What do the new data tell us?
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Barry Eichengreen Kevin H. O’Rourke |
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This column updates the original Vox columns by Barry Eichengreen and Kevin O’Rourke comparing today’s global crisis to the Great Depression. The three previous columns have shattered all Vox readership records with over 450,000 views. This latest edition covers up to February 2010 showing that, while there is cause for optimism, there is no room for complacency. This column is a Lead Commentary on VoxEU's debate on
Join the debateThis column is a Lead Commentary on VoxEU's debate on Join the debate Editor's Note: This column updates the original Vox columns by Barry Eichengreen and Kevin O’Rourke comparing today’s global financial crisis to the Great Depression. The previous columns have shattered all Vox readership records with over 450,000 views (O’Rourke and Eichengreen 2009). The latest data cover up to February 2010, the original April 2009 column and the subsequent updates appear below. Click here to read the original column. Global outputGlobal industrial production continues to recover – something for which policy deserves considerable credit (as we have argued on this site, see Almunia et al 2009 and O’Rourke and Eichengreen 2009). But before indulging in self-congratulation, policymakers should note that the level of industrial production is still 6% below its previous peak (figure 1). (At the trough it was 13% below its previous peak.) It follows that considerable excess capacity remains in a number of important economies. Exiting now from policies of stimulus in those countries would therefore be premature. Figure 1. World industrial production, now vs. then
World tradeWorld trade also continues to recover but remains 8% below its previous peak (figure 2). (At the trough it was 20% below its previous peak.) The roots of this collapse of trade remain to be fully understood, although recent research has begun to shed light on some of the causes (see Baldwin 2009 and Chor and Manova 2009). Figure 2. Volume of world trade, now vs. then
Equity marketsWorld equity markets are now 25% below peak (figure 3). (At their trough they were 50% below peak.) There was a break in the upward trend in January 2010 that may signal investors’ growing concern about the danger of a double dip – although if the crisis has taught us anything, it has taught us that too much should not be made of the forecasting ability of financial markets. Figure 3. World equity markets, now vs. then
Start of second update (published June 2009); original column (published 6 April 2009) appears belowEditor’s note: The original Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records (30,000 views in two days, over 100,000 in a week, now fast approaching 350,000). Here the authors provide updated charts, presenting monthly data up through June 2009 (or latest). What do the new data tell us?
This is a sharp divergence from experience in the Great Depression, when the decline in industrial production continued fully for three years. The question now is whether final demand for this increased production will materialise or whether consumer spending, especially in the US, will remain weak, causing the increase in production to go into inventories, leading firms to cut back subsequently, and resulting in a double dip recession.
Figure 1. World industrial production, now vs then
Figure 2. World stock markets, now vs then
Figure 3. Volume of world trade, now vs then
Figure 5. Industrial output, four big Europeans, then and now
Figure 6. Industrial output, four non-Europeans, then and now
Figure 7. Industrial output, four small Europeans, then and now
Start of first update (published 4 June 2009); original column (published 6 April 2009) appears belowEditor’s note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.) New findings:
The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; note the rebound in Eastern Europe. Updated Figure 1. World Industrial Output, Now vs Then (updated)
Updated Figure 2. World Stock Markets, Now vs Then (updated)
Updated Figure 3. The Volume of World Trade, Now vs Then (updated)
Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
New Figure 5. Industrial output, four big Europeans, then and now
New Figure 6. Industrial output, four Non-Europeans, then and now.
New Figure 7: Industrial output, four small Europeans, then and now.
