted demands, hedges against currency devaluations, and inflation. China plays a major role in the demand factor. In a recent NY Times article, referenced above, they state that while China is stockpiling commodities production lags.
At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.
“There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.
China is getting ahead of it future needs, which makes sense, but how long can it continue? I have no doubt in my mind that we will see higher prices for everything, while wages stagnate and job losses continue. The question however is if commodity prices will continue to rise without a correction? If I had a crystal ball I would say yes primarily due to our fiat money system, record low levels of food supplies, and energy stocks being depleted while further exploration and extraction projects are being put on hold. Until we see higher energy prices they won’t be put into full swing, which take years to develop. Nothing goes in a straight line however, so a mild correction would be encouraging for buying on the dip.
Back to the demand situation…
Richard S. Elman, the chief executive of the Noble Group, Asia’s largest diversified commodities trading company, bounced up from the conference table in his office here when asked about freight rates during an interview on Tuesday morning. He walked over to his desk, dominated by three computer screens that partly obscure a perfect view of Hong Kong’s harbor, and quickly punched up on one screen a list of daily charter rates for large bulk carrier freighters.
The list showed ship owners charging $58,000 a day now but just $24,000 a day for charters next year or in 2011 — an indication that there will be more ships than cargoes in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom.
Pointing to the rates for the next two years, Mr. Elman said, “That’s the real market” for ships.
I’ve stumbled upon an extremly useful site… Really it goes beyond just useful, and if you are interested in Finance, Math, or Physics I recommend you check it out. Even if you aren’t and may know someone in school send them to this site. Mind you that without YouTube it would be much more difficult to implement such a site.
Okay, how did I discover this? Well, I must thank Gary North for pointing me to it. Without his continued efforts to find valuable resources and simplify complex matter I may have not discovered it for sometime.
Anyways, please check out Khan Academy. Salman Khan does an amazing job of simplifying potentially complex ideas. So far I’ve gone though some of the finance and banking videos. While I’ve understood many of the concepts presented I’ve really enjoyed the refresher and he has also managed to get me thinking from a different perspective.
Sometimes we find the material, but how it is presented makes all the difference. Have you ever been confounded by the Federal Reserve’s material? Sometimes I think they are speaking another language… How about a textbook or college professor? Mr. Khan is doing a service to society through his non-profit making all his content available free of charge. Again from what I’ve watched thus far I can’t recommend it enough.