From recession to depression? The world economic downturn gathers pace, and, increasingly, are the parallels with the Great Depression of 1929. The Conference of 2009 on issues of macroeconomic situation in the world, which was held last week in New York investment bank Morgan Stanley, have done particularly often. Expressed a general opinion is that the U.S. economy, at best, waiting for something akin to lost decade in Japan, some believe, the situation may be similar or even worse, the Great Depression.
Hardly. We fundamentally disagree with that position. Indeed, the situation is catastrophic, but not so much as during the Great Depression - the political authorities learned a lesson and threw all the efforts to rescue the economy by undertaking massive monetary and fiscal incentives. Our baseline scenario is that the authorities will be supported during 2009, and towards the end of his second semester, we feel (possibly weak) recovery. Nevertheless, given the universal fear of the depression should be further addressed during the 30-ies., Figure out how tragic the situation, why it occurred, and why we think that it could not happen in the future. Despite the fact that the Great Depression, and the current economic downturn was a global one, we will focus our attention mainly on data from the U.S..
The grim statistics. The fall in GDP in the early 30-ies. was most significant in the history of the United States, beginning in 1790, when the first documented data on GDP per person. In addition, the economic recession of the early 30-ies. - This is the second decline in the annals of business cycles National Bureau of Economic Research (NBER). He lasted 43 months - from August 1929 to March 1933 (the most long-term decline in business activity occurred in the period from 1873 to 1879 he was. But it was less deep). During this period, industrial production declined more than doubled, while real GDP fell by almost 30%. By the spring of 1933 the unemployment rate rose by no less than 25%. Deflation prevailed in almost four years from 1930 until the end of 1933. The level of prices in the period from late 1929 until mid-1933, declined by almost 30%. Other features Depression was permanent, bank bankruptcies and defaults, as well as the failure of companies and households.
Yes, it is our hands cause. The general view of economic historians is that the Great Depression was the result of a number of serious political mistakes that have turned ordinary crisis in a dramatic economic downturn. First, the Fed and other Central Bank remained on the sidelines, watching the way the banks one after the other suffered bankruptcy. They are not sufficiently softened the policy and allowed a grand decrease in money supply. Secondly, fiscal policy was procyclical - according to the principle of balancing the budget by lowering tax revenue generated during the economic downturn, the Government had been obliged to reduce costs. And third, in accordance with the tariff distemper-Hole approved by the U.S. Congress in June 1930, a number of imported goods were imposed high import duties. This sparked trade wars - Europe repay the U.S. of the same coin, then the world economy entered a tailspin.
The leading role of the monetary authorities. It is difficult to say which of those three misses was the political basis for the Great Depression. Nevertheless, since the publication in 1963, the constructive work of Milton Friedman and Anna Schwartz "The History of Money in the United States, 1867-1960" (Note Profinance.ru: A Monetary History of the United States), most economists agree that the monetary authorities, whose work provided the existence of the gold standard, may have played a most important role. Incidentally, this view is shared by Fed Governor Ben Bernarke, whose report on Money, gold and the Great Depression (Note Profinance.ru: Money, Gold, and the Great Depression), read 2 March 2004, is a good summary of the book Friedman and Schwartz, as well as the work of other researchers monetary reasons Depression.
The failure of the Fed. Explain the failure of the Fed in early 1930. In 1929 began the reduction of money supply, which lasted for several years. Since the maximum in October 1929 to a minimum in April 1933, the amount of money in circulation decreased by almost 40%. This largely reflects the neglect of the Fed banks' bankruptcies, which have led to a reduction in the deposit base. Since the banks no longer seemed safe, people began to make personal savings, which consisted mainly of being in circulation of banknotes and coins. Lending to the private sector has also dropped - from November 1929 until the end of depression in August 1935, the outstanding loan amount has decreased to not less than 50%. Incidentally, the Great Depression may also serve to illustrate the point made by us last week: the growth of credit as a relatively short growth of money supply, as well as on the economic recovery. Although the economic recession ended in spring 1933, the positive rate of growth of credit was recorded only in two years.
No more golden handcuffs. End of the Great Depression at the beginning of 1933 was the newly elected President Roosevelt's decision to remove the pressure the gold standard for monetary policy: for the dollar was initially released in the free swimming, then the value of American currency was fixed at much lower levels. He also had stabilization of the banking system: first, all bank transactions have been terminated ( "bank holidays"), then the banking system was consolidated, and after that the deposit insurance was introduced. Fiscal expansion, implemented through the program of Roosevelt's New Deal, began to yield tangible results only in later years, when the restoration has already begun.
Money matters. Therefore, at this time, no depression. The main lesson of the Depression was that policy, especially monetary, plays a crucial role. Head of the Central Bank of the world learned this lesson and not just early and aggressively lowering interest rates, but also put in place quantitative indulgence, together with their governments stabilize the banking system. Thus, money supply is currently increasing, not decreasing. All this, together with the upcoming fiscal expansion, a cause to believe that the universal fear of Depression - this is just fear.