Start of original column (published 6 April 2009)The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30. Comparing the Great Depression to now for the world, not just the USThis and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences. Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices. In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then. Figure 1. World Industrial Output, Now vs Then
Source: Eichengreen and O’Rourke (2009) and IMF. Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30. Figure 2. World Stock Markets, Now vs Then
Source: Global Financial Database. Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression. Figure 3. The Volume of World Trade, Now vs Then
Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html It’s a Depression alrightTo 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. That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response. Policy responses: Then and nowFigure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally. Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank. Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline. Figure 5. Money Supplies, 19 Countries, Now vs Then
Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators. Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater. Figure 6. Government Budget Surpluses, Now vs Then
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009. ConclusionTo summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. 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. ReferencesEichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress. Almunia, Miguel, Agustín S Bénétrix, Barry Eichengreen, Kevin H O’Rourke, Gisela Rua (2009), “The effectiveness of fiscal and monetary stimulus in depressions”, VoxEU.org, 18 November. Baldwin, Richard (eds) (2009), The Great Trade Collapse: Causes, Consequences and Prospects, VoxEU.org Ebook, 27 November. Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press. Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82. Chor, Davin and Kalina Manova (2010), “Off the cliff and back? Credit conditions and international trade during the global financial crisis”, VoxEU.org, 15 February. Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009). Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009). This article may be reproduced with appropriate attribution. See Copyright (below). Topics:
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In sports its is often said
In sports its is often said that you can't compare era's. Today's players are faster an better trained than in the past. This make it difficult if not impossible for sports historians to truly say who was the best ever. In comparing the Depression to the Crisis how does the rate of economic activity affect the slopes of many of the curves. Does a steeper decline in 2009 represent a deeper economic downturn or can we expect given higher rates of commerce that the slopes today would be steeper? My hunch is that as given speed of information and money in our economy today we would expect that the time frame for economic downturns would shorter with recovery coming sooner. This maps to work done by the Santa Fe Institute which shows that the metabolism of cities and other activities has been increasing over time.
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Barry M. - Naples Fl.
PC Pro School
Excellent article and please
Excellent article and please do keep up the fine work as this economic debacle unfolds. Two points;
Global trade is now much larger than it was in GD1, so it shouldn't be a big surprise that has collapsed as much as it has.
Another commenter mentioned that "it doesn't feel as bad as you would expect given the circumstances" -- I would say the social programs have had a positive impact in this area. Many of these did not exist in the 1930's. Where there is an advantage, there is also a disadvantage and in this case it will be the hangover from the debt incurred to pay for this relief. This will either have to be inflated away or paid off over decades, slowing future growth.
Historical Trade Data
Excellent post! Very intriguing... I'm just a bit curious, where did the historical trade data come from? My recollection was that there was a collapse in world trade following the Great Depression, which accompanied the worldwide financial crisis and movement toward protectionism, Smoot-Hawley, etc. This Wikipedia entry has world trade falling 66% in a matter of years after 1929 (http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act ). If I'm reading your graph correctly (my apologies if not), I see world trade was down between 10 and 15% in 1931-32. 36 months out, which would be June of 1932, it looks like trade was down a mere 8% from June of 1929... Is it the case that nominal trade collapsed, but that so did prices, so that real trade held up?
Question about Trade...
Fantastic job overall, everything is really interesting. We're fortunate to have you guys posting... I'm just a bit curious though, where did the historical trade data come from? My recollection was that there was a collapse in world trade following the Great Depression, which accompanied the worldwide financial crisis and movement toward protectionism, Smoot-Hawley, etc. This Wikipedia entry has world trade falling 66% in a matter of years after 1929 (http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act ). If I'm reading your graph correctly (my apologies if not), I see world trade was down between 10 and 15% in 1931-32. 36 months out, which would be June of 1932, it looks like trade was down a mere 8% from June of 1929...
Comparing era's
In sports its is often said that you can't compare era's. Today's players are faster an better trained than in the past. This make it difficult if not impossible for sports historians to truly say who was the best ever. In comparing the Depression to the Crisis how does the rate of economic activity affect the slopes of many of the curves. Does a steeper decline in 2009 represent a deeper economic downturn or can we expect given higher rates of commerce that the slopes today would be steeper? My hunch is that as given speed of information and money in our economy today we would expect that the time frame for economic downturns would shorter with recovery coming sooner. This maps to work done by the Santa Fe Institute which shows that the metabolism of cities and other activities has been increasing over time.
