Is it 1930? Certainly that is the parallel many recovery sceptics are citing. We hear stories about how eerily similar this year's green shoots are to positive stories that developed the year after the great crash; there's even a blog devoted to tracking the daily news from that year. Meanwhile, Calculated Risk has earned himself quite a few links by posting stock price charts from Doug Short comparing "four bad bear" markets. And it's true, the market's collapse from September to March was similar in severity to the crash of 1929, and the market recovery since March looks eerily like the short-lived bull from 1930—which ultimately gave way to an epic bear market that persisted for years.
And right on schedule, the markets appear to be faltering. In the eyes of many observers, the whole recovery narrative has been false, and America is about to relive the Great Depression, or at least a serious drop in the market.
Maybe. I certaintly wouldn't be surprised by a period of decline for equity markets, even one of 10% or more. But I caution strongly against viewing this as simply a reenactment of the events of 1930. As James Hamilton says, it took some very bad policy decisions—including a contraction in the money supply that ultimately amounted to about one-third by 1933—to produce sustained economic decline. It certainly seems that current leaders aren't that worried about closing budget deficits, and Ben Bernanke will in no way allow sustained deflation to take place.
As I believe Brad DeLong put it some time ago, these leaders are very determined not to repeat the mistakes of the 1930s. They may make other mistakes, but they'll not allow contractionary monetary and fiscal policy to destroy the economy.
This article originally appeared on The Economist.com