Uncharted Economic Waters?

One of my late grandmothers lived through the 1929 Depression in New Zealand and that stayed with her all her life.  She lived for 90+ years but the memories of those times were never far away and it always seemed like a pivotal moment which shaped a generation (or two.)

She used to remind us of this fairly often even though there were many other events we might have wanted to hear about  – 1929 was the biggie of them all.

Since then the world has had a series of smaller economic shocks like the 1973 Oil crisis, Black Friday in Oct 1987 and many other meltdown periods in between like 9/11/01

A few weeks back David Slack asked the question The lesson of the Great Depression is? The discussion seemed to get side-tracked but it is a useful question to ask.

Every time I look at the writing on 1929 there seems to be about 4 theories on what the lessons were depending on your taste in economics.

The causes of the Great Depression are still a matter of active debate among economists. For some ideas on the causes of the Great Depression here is a summary.

I like the debt deflation theory the best. perhaps one lesson is – there is no such thing as a free lunch / debt sucks.

It is also clear that governments of today are intervening much more actively to help manage the downside risks which hopefully showed we’ve learned something about macro economic management.

Lets hope so anyway. There was at one particularly helpful comment over there by WH

“There was a great chart at the Standard that is really worth checking out, if you haven’t already seen it: http://www.thestandard.org.nz/how-to-stimulate-the-economy/
I’ve been really impressed by Steve Pierson’s writing, fwiw.

It can be difficult to explain that the government spending multiplier can have a greater expansionary effect than tax cuts.”

I’d be interested in what you all think about tax cuts and other government interventions.

For an Australian view here is a snip I found yesterday from EFIC.

EFIC is Australia’s export credit agency, and provides specialist finance and insurance services to Australian companies exporting and investing overseas. In other words they are risk managers at the global end of world trade and their assessment is one that I like.

Back to the 1930s? Unlikely says EFIC’s Chief Economist, Roger Donnelly

There has been much talk recently that the world economy is ‘going back to the 1930s’. “How close are we to a 1929-like Financial Crash and 1930s-style Great Depression?” ask Donnelly. “Two points are worth noting.”

“It is difficult to exaggerate the severity of the recent panic and recent events certainly seem to have been on a scale resembling the 1930s.”

“But in the 1930s, central banks stood idly by as depositors rushed to withdraw their money and banks called in loans. The central banks mistakenly thought that this was a healthy ‘purge’ after the ‘binge’ of the Roaring Twenties.”

In fact, what happened was the stock of money and credit collapsed, and deflation set in, forcing highly geared borrowers to default in repeated waves (a virulent process economists call ‘debt deflation’).

Central banks and treasuries have learnt that to head off such a disaster they mustn’t be complacent. So this time, they are taking decisive steps to ensure money, credit – and aggregate demand – don’t collapse.

However, Donnelly warns: “There remains a risk that the panic doesn’t subside and central banks and treasuries finally ‘use up all of their ammunition’ – interest rate cuts, borrowing capacity etc – to fight it. In which case, the world economy could succumb to a Great Depression. But that still seems to be a small risk.”

“The bigger risk is that the world economy will now perform only sluggishly for a protracted period, as bank and non-bank firms alike continue to de-gear and recapitalise.”

“A synchronised G3 recession is in prospect, though growth could still hold up quite well in Asia and the Gulf. In these more difficult conditions, fragile and vulnerable entities, be they countries, governments, banks or companies, could collapse, though they may be rescued by the state if deemed Too Big or Too Important to fail.”

Here are some questions to think about

  • What are your thoughts on recession / depression lessons?
  • Have we learned from previous economic shocks before?
  • Does history matter?
  • Maybe even where do economists and idealogy get too tangled to be useful?

And if you would like to be part of the future answers for NZ have another look at the latest update on NZX by the Morrison & Co teams.

For another set of views see NEF Their tagline is “We believe in economics as if people and the planet mattered.” They mention

“the Green New Deal Group. It is a response to the credit crunch and wider energy, climate and food crises, and to the lack of comprehensive, joined-up action from politicians.”

I think it is important that we debate these ideas and encourage our governments to help fix structural disconnections.  I am concerned that the various debates will get polarised by right or left ideologies and miss being useful because of that.

Hopefully we can take into account some of the wider issues and make longer term decisions. Over to you.