Comparing era's
In sports its is often said that you can't compare era's. Today's players are faster an better trained than in the past. This make it difficult if not impossible for sports historians to truly say who was the best ever. In comparing the Depression to the Crisis how does the rate of economic activity affect the slopes of many of the curves. Does a steeper decline in 2009 represent a deeper economic downturn or can we expect given higher rates of commerce that the slopes today would be steeper? My hunch is that as given speed of information and money in our economy today we would expect that the time frame for economic downturns would shorter with recovery coming sooner. This maps to work done by the Santa Fe Institute which shows that the metabolism of cities and other activities has been increasing over time.
Update, Please!
Very well done article. I have been waiting to see an update. I use this great analysis as a basis for my understanding of the current economic position, and often recommend it to others, but its now out of date.
Ray McGill
Data Analyst (not financial though!)
Very insightful, but
Very much enjoyed this Tale of Two Depressions and am looking foward to future updates.
One large difference in the two depressions is the effect of the BRIC countries on our current situation.
Of course they were not a factor in 1929, but may be an engine for recovery in the current depression.
Your thoughts?
John Brophy
missing variables
It could be intersting to track also unemployment, consumption, wealth, debt
this variables can mark the deifference between the two crisis.
I guess that unomplyment has not risen at 1929 level also because pubblic employment;
Personal income has not fallen because of welfare programmes ( in some countires)
henceforth, consumption could not have fallen.
The question is not anymore about the severity of the crisis but is: who is paying the bill?
The State, I would say, is taking on his shoulder the burden of the crisis. Public nets are at work.
National debt is the result.
regrds,
m. gomellini
Who is paying the bill
I would argue that US is taking on his shoulder the burden of the crisis. In fact US is exploiting the fact that the dollar is the most traded currency, thus US can easelly take chip credits from the entire world. And credits means stimulation of the internal comsuming demand - main engine of the modern economy and the only solution to overpass the crisis. Another benefit of US is the fact that if there are some problems in the economy of the US and the dollar is falling down, the entire world that baught US government bonds or has reserves in US dollars suffer from this.
Of cause, it is not the fault of US that other nations decided to keep their reserves in US dollars, but for sure US at a certain extend is exploiting this position and for sure is not the case of "taking on his shoulder the burden of the crisis"
Compare to Great Depression
springspat, Why did you start the charts in April 2008 when the actual market peak occurred in Oct 07--even though a recession was not declared until later? Using Oct 07 = 100, I believe your charts would show we are much farther along the path in comparison to the 'Great Depression' and might cause you to draw different conclusions as to the depth, etc. Your article is much appreciated either way however.
Industrial output as a % of GDP?
The conclusion above (i.e. "the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30 ") may be true or it may not be true. One thing is sure, figures based purely above may be that industrial output industrial output alone won't support it: in all the countries named above, industrial output is a much smaller percentage of GDP (both in each country and for the world as a whole) now than it was in the 1930s.
timing
This "depression" especially with respect to the US stock market, started in 10 of 2007 the charts given start in 4 2008.
That puts us 6 months farther along than these charts would have one think.
The data here makes me think we are closer to a US stock market bottom than I did before I read the article.
Policy response is similar not different
You state: "The good news, of course, is that the policy response is very different. "
On this you are incorrect. The policy response is very similar.
The policy response to the 1920 downturn (which was as severe if not more severe than 1929) was truly "very different". In that case taxes and government spending were lowered, and no bailouts were done. The recovery was swift.
The response to the 1929 crash was similar to this one in that within a month Hoover had all sorts of bailout and spending programs going. There were also attempts to prop industry sectors up. Protectionism rose (more than today but still similar to today). Government stimulus was also won the day in the followup to 1929 just like today.
I'd prefer it if the policy response was more like 1920-21 than what's happening today. This is going to be a very long "recession" the way the US responding now. Low interest rates, government intrusion into markets, and vast government spending got us here and more of the same is not going to get us out.
