Tracking Two Depressions

Henry Blodgett, writing at TheBusinessInsider.com, has posted a 17 slide show of graphics from the ongoing research project of Barry Eichengreen and Kevin O'Rourke. Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley; and formerly Senior Policy Advisor at the International Monetary Fund. CEPR Research. O'Rourke is Professor of Economics at Trinity College Dublin and CEPR Research Fellow.

This project is comparing an extensive number of economic measurements from June, 1929 forward with the same measurements starting April, 2008. One of the comparisons most favorable to the 2008-09 measurements is shown in the following graph:

See all 17 slides here.

This research project shows what a steep challenge the world faces to pull out of the current tailspin. The people worrying about further deflation in the coming year or two are getting my attention more than those worrying about inflation. These graphs tell a story of a patient in danger of bleeding out. Before we can worry about any other complications, the bleeding must be stopped.

Comments

[Dave Wrixon:]

The last graph:

static.10gen.com/www.b.../~~/f?id=4a38d295796c7...

is in my mind the most worrying. It seems that there was some forced change of policy in the Great Recession, and it also seems that we are getting close to that point where that forced change occurred. Did it happen to defend the dollar and what happens when the dollar collapses as most people seem certain it must?

Jul 05 06:19 AM

[Dave Wrixon:]

Sorry, link broken. Follow this one and then select last image:

static.10gen.com/www.b.../~~/f?id=4a38d295796c7...

Jul 05 06:21 AM

[Dave Wrixon:]

Sorry that did work either. You will have to navigate from original article.

Jul 05 06:22 AM

[cameroni:]

The worry of course John is that in order to "stop the bleeding" and save the patient, authorities will undertake to enact measures that will result in nothing other than inflation.

It will occur though as unemployment is still high, asset prices are flat or declining and imports are anemic. The cure of course is government intervention and that means spending to offset contractions in the private sector. But spending is clearly devaluing the currency and national debts are no longer sustainable.

Monetization is the only real lever left in the arsenal (sarcasm of course) of central planners tools to battle deflation and that action will send us unavoidably inflationary. Even hyper-inflationary. The only other alternative of course is to allow the asset destruction to run it's course. But the risks of social upheaval brought on by a general collapse are so great I do not think that it will be permitted.

Nor can it. Busy hands are preferred over busy minds. We need to get back to full employment and that means governments will need to pull out all the stops and flood markets with more liquidity. Much more.

The outcome won't be pretty though.

Jul 05 07:36 AM

[Living4Divi...:]

John Lounsbury - thanks for your article. Once again you deliver the goods.

Jul 05 08:27 AM

[ain't no fo...:]

I totally agree John. First things first - so my concern remains deflation. It is what we have TODAY and it presents itself in a massive reduction of the American consumer's net worth by approximately $12 Trillion the past two years. That represents a collapse in asset values of nearly 20% - that is a massive wound - physically but more importantly, psychologically, and its reflected in the continuing almost non-existence of the velocity of money. The patient is in what could be a case of fatal shock if its not treated immediately.

I'm yet to see any overwhelming evidence that the economy has stabilized, much less is accelerating towards an inflationary outcome. A lot could happen between now and the onset of serious inflation, but it won't matter a bit if we don't survive the initial injury and take care of TODAY's problems, which are that we have an economy that got hit head-on by an 18 wheeler.

Jul 05 10:12 AM

[D. McHattie:]

Inflation is not always produced from the same source.

Our employment levels were very much dependent on the real estate bubble which will continue to deflate for the next couple years. An overheated economy as the typical source of inflation is highly unlikely to occur in our present environment.

A currency collapse, on the other hand, can also create something that looks very much like inflation - this is far more likely to occur.

Jul 05 10:38 AM

[derryl:]

I agree with John and D.McHattie. The massive consumer, business and bank deleveraging going on is purely deflationary and the massive stimulus going on is insufficiently inflationary. I think the forex value of the Yen is stilll being upheld due to demand for Yen as the carry trade unwinds and people need Yen to pay their Yen-denominated debts. The same is true of the US$ because, as the world's reserve currency, many international debts are denominated in and must be repaid in dollars. Once these international debts are wound down and defaulted demand for these 2 currencies will decline. As a large importer of commodities, especially oil, the US could see price increases caused simply by devaluation of the US$ on forex markets. Printing your way out of this stagflationary scenario can generate hyperinflation. The outcomes will be political, not economic, so it's really impossible to say which way this thing will play out because you can't predict what people will do to save themselves in a crisis. The immediate term rescue can bring about the short term catastrophe.

