They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.

This week’s OTB will print long, but it is primarily charts. Please note that I have re-arranged some of the new charts to cut down on space because of some duplications. Word count is not all that much and it reads well. I will be referring to their work in future letters as well. Have a great week!

John Mauldin, Editor
Outside the Box

A Tale of Two Depressions

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 stabilized, 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 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.

Updated Figure 1. World Industrial Output, Now vs Then (updated)

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.

Updated Figure 2. World Stock Markets, Now vs Then (updated)

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.

Updated Figure 3. The Volume of World Trade, Now vs Then (updated)

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.

Updated 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.

[They added some country data in their revision that I put here, hence the two figure 5's, but they are labeled as such on the website and I did not change their labellling – JFM]

New Figure 5. Industrial output, four big Europeans, then and now

New Figure 6. Industrial output, four Non-Europeans, then and now.

The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below;

New Figure 7: Industrial output, four small Europeans, then and now.

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.

Source: A Tale of Two Depressions

As the economy goes down, I can see that my poor work performance and lack of competence means that I will soon be laid off again (”Scram! You’re fired!”), and so I naturally figured that I would go back to someplace where I was fired so long ago that my previous supervisors had all, hopefully, retired.

But I soon find that their snotty attitude is akin to the respect that they may have for a doctor who’s killed every one of his patients, and who thus never gets to go back on the staff of a medical school, and if he did, you would know all you needed to know about that medical school. Ergo, no dice on the job. Or even an interview. Just a phone slammed into my ear.

Perhaps similarly you know all you need to know about Columbia University and their Graduate School of Business when you learn, to your complete surprise, that they hiring back Frederic Mishkin, another lackluster, failed and disgraced member of the Federal Reserve that for the last 20 years has been the biggest, most tragic, most colossal, most horrific failure this country has ever seen, in that the Federal Reserve created so much money and credit that it financed enough inflation in asset prices that it created four huge bubbles: stock, bond, housing and government! And now a fifth: food and energy!

Darryl Schoon of drschoon.com obviously agrees with my crude denunciation of Mr. Mishkin and the Fed, even though he doesn’t say so directly, but says, “While central bankers and governments do not intend to cause hyperinflation anymore than drunk drivers intend to crash, they are nonetheless responsible for the decisions that lead to hyperinflation and deflationary depressions.”

Naturally, the mention of drunk drivers makes me ashamed to realize what a big hypocrite I am, as I can easily identify with him, as I, too, am both a loser and a coward, always ready to slink out of town in the middle of the night with the petty cash and a lot of loose office supplies, too embarrassed to show my face after screwing everything up and then facing the certain humiliation of getting fired anyway.

Luckily, I had been transferring lots of money from the operating account at the bank into cash in the office safe in case of some kind of emergency. And sure enough, here’s an emergency! Who says I don’t know how to plan ahead? Hahaha!

But since I can never go back to any of the companies that I almost destroyed and get my job back, I can still be outraged that anyone would hire this total failure to teach impressionable kids about economics, when it is obvious that he has no freaking idea what in the hell he is talking about. I mean, go over to the damned window and look out to see what the Fed and Frederic Mishkin have done to the economy! Does that look like the handiwork of someone who has even a clue as to the basics of economics? Hell, no!

But corruption is always at its height at the end of long economic booms, so almost anything slimy can be expected, which brings up a poem by Alexander Pope, writing about the South Seas Bubble of the early 1700s which he saw with his own eyes, which opens:

“At length corruption, like a general flood,

Did deluge all, and avarice creeping on,

Spread, like a low-born mist, and hid the sun.”

After listing a representative few of the statesmen and patriots, peeresses and butlers, judges and bishops, and even “mighty dukes” who were corrupted, the poem ends with the line “Britain was sunk in lucre’s sordid charms.” Now it’s our turn, I guess.

And speaking of the corruption of being “sunk in lucre’s sordid charms”, here comes the Bloomberg.com headline “Wall Street may get permanent credit line at Fed”. Yikes! Hahaha! How ridiculous!

The article says “Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies.” Hahahaha! Oversight of an incestuous ménage a trois relationship like Wall Street, government and the Fed? Hahahaha! It worked like a charm to prevent the housing crisis, didn’t it? Hahaha!

No one paid any attention to my rude laughing and asking Mr. Kohn in a loud voice, “Are you some kind of idiot that you think we would go along with this engraved invitation to commit fraud and market manipulation?” Instead, Mr. Kohn skirted the issue entirely by answering another question, saying that a shortage of Treasury securities is “not one of the things I’m worried about”, which is Fed-speak for “The federal government has no option but to borrow and spend ever-increasing amounts of money until the whole concept of the dollar disappears into nothingness, and the taunting Voice Of The Transcendental Mogambo (VOTTM) echoes across this vast void, laughing ‘Hahahahahaha! I told you so, you morons!’”

Even funnier, “Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize”, and that these sources of credit would stay open “either on a standby basis or operating at a very low level”! Free money forever! Hahaha! This is insane! We’re freaking doomed!

Laughing until I am coughing up blood and (seemingly) just about everything I had eaten for a week, it took me over the edge when the article bizarrely goes on to say that Kohn thinks “The Fed could limit borrowing to times when the central bank deems financial-system stability to be at risk”! Hahahaha! Tell me a time in the last decade when the Fed thinks that financial system stability is NOT at risk! Hahahaha!

For another example of sheer government corruption and how corruption of every kind is always highest at the ends of booms, it seems appropriate at this time to introduce the Lighthouse newsletter, published by The Independent Institute, which summarizes the new grotesque farm bill from Congress as “New U.S. Farm Subsidies Are Pure Pork”, which immediately makes you daydream of a nice pork barbeque, or maybe a nice grilled pork chop, or even (dare we dream?) some fried pork chops! Yum! Or some bacon!

Alas, my dreams of pork-product Nirvana were in vain, and soon they were back to being about farm bill, which Rep. Ron Paul says “features brand new federal programs, expansion of existing subsidies, more food stamps and more foreign food aid”, which means that over the next few years, hundreds of billions of dollars are to be literally given out, mostly to farmers, most of them rich, and who will get richer, because “Rather than limiting government subsidies to farmers with adjusted gross incomes of $200,000 or less, the Senate raised that limit to $750,000.” Hahaha! Let’s have another look at that Alexander Pope poem! Hahaha!