I can see many parallels between the (first) Great Depression and what is emerging across the financial planet today, especially in the West. Below I summarise the Great Depression and consider how our modern world is travelling along a similar trajectory. Will taking this parallel path take us into the second Great Depression and an even more hellish destination beyond?
The First Great Depression
The Great Depression was preceded by WWI, a financial indulgence that plunged governments into huge deficits. During the 1920’s governments pursued growth as a way to clear their debts processes that intentionally or not rewarded the strong and tolerated the weak. Countries implemented policies, such as lower taxes that reward the fittest, the strongest and reduced payments to the unproductive. Governments tried to achieve recovery by rewarding the strongest elements of society; banks failed, tax rates were lowered, unions were marginalised, the middle class were squeezed, poverty exploded while stocks surged only to in 1929 crash. With GNP falling and unemployment rising, countries then adopted self-protective actions; interest rates were lowered and trade tariffs were increased.
By 1932 shares were down hugely, globally thousands of banks had failed, bank deposits were lost and the money supply contracted, GNPs had collapsed, millions had lost their jobs, commodity prices had fallen as did international trade. The protective measures of lowering interest and higher tariffs designed to protect productive industries failed. The world was firmly in the grip of the first Great Depression.
With all fiscal options exhausted, money supplies were expanded, taxes were raised and governments spending increased.
The experience of depression was followed by wide spread political change; incumbent governments fell and were replaced by politicians offering a new deal, a new direction and most importantly hope. Initially these new governments created further instability and uncertainty, but eventually their new measures began to take hold and the slow long road of recovery began. Over the next few years GNPs, although patchy, generally rose and unemployment generally fell.
In 1936 Germany fully recovered from the Great Depression, a feat that was made possible through heavy deficit spending on their military. The United States only truly began emerging from the Depression In 1939 by borrowing and spending $1 billion, to build up its armed forces. Between 1939 and 1941 U.S. manufacturing exploded 50%! Economically the world had emerged…
Where to begin?
So many doomsters around and so many pointing to history.
Fortunately we have history to teach us where mistakes were made.
Most importantly the world economy is so globalised these days in comparison to then. So much of our manufacturing and other processes are located overseas so putting up trade barriers won't work.
The "West" is now only 1 and a but Billion. The Developing and Developed (China) are 5 and a bit Billion - growing strongly. Back at the time of the GD, the figures were much much different and there was no real driver for the global economy other than "The West" - not so now.
Besides, it seems as if the US is already well on the mend, judging from latest and trend data. Its still the biggest economy so any growth there, coupled with China etc, is a very positive backdrop.
Arguably you could say that the EU's existing trade barriers have not helped the economy. Protecting poor and inefficient manufacturers, service providers, farms, etc just isn't sensible. Personally I'd do away with all trade barriers globally. Those inefficiencies and the associated costs (of monitoring and also end prices/extra taxes) only hold back the global economy and better integration/understanding and erode inequalities.
Tax, as Cowperthwaite found and proved, is the grit in the engine of progress. Keep taxes low, increase efficiencies and then we'll all be better off long term.
Well, I can dream can't I? Can't let all the doomsters have their own way.
D
