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Parallels and Peril  Market Watch

True, historical parallels are never precise. We won't replay the Long Depression of 1873 to 1896 exactly, nor will this slump necessarily last as long. It is, however, a far more instructive episode than the Great Depression of the 1930s. And there are five key lessons we should learn from it.

First, depressions can last a very long time, and when their origins are in a debt bubble they should be measured in decades not years. For a century or more, depressions have been relatively short, sharp episodes. They are like having a tooth pulled, rather than a chronic sickness -- painful, but over quite quickly. But it doesn't have to be that way. In the U.K., for example, this is already the longest recession since records began -- in the sense that output is still below its 2008 peak. It is more enduring than the depression of the 1930s. That is true of many other countries, as well. If, as seems likely, Europe, and perhaps the U.S., slips back into recession in 2012, it will be clear to everyone we are witnessing something far longer than the conventional economic textbooks allow for.

Second, this depression is structural. The Long Depression of the 19th century had its roots in financial speculation, technological change, and the arrival of a massive new player in the global economy. Our current depression likewise has its roots in three huge crises coming together at the same time. We have a debt bubble that had been building up over three decade and which burst spectacularly in 2008. The dollar is in long-term decline as a reserve currency, and as the anchor for the global monetary system, but there is still not much sign of what will replace it. And in the euro, the biggest single economic bloc has created the most dysfunctional monetary system in human history, threatening financial collapses on an unprecedented scale. Think of it as the world economy's suffering a heart attack, then a stroke, then getting picked up by an ambulance that crashes on the way to the hospital -- it is hardly surprising the patient isn't in good shape.

Three, it's uneven. The Long Depression of the 19th century was a sustained period of lower growth compared with what came before and what came afterward. Germany, for example, grew 4.3% annually between 1850 and 1873 and then at 4.1% between 1896 and 1913. But in the Long Depression years, it only managed a growth rate of just over 2% a year. It was similar in other countries. The markets remained volatile, with repeated booms and busts, regularly collapsing back into recession. They did grow occasionally, just as Japan has sometimes grown in what is now its second decade of slump. But the growth is never sustained.

....

Five, it won't be fixed easily. The parallel with the 1930s is dangerous, because it has convinced bankers and policy makers that if you can just pump up demand, everything will be OK. It won't.


For starters, just how long will it take before The Serious People accept that the business cycle is not going to save them this time?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 19th, 2011 at 12:20:36 AM EST
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