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Although more and
more people are starting to see the similarities between current economic
conditions and those that existed 80 years ago, many differences of opinion
remain about where we are in the cycle.
To the pessimists,
we've only just begun the slide down the slippery slope. To the optimists,
there are clear signs of a light at the end of the tunnel.
In "Bad News: We're Back to 1931. Good News: It's Not 1933
Yet," the Telegraph's
Ambrose Evans-Pritchard suggests that the latter group has likely gotten way
ahead of itself.
Barack Obama inherits
an economy already contracting at an annual rate of 6pc, much like the
mid-Depression year of 1931 (-6.4pc), writes Ambrose Evans-Pritchard
This may beat Germany (-7pc) Japan (-12pc) and Korea (-22pc) over the fourth quarter. But that merely underlines
the dangers ahead as the collapse of global trade chokes the mini-boom in US exports, setting off another stage of the crisis.
The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10m Chinese have
lost their jobs since the crunch began. Japan's exports fell 35pc last month,
year-on-year. The central bank is printing money furiously, buying bonds to
prevent a relapse into deflation.
So yes, it is like
early 1931. Citigroup and Bank of America have more or less disintegrated. JP
Morgan's health is failing fast. General Motors and Chrysler survive only on
life-support from the US taxpayer.
But it is not yet
like 1933. That second leg down was the result of "liquidation"
policies by a Dickensian leadership blind to the dangers of debt deflation. By
then the Gold Standard had degenerated into an instrument of torture. It
forced the Fed to raise rates from 1.5pc to 3.5pc in October 1931 to stem
gold loss, with predictable results for shattered banks.
It is worth glancing
at the front page of New York Times on Monday March 6, 1933 to see what the
world looked like three days after Franklin Roosevelt moved into the White
House.
The newspaper
splashed with the story that FDR had closed the US banking system –
invoking the Trading with Enemies Act – and ordered the confiscation of
private gold. From left to right, the headlines read: "Hitler Bloc Wins
A Reich Majority, Rules Prussia"; "Japanese Push On In Fierce
Fighting, China Closes Wall, Nanking Admits Defeat"; "City Scrip To
Replace Currency"; "President Takes Steps Under Sweeping Law of War
Time"; "Prison For Gold Hoarders".
President Obama faces
a happier world. The liberal economic order is still in tact, if fraying at
the edges. Capital and ships move freely. North America and Europe talk the
same political language. China has so far proved a dependable pillar of the
international system.
But then the world
seemed benign enough in early 1931. It is the second phase of depression that
does terrible things.
Roosevelt took over a country
where the economic machinery had completely broken down. The New York Stock
Exchange and the Chicago Board of Trade had closed. Thirty-two states had
shut their banks. Texas had restricted withdrawals to $10 a day.
Few states could
borrow on the bond markets. Illinois and much of the South had stopped paying
teachers. Schools closed for months. An army of 25,000 famished war veterans
squatting in view of Congress had been charged by troopers of the 3rd US cavalry with naked sabres – led by a Major George Patton.
Armed farmers
threatening revolution had laid siege to a string or Prairie cities. A mob
had stormed the Nebraska Capitol. Minnesota's governor was recruiting
Communists only for the state militia. Lawyers attempting to enforce
foreclosures were shot. More than 100,000 New Yorkers applied to go to the
Soviet Union when Moscow advertised for 6,000 skilled workers.
We forget how close America came to open revolt. Eleanor Roosevelt feared the country was beyond saving. Her
husband kept the faith. He channelled the anger against Wall Street,
diffusing it. "The practices of the unscrupulous money-changers stand
indicted in the court of public opinion," he began his presidency.
The Fed was an
ideological deadweight. Bowing to pressure from Congress it began to purchase
bonds in mid-1932 to boost the money supply, but then recoiled, before
retreating into pitiful self-justification. A third of the rescue funds in Hoover's Reconstruction Finance Corporation had been embezzled.
Today there has been
no such failure of US institutional imagination, even if, as George Soros
argues, the Treasury's policies have been "haphazard and
capricious".
The twin blasts of
fiscal and monetary stimulus have been massive. In short order the Fed has
slashed rates to zero. It is now conjuring money out of thin air on an industrial
scale, buying $600bn of mortgage bonds to force down the cost of home loans,
and propping up the commercial paper market to avoid mass corporate default. Ben
Bernanke, a Depression junkie, is proceeding with a messianic sense of
certainty. The wash of money should ensure that the next 18 months will not
mimic the cascade of disasters from late 1931 to early 1933.
It buys time. But it
does not solve the deeper problem, which is that a West addicted to Ponzi
credit has put off the day of reckoning with ever more extreme monetary
policy with each downturn, stealing prosperity from the future.
It will be an
extremely delicate task to right the ship again. Central banks will have to
extricate themselves from their venture into the bond markets without setting
off a bond debacle in 2010 or 2011. Governments will have to map out of a
path of Puritan discipline for year after year.
This will be Barack
Obama's grim test of statesmanship.
Michael J. Panzner
Editor, Financialarmageddon.com
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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