This slump and the great depression
This is a very good piece. It was necessary to draw these parallels which are real between the two events in order to pressure stubborn misguided politicians who were obsessed with balancing budgets despite circumstances . But it is premature to conclude that the fiscal stimulus and loose monetary policy is not effective. Most of the stimulus money in Canada and the U.S. has not yet been spent.(TARP monies , by the way do not count . So far some 68 billion of the TARP funds is being repaid with dividends and interest.) Once the bulk of the stimulus is spent and provided that interest rates are kept low we should start to see positive results in the coming two quarters.
The arguments of those who warn about inflation has also got to be countered. In Canada we have had a 14 % growth in M2 yet inflation and output continue to fall. This strongly suggests a large demand for holding cash.
Contrary to widespread belief quantitative easing in the current circumstances is not likely to result in inflation.In the 1980s and 1990s I did studies of the relationship between the ratio of government debt held by the central bank as a proportion of M2(that is, monetized debt) and the rate of inflation. I found no correlation over 40 years of evidence from 1940 to 1989. There were years when the ratio of monetized debt to M2 was over 20 % and inflation quite low during the 1950s except for 1951 and years when the ratio was below 12 % yet inflation quite high above 6 %. I suspect the same results are true of the U.S. and other countries.So in the current circumstances there is little risk of inflation.
Industrial or Global Output?
Was industrial output share out of TOTAL output simalar in both events? ( Cannot find the data for the 30´) ?
The relative importance of services in modern economies is higher than it was 80 years ago but also agriculture share was higher , so the net effect is not clear.
Can industrial output considered as a good approximation?
Analysis vis-a-vis other recessions
I appreciate the analysis done so far. It would be much useful if the current downturn was also compared to other recessions. The current comparison to the great depression may not be significant if other recessions have similar curves on the down-direction that trended upward relatively in a short span of time. I'd be interested in that comparison.
Other downturns?
Fantastic graphs, of course, but I wish there was a parallel exploration of other downturns. For each of the indicators depicted, were there any periods that resembled the Great Depression, or the current period, but did not last as the Great Depression did? Or else, are the Great Depression and the current period clearly different from every other downturn? The answer is likely 'yes', but it would be nice to see it.
Excellent presentation.
Excellent presentation. "...we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline." It does not seem that money supply is having much of a mitigating impact yet (although it's still early to say). It would be interesting to see China and Argentina considered in this analysis.
A Tale of Two Depressions
An analysis is missing of the institutional changes (in laws, organizations, ideology and political leadership, for example) and their interaction with changes in income distribution and wealth, co-determining the effects of the policy variables you analize.
Also, it is convenient to analyze US economic behavior and long term trends after 1933 in order to test the hypothesis of the Second World War and its corresponding post-war changes as the main causes of the "glorious 30 years", in contrast to conventional aggregate demand policies.
Tracking worse than the great depression
I would suggest that we're tracking faster than the Great Depression. The outcome might be worse but perhaps the revelation is that the prcess is faster. Surely this shouldnt be a surprise ... isn't this another factor that the rate of change is not linear but exponential -- as Kurzweil would have pointed out? In addition to the exponential rate of change, we have a greater interconnectedness -- which produces a global accelerator. Connected consumption.
My hope would be that these same factors would produce a faster recovery curve. My belief is that we could if we could harness the connectedness then the individuals could help us progress forward. There are millions of individuals watching from the sideliness looking for guidance to get involved. "Buy a car" from GM is not the answer. We have no stomach for spending our way out of this. But there would be a desire to help others out of this. Like earthquakes or other disasters, Americans in particular are fast to build a coalition to attack the cause. It just needs a center. Washington is not that center.
Rather faster than more severe
Great comment, that is the point, nowadays we have the following:
1. Information circulates a lot faster and is much more complete.
2. The industries are more flexible to readjust to the needs of the market.
3. There is a significant knowledge cumulated for restructuring processes and various consulting companies helps to react professionally to the crisis and minimize losses.
I think the period of 36-40 months of recetion during Great Deprecion in 29-30 will turn in 18-20 months nowadays. Actually, if we just compress the graphs of the Great Deprecion we will have even closer trends to the nowadays recetion. :)