9 September 2009

Back to 1874

Nice short item. Thx to Jesse.


The search is on to identify historical precedents for the present global crisis in the hope that they may give useful pointers to the strategies to adopt, and those to avoid, for an effective cure and a solid return to the stability and growth of the 80s and 90s.

So far, most commentaries on historical parallels for the present financial crisis have focused on the Great Depression as the period when the US economy suffered effects most similar to the present turmoil. A contributing factor in this identification is no doubt the
fact that presiding Fed chairman Ben Bernanke did his major academic work describing and analyzing the Great Depression, its aftermath and the efficacy of the various policy moves adopted at the time.

But from a global viewpoint, a more accurate and significant parallel looks to be the depression which started in 1873, which lasted more than five years and was ultimately referred to as the Long Depression. That depression, like the present one, was accompanied by widespread financial turbulence, including bubbles in credit, land prices and mortgage-lending in the major European countries and the collapse of many large banks in the USA and Europe. The end result was the widespread adoption by many countries of protectionist policies and currency floating.

Moreover, it was during the 1870s that the USA entered global markets for the first time as a major exporter of agricultural and manufactured goods. The USA had by then become the low-cost producer of a wide range of products and in the 1870s began to flood Europe with cheap commodities (agricultural goods, minerals, timber) as well as manufactures. The economic effect on Europe was devastating. The existing international flows of production and consumption were rendered instantly obsolete, unemployment soared and there was widespread and lasting hardship.

The origin of this upheaval was the decisive shift in economic competitiveness from the old high-cost producers in Europe to the new low-cost producer, the USA. From then on the international competitive edge of the USA continued to gather strength as its economy developed rapidly with the expansion of the railroad system and the creation of a large-volume internal market enabling economies of scale.

It is this shift that makes the Depression of 1873 rather than the 1929 Great Depression the most relevant parallel for the present crisis. Over the last ten years China has grown to become today the ascendant global economic power, with India and the other developing economies in its train.

This shift will not be reversed. The developing economies have for some years now contributed the lion’s share of global growth.

At the time the adjustment to this massive secular shift in economic ascendancy was immediate and was realized through sharply lower living standards in Europe. There was no possibility of delaying its effects through the accumulation of the enormous imbalances of today. It is likely to take a long period of adjustment, economic and financial certainly, but also probably social and political, for the G3 economies to adapt to their reduced status.

If this analysis is accurate, simply avoiding the mistaken tight-credit policies adopted at the time of the 1929 Depression and flooding the US economy with money will in the end prove irrelevant and ineffective. The problem is not a simple lack of liquidity but more deep-seated, serious and challenging: that, after 130 years in the economic sun, the US, along with Europe and Japan, is no longer economically competitive. The US, at least, has always demonstrated a remarkable ability to adapt to changing economic conditions; we must hope that it manages to do so again.

No comments: