Posts
We have the good fortune (?) in the developed world to have a well documented history of the causes and solutions for the great depression of the 1930's.
The period also marks the shift from Sterling as the great international reserve currency to the US Dollar fulfilling that role. (1928 is given by many historians as the year in which this happened - open to much discussion but reasonably accurate give or take a year or so).
One of the reasons for this was the policy adopted by the US, usually referred to as a beggar-my-neighbour policy, in which the dollar was allowed to lose value and a highly protectionist stance adopted in order not only to protect the domestic economy but also to knowingly damage other economies that were at least partly reliant on US goods and services, thus creating dependent almost vassal states. It is highly significant that Dr. Ben Bernanke, Chairman of the US Federal Reserve, made his academic reputation in studying this shameful era.
This time around, armed with the power of 20/20 hindsight, the game is being widely played, most notably and successfully by the Chinese - but not only them as many developed economies rush to devalue and inflate (actually the same thing and two sides of the same coin) their currencies faster than their neighbours.
This can only end, ultimately, in tears. The rationale is that stimulus by either conventional Keynesian methods or more directly by Quantitative Easing will somehow restore economic activity without an ultimate cost. For what it is worth, I feel that QE was an unavoidable and necessary evil but certainly not to intended be a permanent feature of the economic landscape. Gresham's Law ("Bad money drives out good") will apply and can not be avoided. The "magic bullet" to reign in the extra money supply (which is, incidentally, not going to the right places in any case) is now perceived to be to keep interest rates artificially low while allowing a slightly above-trend inflation number (not seen as a risk in a a recession) and to allow one's currency to race the others' to the bottom. With the Aussie Dollar at parity to the US Dollar I can't help but wonder if the commodity-backed economies are on a new Gold Standard?
In the the 1930's the US was alone in this sort of sleight of hand - now we are all at it. The bad money that is driving out good is the same money we have in our banks and investments. Equities going up? Well yes - but a share of the producing assets of this planet expressed in a depreciating unit of exchange would be expected to be moving up. Welcome to Weimar!
Now the Zambian Kwacha is backed by Copper isn't it????
Dum Spiro Spero
Interesting comments for those of us who grew up after the war when we believed that we had learned how to manage the economy so as to avoid the insecurities of the 1930's.
ReplyDeletePersonally I doubt whether history is much help to us. Like Generals we tend to prepare to fight the last war, when in fact we are confronted with a new set of circumstances the full consequences of which we cannot fully understand.
I am often reminded of Marx's comment that capitalism, before its inevitable collapse, would go through a number of crises, each worse than that which preceded it. What he did not account for, living as he did in the age of laissez faire, was that Governments would actively intervene to try to prevent this happening. Whether they make things worse or better is something that could be debated until the cows come home!
cheers
John
Valid points John - especially that about the post-war generation. We also seemed to be the optimists, unlike the endemic pessimism to be found in the UK today.
ReplyDeleteI am always worried by the "Its different this time" argument however - that way we are doomed to never learn from the lessons of history. Of course there are always new circumstances to some extent - but I am sure that the rear-view mirror of History will show 2007 to 20?? in the light of being an explicable "normal" crisis.
As for Marx - I do tend to find Groucho's aphorisms of more value than Karl's. The one you mention strikes me as being like the housing collapse so widely predicted in some quarters for 30 years. If it does not happen then extend the timescale yet further. As a stockbroker once, I am reminded that a long-term investment is often a short-term punt that went wrong!
Guess we will have to differ re Karl! I find the concept of a "normal crisis" slightly problematic - and indeed the idea that "history" is cyclical or repetitive or predictable.
ReplyDeleteInteresting times anyway.
cheers
John
I know the idea of a "normal crisis" is semantic nonsense, but unlike Roubini's "Black Swans", the work of Mandelbrot (who like me thinks Markowitz and EPT is pure fiction) would seem to indicate such crises are normal.
ReplyDeleteHistory may not be exactly predictable or totally cyclic. Asimov's invention - Hari Seldon - and his "psychohistory" is a ridiculous idea, but human nature? Surely that is depressingly so?