May 25, 2009
As the recession continues some analysts are arguing the appearance of green shoots and a bottoming out process. Other more bearish analysts reflecting upon the rising unemployment and the prospects of some prime mortgage holders getting into difficulty as unemployment spreads are rummaging through the entrails of data from the thirties, including the catalogue of optimistic headlines and quotes from prominent figures predicting the return of happy days throughout the period of 1930-31 which , of course, as we now know turned out to be very wrong.A few minutes research on the internet and within the pages of works by Charles Kindleberger,J.K. Galbraith, Milton and Rose Friedman and Anna Schwartz, Allan Meltzer and John Maynard Keynes and other economists and historians of the period provide a rich basket of material from which to choose.
First of all let us remember that GDP in the U.S. declined in the first year of the depression after the crash by more than 20 %. Robert A. Gordon in his classic work on industrial fluctuations shows a drop in industrial activity, an index developed by AT&T that dated back to 1899,based on 25 component indices of manufacturing activity, output and hours worked and electric power, of over 45 % by the middle of 1931. U.S. government data shows that the GDP fell from 97.4 billion in 1930 to 83.8 billion in 1931, a drop of over 14 % . It continued to plunge to 57.6 billion by 1933.This represented a drop of 40.8 %
U.S. GDP has fallen by 6.1 % % in the first quarter of 2009 and by 6.3 % (both annualized rates) in the last quarter of 2008. These are very serious declines but much smaller than that experienced in the great depression.
Policy this time on both the fiscal front and on the monetary front, including the liberal use of quantitative easing and quickly cutting interest rates as well as the use of a substantial stimulative deficit has been considerably more robust than what was done during the early months that followed the 1929 crash.
Allan Meltzer, John Garraty and others point out that during the last two years of the Hoover Administration while there was some attempt at fighting the slump by organizing the private sector to bail out failing banks, the efforts were inadequate and some 3300 banks failed. Furthermore Congress and Hoover passed tax increases to try to reduce the growing passive deficit.
In 1933 Bernard Baruch the influential financier railed against deficits claiming that when they were central bank financed they would lead to inflation and undermine confidence in the economy.
Baruch, of course was wrong as Allan Meltzer correctly points out, but in his time he was sadly influential. He, of course, has some contemporary followers.
So on balance though the times are difficult, the fiscal and monetary policy response is much better this time, though it may still have to be strengthened.
This does not mean however that the bulls will quickly and conclusively triumph over the bears in the stock markets.
Stock markets appear to behave somewhat like oscillating strings where deviations from the trend can be remarkably large(See the mathematics of oscillations of elastic systems in Mathematics:Its content, methods and Meaning A. Aleksandrov et al )This tendency seems to be exacerbated by computer driven options strategies implemented by hedge funds.
After the great crash the stock market began to recover early in 1930 . But shortly after it began to drift much lower and only began a true but partial recovery beginning in 1933. Overall the Dow fell from its peak in 1929 of 381.70 to its bottom in 1932 of 41.22- an incredible decline. It did not regain its previous peak until 1954.
History does not always repeat itself but under the circumstances some caution is still in order
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