A tale of two depressions, updated Post author By Kevin O’Rourke Post date March 6, 2012 Barry Eichengreen and I provide an update to our original Vox column here. Categories In Economic history, World Economy 7 Comments on A tale of two depressions, updated ← Senior Irish Official Sees Wider Refinancing Of Bank Burden → The Fiscal Compact – Views Differ 7 replies on “A tale of two depressions, updated” I read the updated article with interest. This is a very difficult but worthwhile exercise and perfectly legitimate to compare this crisis with that of the 1930s. There are millions worldwide being affected by this crisis yet policy makers seems utterly engrossed with the getting the banks fixed, or getting back to the markets which seems to have little impact on employment. Then we hear of austerity measures, designed to protect capital from losses, being written in stone into constitutions. We need to provide solutions for ordinary people ie employment. That should be top of the agenda. That is why the comparison with the 1930s is so valid. Keep up the good work. In the case of mortgages, if inflation is quite high (e.g. 1970s/80s), the debt servicing burden would ease after a few years (i.e. principle borrowed at a fixed point in time whereas wages would increase). In transitioning from a high to a low inflation environment, it’s easy for borrowers increase their debt levels and sustain old debt servicing levels. Such increases in levels of debt can cause asset bubbles / misallocations etc. Should credit bubbles occur in this scenario, there aren’t many tools to stop losses. Inflation isn’t there to erode debt levels and even if it was, increased debt servicing would probably cause the borrower to default. As interest rates are already low, they’re not much of a tool. So the options are default (/losses and risks contagion) or (creative) money creation. As the appetite for direct losses seems low and if we pursue a low inflation economy, I think CB ‘extraordinary’ interventions will become more ‘ordinary’. Although I don’t know the unintended consequences, I don’t think markets know how to price in QE. So far the UK has fared very well. Yes, the UK’s economy looks dodgy, but it could have been a lot worse. I’ll gloss over Zimbabwe, other than to note market confidence seems to be important. The ECB’s LTRO, although targeted, seems misdirected. My view is EZ distressed countries should be able to access funds at 1%. Though in order to access the 1%, they should repay 3% principal. For example, Ireland borrows 100bn from ‘special ops’ and pays 4bn per annum (1bn interest and 3bn principal), so after 10 years Ireland’s debt reduces to 70bn. Boston meets Berlin kinda thing. A couple of comments: The US employment data is deeply flawed – statistically. The actual numbers of persons employed in the US (hence paying taxes) is on an decline trend. The ‘growth road’ has petered out. And attempting to compare 2011 with 1939 is not valid. In the 1930s there were no China, India, Indonesia, etc, etc. There was no global FIRE. The financial chicanery was restricted to the ‘developed economies’ of the time. In 1930s the massive oil-fields of Saudi were still a geologist’s dream – though some folk had a good feel about the outcome. The global population was also a lot less than to-day. Now, lots more bums want some of that nice liquid energy – especially to put into the fuel tanks of their personal vehicles. We have probably only reached the end of the beginning of this economic crisis. The financial world needs to blow another Ponzi asset bubble as soon as it can. Should be interesting. Any “stimulus” primary aim should be to break the back of the oil revenue transfer system that fills up the greasy tills of the New York & London banks – but obviously this will not happen. We will continue to sell race horses and other Grot to Saudia Arabia and the rest of the surplus energy countries and expect long term wealth !!! from this farcical trade relationship. New Look for Mecca: Gargantuan and Gaudy http://www.nytimes.com/2010/12/30/arts/design/30mecca.html. The French or other Treasuries can no longer say right lets finish this with perhaps the Rothschilds backing as they no longer control the levers of state like they did in the 70s. This real investment in non oil consuming power plants created the oil glut of the 80s that the monetarists incredibly believed was of their making and they wasted the lot on crap. How can the French states new pathetic investments for example , much of this dependent on local authority money compare with the massive investment of the 70s ? findarticles.com/p/articles/mi_m0BQQ/is_6_49/ai_n31979228/ Our 2007 “investment” in one year of 35 Billion or so in buildings and stuff dwarfs the french real investment over a multi year time frame!!!! The farce that is Finlands Financing structure for their EPR turnkey project illustrates the disaster that is the market state. This IEA paper from 2007 (go to Nuclear illustrates the absurd complexity that is now standard managerial practise) http://www.iea.org/textbase/nppdf/free/2007/finland2007.pdf All to avoid fiscal defecits I suppose. Its not the size of the defecit thats important – its what you spend it on. @ Dork: “Its not the size of the defecit thats important – its what you spend it on.” I believe that the size of the deficit would matter if there was a probability that you could not ramp up productive capacity, foreign sales, and nett a surplus. You’d run into a dead end eventually. I believe eventually is now. Aggregate economic output, (aka: growth) is reliant on finite physical resources, and technologies with limits. Growth will margin out, then become un-growth. I believe we may be quite close to our growth margin – other countries are in different situations and will display different outcomes. However, once a critical mass of folk get their heads around the idea that liquid haydrcarbon fuels are absolutely essential (and there is no doubt about this) to attain and maintain a specific living standard – then political situations may become quite ugly. Folk are a tad attached to their ‘western-style’ standard of livings endownment, and will cling on, limpet-like, even as their society implodes. 100% of nothing appears to be better than 10% of something! Well Brian – from a monetory perspective I guess size matters…..but from a real world resourse utilization viewpoint its what you do with the stuff. The above modest by Irish construction bubble standards French Y2009 light rail investments are coming into frution now – some are quite small but are managing to link different transport nodes into a elagent pattern. For example – this reuse of a old rail cutting will link a new high speed railway station situated some distance outside the small city of Besancon with the older central railway station which will also have a Tram service withen a couple of years. Every little investment like this cuts useless money transfers to Saudia Arabia and others. fr.wikipedia.org/wiki/Ligne_de_Besançon-Viotte_à_Vesoul Stuff like this is happening all over France – meanwhile in Ireland…..we just stay at home to watch telly or go to Australia. Apologies: a bit late in the day. Thanks for the paper. Paul Krugman picks it up further here: http://krugman.blogs.nytimes.com/2012/03/07/europes-two-depressions/ Comments are closed.