'Depression' Makes Return to Mainstream Lexicon

Wednesday, 05 Oct 2011 12:00 AM

 

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You know it's grim when the prevailing debate among economists and historians is whether the world economy faces the "Great" depression of the 1930s or the "Long" depression of the 1870s.

Listening to commentary surrounding the seemingly intractable sovereign debt and banking crisis in Europe, the stimulus/austerity battle in the United States and even hard-landing risks in China, gloom is fast becoming the consensus.

Only the shade of gloom, it seems, is in question. It's got so that, depending on your view of big or small government, you can pick your version of the pending depression.

Harvard professor and economic historian Niall Ferguson, a fan of the British government's austerity drive and septic of further stimulus, reckons the world is facing a "slight depression" and favors comparison with the late 19th century rather than 1930s.

Speaking on Monday at private bank Kleinwort Benson, where he is on the advisory board, Ferguson restated his critique of the fiscal and monetary stimuli from western governments over the past four years and said their modest impact questioned the key lessons most economists took from the Great Depression.

"They may have stopped another 'Great' depression but not a depression and what for many was the most profound lesson of economic history may turn out to be wrong," he said, adding the fact that government debts and obligations were already so high before the crisis pump priming meant they now risked backfiring.

Quite what a "slight depression" would look like, however, is not all that clear—most likely years of low to zero economic growth and deflation across several countries, structurally higher unemployment, periodic bursts of banking shocks and crises and possibly rumblings of social unrest.

Some call that a "Japanisation" of the western economies to mirror Japan's recent decade of lost growth and deflation. Others, like giant U.S. bond fund investors Pimco, talk of the "new normal" of several years of low, sluggish growth.

But however bad it has been there, Japan's permafunk can hardly be equated with the Great Depression.

Long-term market bear Albert Edwards at Societe Generale has talked more apocalyptically for years of an economic "Ice Age" dominated by household deleveraging, low growth and deflation.

But now "depression" is very much back in the mainstream lexicon as the small economic bounce from the deep global recession of 2008/09 fades rapidly after little more than two years and Europe's bank and sovereign debt crisis intensifies.

Economist and doomsayer Nouriel Roubini now says there's a "huge" risk of 1930s-style depression and, on the other side of the political spectrum to Ferguson, advocates further government spending to offset it.

HSBC chief economist Stephen King, who wrote earlier this year of a "new economic permafrost", warned last week that the systemic financial threat of a euro zone collapse and breakup risked another "Great Depression".

Depression Back in Lexicon

"Depression" in economics is a big word. To most people, it conjures up images of large scale bank and business failures, mass unemployment, homelessness, soup kitchens and forced migration.

Because depressions thankfully haven't happened too often in the modern era, most people think only of the "Great Depression" of the 1930s which had all those terrible features.

But search for a precise definition of economic depression and you'll be hard pressed to find anything more specific than it's more severe than typical business cycle recessions, tends to cross multiple countries and lasts much longer.

Anecdotal rules of thumb—cited in The Economist magazine and elsewhere—center on a peak to trough drop in real gross domestic product of more than 10 percent or recessions lasting more than three years.

On that measure, the 1929-1933 Great Depression in the United States qualifies with a 27 percent loss of GDP and a peak unemployment rate of some 25 percent. The shorter 1937 and 1945 downturns qualify on the GDP measure alone too.

No other post-World War Two recession comes close. Even the 18-month U.S. recession of 2008/09 saw a 5 percent drop in real GDP and a peak jobless rate of 10.1 percent.

Harvard's Ferguson and HSBC's King both cite the panic sown by another European banking crisis—1931's default by Austria's Creditanstalt—as a trigger that made that depression "Great".

But, despite that parallel, it's still a very big call to talk of another depression of that scale looming again.

So, is the "Long Depression" of the 1870s—a global crisis rooted in the bursting of financial bubbles from European stocks to the post-Civil War U.S. railway boom—a more appropriate comparison?

The banking and financial contagion was estimated to have caused an estimated peak to trough drop in U.S. business activity of some 20-30 percent but was reckoned to have been shallower over a longer period of time, lasting over five years.

Some economists even doubt there was a continuous contraction, rather a protracted period of low sluggish growth or unremarkable recoveries.

But the United States was still essentially an emerging market back then and the parallel depression in global economic powerhouse Britain was said by some to have persisted from 1873 to 1896 and weakened the country against its continental rivals.

For Ferguson, now is not the 1930s for some key reasons—China has emerged as the world's second largest economy, globalization has not broken down into protectionism and the era's rapid technological revolution has not skipped a beat.

And just in case you thought this depression talk was too dark, he doesn't expect a rise of fascism or another world war.

© 2014 Thomson/Reuters. All rights reserved.

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