Hardly. We fundamentally disagree with that position. Indeed, the situation is catastrophic, but not so much as during the Great Depression - the political authorities learned a lesson and threw all the efforts to rescue the economy by undertaking massive monetary and fiscal incentives. Our baseline scenario is that the authorities will be supported during 2009, and towards the end of his second semester, we feel (possibly weak) recovery. Nevertheless, given the universal fear of the depression should be further addressed during the 30-ies., Figure out how tragic the situation, why it occurred, and why we think that it could not happen in the future. Despite the fact that the Great Depression, and the current economic downturn was a global one, we will focus our attention mainly on data from the U.S..
The grim statistics. The fall in GDP in the early 30-ies. was most significant in the history of the United States, beginning in 1790, when the first documented data on GDP per person. In addition, the economic recession of the early 30-ies. - This is the second decline in the annals of business cycles National Bureau of Economic Research (NBER). He lasted 43 months - from August 1929 to March 1933 (the most long-term decline in business activity occurred in the period from 1873 to 1879 he was. But it was less deep). During this period, industrial production declined more than doubled, while real GDP fell by almost 30%. By the spring of 1933 the unemployment rate rose by no less than 25%. Deflation prevailed in almost four years from 1930 until the end of 1933. The level of prices in the period from late 1929 until mid-1933, declined by almost 30%. Other features Depression was permanent, bank bankruptcies and defaults, as well as the failure of companies and households.
Yes, it is our hands cause. The general view of economic historians is that the Great Depression was the result of a number of serious political mistakes that have turned ordinary crisis in a dramatic economic downturn. First, the Fed and other Central Bank remained on the sidelines, watching the way the banks one after the other suffered bankruptcy. They are not sufficiently softened the policy and allowed a grand decrease in money supply. Secondly, fiscal policy was procyclical - according to the principle of balancing the budget by lowering tax revenue generated during the economic downturn, the Government had been obliged to reduce costs. And third, in accordance with the tariff distemper-Hole approved by the U.S. Congress in June 1930, a number of imported goods were imposed high import duties. This sparked trade wars - Europe repay the U.S. of the same coin, then the world economy entered a tailspin.
The leading role of the monetary authorities. It is difficult to say which of those three misses was the political basis for the Great Depression. Nevertheless, since the publication in 1963, the constructive work of Milton Friedman and Anna Schwartz "The History of Money in the United States, 1867-1960" (Note Profinance.ru: A Monetary History of the United States), most economists agree that the monetary authorities, whose work provided the existence of the gold standard, may have played a most important role. Incidentally, this view is shared by Fed Governor Ben Bernarke, whose report on Money, gold and the Great Depression (Note Profinance.ru: Money, Gold, and the Great Depression), read 2 March 2004, is a good summary of the book Friedman and Schwartz, as well as the work of other researchers monetary reasons Depression.
The failure of the Fed. Explain the failure of the Fed in early 1930. In 1929 began the reduction of money supply, which lasted for several years. Since the maximum in October 1929 to a minimum in April 1933, the amount of money in circulation decreased by almost 40%. This largely reflects the neglect of the Fed banks' bankruptcies, which have led to a reduction in the deposit base. Since the banks no longer seemed safe, people began to make personal savings, which consisted mainly of being in circulation of banknotes and coins. Lending to the private sector has also dropped - from November 1929 until the end of depression in August 1935, the outstanding loan amount has decreased to not less than 50%. Incidentally, the Great Depression may also serve to illustrate the point made by us last week: the growth of credit as a relatively short growth of money supply, as well as on the economic recovery. Although the economic recession ended in spring 1933, the positive rate of growth of credit was recorded only in two years.
No more golden handcuffs. End of the Great Depression at the beginning of 1933 was the newly elected President Roosevelt's decision to remove the pressure the gold standard for monetary policy: for the dollar was initially released in the free swimming, then the value of American currency was fixed at much lower levels. He also had stabilization of the banking system: first, all bank transactions have been terminated ( "bank holidays"), then the banking system was consolidated, and after that the deposit insurance was introduced. Fiscal expansion, implemented through the program of Roosevelt's New Deal, began to yield tangible results only in later years, when the restoration has already begun.
Money matters. Therefore, at this time, no depression. The main lesson of the Depression was that policy, especially monetary, plays a crucial role. Head of the Central Bank of the world learned this lesson and not just early and aggressively lowering interest rates, but also put in place quantitative indulgence, together with their governments stabilize the banking system. Thus, money supply is currently increasing, not decreasing. All this, together with the upcoming fiscal expansion, a cause to believe that the universal fear of Depression - this is just fear.
Morgan Stanley Source: Forexpf.Ru - Stock Market and Forex
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