The “Depression-Sized Event” Continues

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Forget what the CNBC squawkers tells you. We are not out of the woods yet. Economic measures continue to track remarkably closesly with the downturn in 1929, the start of the Great Depression. These charts, by Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, tell the story.

One key quote: “World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.” The good news, the authors explain, is that the policy response has been different this time, so the worst can still be avoided. “The question now is whether that policy response will work,” the authors write.

The Financial Times’ Martin Wolf, who is probably the most influential economic columnist in the world, puts this information in some plain-language context.

The question is whether today’s unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression. If the latter wins, we will not. What everybody hopes is clear. But what should we expect? We are seeing a race between the repair of private balance sheets and global rebalancing of demand, on the one hand, and the sustainability of stimulus, on the other. Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process. Meanwhile, the federal government has become the only significant borrower. Similarly, the Chinese government can swiftly expand investment. But it is harder for policy to raise levels of consumption.

Read Wolf’s entire column here.

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