Friday, April 10, 2009

Not Grapes of Wrath, but Getting There

The "Great Readjustment," looks every bit as bad as the Great Depression of the 1930's at the current time. When viewed on a global scale the economy is certainly giving that era a run for its money. Looking at some comparable pictures, what do we see and what our the conclusions? Clearly policy makers are not sitting idly. But are they doing more harm than good?

I. Global Industrial Output

The decline experienced in the past year is equal to the collapse in the comparable post 1929 period.

II. The World Stock Markets

Contrary to the belief that the 1930's collapse was far more dramatic, global markets have fallen faster than in the previous economic depression. The U.S. market has not fallen as dramatically as it did eighty years ago but globally by various measurements it is every bit as bad.

III. World Trade Flow

Early on as the world slowed rapidly in 2008, the leaders of the G-20 crossed their hearts and swore to keep international trade flowing. The chart above suggests their fingers were crossed as well? Certainly the globalization and specific trade flow makes this less clearly comparable. The volume of oil trade alone and the rapid fall in price and demand of petroleum may mean this chart is less than meets the eye.

Verdict? If we use the metrics of Industrial Production, Equity Prices and Global Trade the term "recession" may just be semantics.

That is what has happened. The bigger question is what have we done about it? What have the policy actions been to deal with the crisis?

I. Money Supply

In periods of economic slow down there is a very clear correlation between money supply and increasing economic activity. The lag is a substantial six to nine months. In the immediate post 1929 years the money supply collapsed and did not reverse until 1933 when Roosevelt removed the dollar from the gold standard. Current policy has injected massive money supply through quantitative easing and the purchase by the Federal Reserve Bank of treasury bonds and mortgage backed securities in particular.

II. We're all Keynesians Now

The final picture in the series is the most contentious. Honestly, economists and political agendists are still debating whether or not Roosevelt's fiscal stimulus of the 1930's was the saving grace or misguided policy. Keynesians, montarists, Austrian school economists each has compelling arguments to support their thesis. What is more agreed upon is that if you lay all the world's economists end to end they would still not reach a conclusion.

What is also clear is this this administration is willing to create a much larger deficit in pursuit of economic recovery. I fear that it will not be either easy or quick. And, like that 1930's event others may debate forever whether the eventual recovery came (as it will) because or in spite of government action. The intervention of World War II means that the answer will never be conclusively known. Let's hope that we are not confronted with such a global event simply to keep the debate alive forever.

In any event the current situation requires more active participation by investors since they may be sailing upwind for a while and must be alert for the shoals of unintended consequences.

John Barnyak