A happy shout out to economic historian Price Fishback for reminding us in a piece published in the New York Times that, as bad as things may now seem in the economy, they are nowhere near as bad as during the great depression of the 1930′s in the US.
He begins by saying that economic cycles and downturns are a natural part of the economic cycle [and "nature's" cycle], but that we may be more sensitive to them now because the big downturns have been coming less frequently since the 1980′s. In other words, we may have gotten a little spoiled and less used to the hardships of the normal business cycle [this lag in business cycles may have something to do with the increasingly loose monetary policy of the last several decades, which climaxed during the reign of "Bubbles" Greenspan].
And according to the theories of Soviet economist Nikolai Kondratiev on the nature of economic supercycles, we are basically due for another big downturn in the world economy. In other words, this is all part of the divine plan and this too shall pass.
But comparison with the Great Depression just doesn’t hold up. Yes the stock market is down about 40% from its highs and real estate has taken a 25%+ beating with possibly more to come, but he “can safely say that the current situation is nowhere near as bad as the situation during the 1930′s . . . the problems of the Great Depression were several magnitudes greater.”
For example, since the Recession began in 2007 until January 2009, the unemployment rate in America has only risen from 4.9% to 7.6%, a level not particularly abnormal by historical standards. In contrast, during the Great Depression unemployment shot up the first year from 2% to over 10%, went to almost 17% the next year, then stayed above 20% for a shocking 4 years.
Then add on another 5 years at a 14% unemployment rate before getting back below 10%. These are far more serious numbers than anything we have seen so far in this economic crisis.
With respect to GDP the numers are even more shocking. While the US economy has been contracting slightly, during the Great Depression GDP plunged 8.6% the first year, 15% the second and a crushing 26% the following 2. These numbers are almost incomprehensible to us today with respect to the amount of pain and suffering and dislocation this would cause in our society. 26% unemployment might bring more serious social unrest than in the past, with urban riots, etc.
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And then one must think about the stability of a country such as China if it were to undergo sever economic dislocation. Already there may be 30,000,000 (million) unemployed there, with thousands of factories closing as American consumers are forced to tighten their belts, stop borrowing to buy things they cannot pay for, and start saving for a rainy day. That day is upon us.
If the current global economic crisis is the result of too much easy money and liquidity pumped into the system by the US federal reserve, one has to wonder about the current explosion of the money supply in China. In the first quarter of this year bank loans surged to 4.58 trillion yuan or $670.6 billion US dollars, or more than triple the amount for the same period a year ago. This despite the yearly goal set by the government at only 5 trillion yuan. The lending surge has raised concerns among economists and analysts that non-performing loans will be on the rise since China’s economy is vulnerable to the economic downturn.
Where is all this money going and who is getting these loans? Are they creditworthy consumers, or is China desperately throwing money at the problem like fuel on a future conflagration? Who is going to occupy the millions of office buildings and apartments currently under construction? While the overall money supply and debt levels of the government may not be alarming at the moment, this unprecedented expansion of lending feels ominous. Call it Deja vu.
While the news was good in April of a drop to about 600 billion yuan, the first 3 months of 2009 each saw loan rates above 1 trillion yuan. March saw a record 1.89 trillion yuan worth of loans made. These are worrisome numbers as the Chinese seem to be making some of the same monetary mistakes as the US. Total loans by Chinese financial institutions are up about 30% to 35.55 trillion yuan this year. The “reminbi deposit” (money supply?) is up 26%.
In the upcoming months, new bank loans should keep growing by 400 to 500 billion yuan per month, estimates Liu Yuhui, an economist with the Chinese Academy of Social Sciences (CASS), and new loans for the year should be about 9 trillion yuan.
Can someone help put these numbers in perspective? Please leave your comments!
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I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.
Thanks for your intelligent post, a rarity these days, even if my reply is a few eons late. Of course the financial system in the US turned into a criminal free for all, with politicians giving the largest banks taxpayer money to bail out their losing gambles. That the Bush administration sold the American Dream down the river is an understatement. The 2000 stealing of an American election marked the low point in modern American history, the beginning of the end of American power. It revealed that geopolitical powers in the guise of multinational corporations for the first time in history were more powerful than the entire US government, not to mention the feckless American idiots who populate her. While we agree Greenspan deserves much of the credit for the American decline by stoking the money supply to fantastic proportions out of synch with any reality, his idea of raising the cost of capital follows common sense. If capital is more expensive, people will less avail themselves of it. Of course the cost of credit is low now because banks are too poor to lend, so it’s not even an issue. As for a bigger equity cushion, that’s the argument sustaining the real estate bubble in China. Since borrowers are required to put down 30% of the loan up front, it shifts risk away from the banks. But what good does that do if it shifts the risk to dumb, uneducated consumers who believe their investment in real estate can only go up forever? What happens when the little guy in China is tapped out? Banks will still fail, and personal bankruptcies will soar. You don’t read it much, but you heard it here loud and clear. The Chinese economy is a farcical bubble whose burst will cause the greatest economic collapse in world history. Let’s hope the government follows suit.