Trading to Win

The Great Depression: Are We Fearing the Wrong Thing?

How about 1938? John Kay the British economist:

"Yet there is another, perhaps no less gloomy, way to draw parallels between the present crisis and the Great Depression. From this perspective, we are not at the start of the crisis but several years into it. The analogue of the 1929 Wall Street crash is not the 2007 credit crunch, but the bursting of the New Economy bubble in 2000. The follies of the 1990s resembled those of the 1920s, as Galbraith’s readers know. The underlying structural weaknesses of the world economy – US budget and trade deficits financed by Asian surpluses – re-emerged in 2000 after being disguised by the imaginary wealth of the New Economy.

The difference between the years after 1929 and the years after 2000 is that the policy mistakes were almost opposite. This time monetary and fiscal policies were strongly expansionary from the outset. These measures led to a wide boom in asset prices, extended unsustainable credit levels and induced further growth of the fundamentally flawed financial infrastructure on which the 1990s boom had been based.

In 1937-38, markets and business leaders came to doubt the durability of the business foundations on which partial recovery from the Great Depression had been built. In 2007-08, markets and business leaders came to doubt the durability of the financial foundations that had supported consumption and asset price growth after the New Economy fiasco.

Our capacity to learn from the Great Depression is limited because we do not know how economies would have evolved after 1938 if politics had not supervened. Life, said Kierkegaard, is understood backwards but must be lived forwards."