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Wednesday, April 08, 2009


it's a depression, alright

barry eichengreen and kevin o'rourke at vox eu sketch out graphical comparisons in industrial output, work stock markets and trade, as well as measures of policy response.

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. 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. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

particularly marked is the stunning crash in global trade, far exceeding the early months of the great depression. this makes some sense, as crossborder shipping and supply lines are a much greater part of the global economy than then. but in a very real sense this implies only a higher ledge from which to fall.

among developed nations a lot of the economic collapse has been shunted off onto japan, thanks to a surfeit of excess capacity in high value goods for export and the unwinding of the massive yen carry trade. germany and china have also suffered tremendously, though in china's case the fact is often obfuscated. also quickly getting the knife have been small countries/currencies with high trade deficits -- iceland, eastern europe -- who have experienced catastrophic currency collapses that have crushed their access to global markets.

the united states, much like the british empire of the 1930s, has ridden a safe-haven reserve currency and its status as the global source of excess demand into a relatively softer decline. the story here is by no means over -- as monetary policy has been sidelined by the collapse of borrowing, government fiscal policies globally will be critical in determining how far the collapse goes before cash flows stabilize. this particularly figures to be a problem in europe under the restricitons of the maastricht treaty; ireland is a poor example of europe as a whole, having had more in common with a euroized iceland, but this could become an altogether too common and tragic theme.

“The S&P downgrade was a kick up the backside,” said Jim Power, chief economist at Friends First in Dublin. “There is a short-term firefighting issue in the budget and a longer-term sustainability issue.”

i suspect ireland is about to find out that cutting government spending will mean larger, not smaller, deficits as economic activity and tax revenues crash out in the aftermath. "sustainability" is something politicians know precious little about in good times and should pay even less attention to in crisis. richard koo recently remarked that ratings agencies, as counterproductive in their evaluations of the public balance sheet during depressions as they were in evaluating private credit during the boom, must be broadly ignored for the duration as govenrments preserve global incomes and deposits through fiscal deficits.

furthermore, changes in trade policy that might reinforce the collapse are still nascent.

ultimately, these are political, and not economic, questions whose outcomes have yet to be determined. i have long been a critic of democracy and won't hide the fact that i think it will serve us particularly poorly now. should raging populism become the driver of policy in world capitals -- as has too often been the case in the past -- the bottom can and will yet drop out.

UPDATE: krugman:

What Eichengreen-O’Rourke show, it seems to me, is that knowledge is the only thing standing between us and Great Depression 2.0. It’s only to the extent that we understand these things a bit better than our grandfathers — and that we act on that knowledge — that we have any real reason to think this time will be better.

i'd feel a lot better about that if there actually was some sort of economic consensus. it seems to me that the gains in economic understanding, while there, are parsimonious and very unevenly distributed. there were a few folks who understood generally what needed to be done in 1930; trouble was, they were frequently utnumbered and disempowered by those who didn't. i don't think it self-evident that the chessboard of public policy has changed all that much since then.

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