Jul 05 12:45 PM

[VALUEDIV:]

Well done to point this excellent analysis to our fellow investors. It may be debated, but the facts do cause concern for the global economy that is greatly dependent upon our economic, financial, and dollar's health, especially China. China, who is a growth hope during these dire times, will be the most damaged by our $ downfall.

However there are two more immediate bubbles that are not academic data, but "real" threats to further recovery. I cite the global derivatives float waiting to demand payment for toxic asset defaults; and, the credit card debacle about to explode. From a non-academic point of view, this looks like a left jab followed by a knockout punch to the chin of any imminent recovery within the next three years.

As an old economics prof and 35 year investor, I see that we have reached a total redirection in the future of finance and business worldwide. Government bailouts and control that will endure in coming decades; and, perhaps, the way business and investment works will never be the same.

Was it the system? No, it was abuse of the financial sector in an economy formerly backed by production as a result of post-WWII "fairly valued" solid growth until 1982. Most of the growth since has been inflated by synthetic accounting. "It was GREED that killed the BEAST, not Beauty" (twist on ending line of King Kong).

God preserve America on this Fourth of July 2009, and perhaps save us from our own folly and human greed.

Jul 05 02:36 PM

[John Lounsbury:]

Commenters - - -

Thanks for sharing your thoughts. There is a common thread and undercurrent in most comments (so I won't try to recognize the individuals) that I want to summarize for emphasis:

We face the possible prospect of deflation for our physical and paper assets (such as land, houses, commercial real estate, securities, etc.) during the same time that our currency depreciates against other currencies and hard assets, such as metals, fuels, etc.

This would indeed be the great American nightmare. And waking from that nightmare would require a rebirth of competitive labor for production to convert us back to a maker of things of utility again, as we were a 50-100 ago. This would be a generational (or multi-generational) change. We may not follow this scenario, but it has to be recognized on the list of possibilities, and, I think, not all that far from the top of the list.

No one really said this in the comments (at least not my entire ramble), but it is what I pulled from what was said and the undercurrent I detected. Thanks to all commenters who have participated.

Jul 05 02:55 PM

[CLH:]

Who measured industrial production? During the war years it must have gone up 5 fold or more. However, the graph does not show that.

All those boats, tanks and arms destroyed were produced during this time (1940-1945).

Jul 05 07:06 PM

[Steven Hansen:]

clh - good observation on industrial observation during the war years. i suspect, however, that industrial production was centered in europe and america before the war, and the rise in production in the warring countries were offset somewhat by the occupied countries (where production fell to nearly zero). also, consumer goods production during the war years also fell to near zero.

if i were a great wizard, i would not know where to start to fix the economic mess we are in. we have so many negative systemic issues facing us - it remains like the perfect storm. all the elements have morphed into a very strange linkage.

out of the potential destruction taking place, we should be building a new core using small business. this core should be based on technology which is not easily exported - such as agriculture or energy based.

Jul 05 07:25 PM

[Gregman2:]

We need a debt jubileee to restore buying power.

Jul 05 10:25 PM

[athena:]

It is obvious. The yuan stayed too high for too long. When the dollar tanks, we may be competitive again as manufacturers and exporters.
The physical assets here are overpriced by about the size of our debts.

Jul 06 07:46 AM

[athena:]

Sorry, meant yuan was too low.

Jul 06 07:47 AM

[JeffDB:]

On Jul 05 06:21 AM Dave Wrixon wrote:

> Sorry, link broken. Follow this one and then select last image:<br/>
>
> static.10gen.com/www.b.../~~/f?id=4a38d295796c7...
> Sorry that did work either. You will have to navigate from original article.
-------

I pulled www.businessinsider.com/ out of the url but am not sure which article you wanting to link to.

If interested, you might consider trying a site like: makeashorterlink.com/i...

You can cut & paste in a long url & it will convert it to a much shorter one that will often work on sites such as these where the long one may not.

Jul 07 02:08 AM