Those who never lived through the Great Depression scarce want to imagine how much worse it was than the Great Recession we are currently enduring. With each economic indicator we hope to see upticks in production, manufacturing, GDP and the rest of the measures indicating health, while a fall in unemployment would also be welcome news. The Federal Reserve reported in June the median net worth for American families fell nearly 40% from 2007-2010.
Recently Ambrose Evans-Pritchard, International business editor of The Telegraph (U.K.) penned a column entitled, “Five years on, the Great Recession if turning into a life sentence.” He writes,
The world remains in barely containedslump. Industrial output is still below earlier peaks in Germany (-2), US (-3), Canada (-8) France (-9), Sweden (-10), Britain (-11), Belgium (-12), Japan (-15), Hungary (-15) Italy (-17), Spain (-22), Greece (-27), according to St Louis Fed data. By that gauge this is proving more intractable than the Great Depression.
Some date the crisis to August 9 2007, the day it became clear that Europe’s banks were up to their necks in US housing debt. The ECB flooded markets with €95bn of liquidity. It seemed a lot of money then. The term “trillion” was still banned by the Telegraph style book in those innocent days. We have since learned to swing with the modern dance music from central banks.
For me, the defining moment was twelve days later when yields on 3-month US Treasury bills to crashed from 3.76pc to 2.55pc in just two hours. At first we thought it was a mistake, a screen glitch. Nothing like this had happened before, not during the crashes of 1929 or 1987, or after the Twin Towers attack on 9/11.
He rejects the idea that banks alone were responsible, blaming, in part, Western multinational corporations:
They drove up the profit share of GDP to historic highs, playing off wage rates in the US and Europe against cheaper labour in China, Latin America, or Eastern Europe. That too concentratedwealth among those who tend to buy shares, land, and Impressionist paintings, rather than goods. The GINI coefficient of income inequality went through the roof, as it did in the late 1920s. It is a formula for asset bubbles.
The credit bubble disguised the exorbitant imbalances in trade, capital flows, and incomes. The game could continue only as long as the West in general — and the Anglosphere and Club Med in particular — were willing to run ruinous current account deficits, borrowing themselves into dire trouble.
As soon as the debtors hit the brakes and slashed spending, the underlying reality was exposed. There is too much saving and too little consumption in the world to keep growth, and people in jobs. It is the 1930s disease. On this the Keynesians are right.
None of this would have been any different if banks had been saints. The forces at work are tidal in power.
What do you think? Are we near the end of the Great Recession, or has it merely given us a brief respite?