As the worldwide recession continues to roll on the similarities with the 1930s depression are growing stronger by the day and there are serious concerns that we could be heading down the same route. Despite greater technology, apparent greater awareness of economies around the world and a more hands-on management of trade and business it would appear that we have learned nothing from the great US depression of the 1930s which spread throughout the world. Those of a nervous disposition should stop reading now…………………..
The deflationary spiral of the 1930s against the recession of today
1930s : It is well documented that the depression of the 1930s began when the US stock market collapsed after a relentless surge in previous years. Governments and businesses in the US inparticular were spending record amounts of money before the stock market crash but suddenly consumers, hit by the fall in the stock market, started to cut back on their expenditure.
2009 : There is no doubt that the current recession, which began in 2007, was the result of a relentless pursuit of property assets in the US and around the world (similar in comparison to the US stock market investment surge). Governments around the world were running record budget deficits as expenditure continued to rise and businesses were pursuing lower and lower margin business in pursuit of profit. As investors watch their property assets decline in value, slowly but surely there has been a reduction in consumer spending.
1930s : The early 1930s saw cheap credit available to the masses but as a significant number of the US population had lost substantial amounts of money in the stock market crash they were reluctant to “spend their way out of the depression”. Wages in the early 1930s remained fairly steady, for those in employment, but there was significant pricing pressure on the retail and services sectors.
2009 : The recession of today has also left many in the UK and around the world facing significant debts and while in theory there is cheap credit available today, this is only available to a small selection of the population and many people are again reluctant to “spend their way out of the recession”. There is also significant pressure on the high street which has seen a number of high profile retail companies go out of business, even though at the moment wage levels are holding steady and in some cases moving higher.
1930s : In the depression of the 1930s there were less “economic tools” available to the authorities compared to those today. As a consequence the US government of the time introduced a policy of protectionism to effectively try and shore up the US economy and keep everything “in-house”.
2009 : Looking back on the US of the 1930s and the US of today there is one issue which has reared its ugly head again. Protectionism has been added to a number of the American rescue packages introduced by Barack Obama which bears a chilling resemblance to the 1930s. Despite prominent figures such as Gordon Brown suggesting protectionism is not the way forward, a number of his European allies are looking towards such measures – so how long can Gordon Brown resist?
The problem with protectionism is the fact that once it starts it will spread like wildfire around the world and magnify the collapse in global trade. This was a significant issue back in the 1930s and is starting to become a hot topic of debate in 2009.
The Irving Fisher timeline for the 1930s depression and the 2009 depression?
Irvine Fisher was a prominent US economist with specialist knowledge of the 1930s recession and the events which he believes created a climate for the collapse in not only the US economy but the worldwide economy. Much like today, he placed great emphasis on excess debt and inflation which brought a number of other factors into play and can be connected to events happening today:-
Debt and distressed selling. As debts continue to rise, more and more people across the world are selling their assets at below “market value” which forces prices lower and lower. However, while asset prices move lower in real terms the individual levels of debt remain constant so in effect there is a “real” increase in relative debt compared to assets.
Contraction of money supply. As banks call in more and more loans we are seeing new credit lines drying up and money supply to the economies around the world is evaporating.
Falling asset prices. As more and more people experience financial problems we have seen assets sold at significantly distressed prices, which creates something of a self fulfilling prophecy – prices move lower and lower.
Businesses under pressure. The pressure on economies around the world has seen business levels reduced significantly and profit margins all but evaporate in many sectors. This has led to more and more corporate and individual bankruptcies.
Falling profits. As profits fall in the world of business this can only lead to reduced investment in the future because of a lack of credit facilities to make up for the shortfall. The consequences for this are all too evident in economies around the world.
Reduced output. As demand for products and services around the world continues to fall this places more and more pressure on business cost bases. Ultimately, this is sure to lead to significant redundancies around the world placing more pressure on economies and the vicious circle begins.
Loss of confidence. Confidence is a major issue in any boom and bust period and while there have been a number of attempts to increase consumer and corporate confidence around the world this has failed miserably. Confidence is currently spiralling lower and lower as more pessimistic forecasts are released into the marketplace.
Hoarding of money. As in the 1930s, those who have savings today are reluctant to spend them on unnecessary products and services even though interest rates on savings accounts around the world are moving ever closer to 0%.
The reduction in nominal interest rates and the threat of deflation. We are currently seeing interest rates around the world fall to levels not seen in recent times. However, inflation has so far remained fairly steady which many believe is storing up significant problems for the future. There will come a time when suddenly consumers cannot afford the most basic services and products and we will see a significant collapse in demand. This will then instigate a serious period of deflation and prices will fall into a downward spiral and the 1930s affect will be fully replicated in 2009 – or will it be different?
As we have hopefully outlined above, there are serious similarities between the current day situation regarding worldwide economies and the depression of the 1930s, which again BEGAN IN THE US. This is the first of a series of articles based around the ongoing economic situation, comparisons with the past and forecasts for the future.