Parallels with the 1930s

07/01/2009 11:30 am EST


John Mauldin

Chairman, Mauldin Economics

John Mauldin, editor of Outside the Box, says the current recession tracks the Great Depression very closely in many key ways, and he warns against complacency.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. [Nobel Prize-winning economist and New York Times columnist] 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 humor, as only "half a Great Depression." [But] the US stock market since late 2007 [has fallen] just about as fast as in 1929-30.

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. 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, 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. [So,] the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which shows a smaller decline in manufacturing production now than then.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression. 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.

Another area where we are "surpassing" our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30. This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. To summarize: 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.

Globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports, or equity valuations. The "Great Recession" label may turn out to be too optimistic. This is a Depression-sized event.

The good news, of course, is that the policy response is very different. What matters now is that policy makers arrest the decline. The question now is whether that policy response will work.

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