The world economy is tracking or doing worse than during the Great Depression

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The world economy is tracking or doing worse than during the Great Depression

A Tale of Two Depressions

Barry Eichengreen   Kevin H. O’Rourke
1 September 2009


This is an update of the authors' 4 June and 6 April 2009 columns comparing today's global crisis to the Great Depression. World industrial production, trade, and stock markets are now showing signs of recovery. Still – today's crisis remains dramatic by the standards of the Great Depression.


Editor’s note: The original Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records (30,000 views in two days, over 100,000 in a week, now fast approaching 350,000). Here the authors provide updated charts, presenting monthly data up through June 2009 (or latest).

What do the new data tell us?

  • Global industrial production now shows clear signs of recovering.

This is a sharp divergence from experience in the Great Depression, when the decline in industrial production continued fully for three years. The question now is whether final demand for this increased production will materialise or whether consumer spending, especially in the US, will remain weak, causing the increase in production to go into inventories, leading firms to cut back subsequently, and resulting in a double dip recession.

  • Global stock markets have mounted a sharp recovery since the beginning of the year. Nonetheless, the proportionate decline in stock market wealth remains even greater than at the comparable stage of the Great Depression.
  • The downward spiral in global trade volumes has abated, and the most recent month for which we have data (June) shows a modest uptick. Nonetheless, the collapse of global trade, even now, remains dramatic by the standards of the Great Depression.

Figure 1. World industrial production, now vs then

Figure 2. World stock markets, now vs then

Figure 3. Volume of world trade, now vs then

Figure 5. Industrial output, four big Europeans, then and now

Figure 6. Industrial output, four non-Europeans, then and now

Figure 7. Industrial output, four small Europeans, then and now




Start of first update (published 4 June 2009); original column (published 6 April 2009) appears below

Editor’s note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; note the rebound in Eastern Europe.

Updated Figure 1. World Industrial Output, Now vs Then (updated)

Updated Figure 2. World Stock Markets, Now vs Then (updated)

Updated Figure 3. The Volume of World Trade, Now vs Then (updated)

Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

New Figure 5. Industrial output, four big Europeans, then and now

New Figure 6. Industrial output, four Non-Europeans, then and now.

New Figure 7: Industrial output, four small Europeans, then and now.





Start of original column (published 6 April 2009)

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.)  Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then

Source: Eichengreen and O’Rourke (2009) and IMF.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then

Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then

Sources: League of Nations Monthly Bulletin of Statistics,

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.


To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

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Re: The world economy is tracking or doing worse than ...

End the Ron Paul

Can a Central Bank Go Broke?

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Re: The world economy is tracking or doing worse than ...

Here are three headlines I saw today which are foreboding:
1.) Gallup Economic Monthly: Job Creation Not Happening
Job creation, consumer spending are both down more than 30% from year-ago levels.
"Right now, the job market apparently continues to deteriorate and the real unemployment rate continues to increase, regardless of what the Labor Department reports on Friday morning."

2.)Food stamp list soars past 35 million: USDA

3.)1.3 million to lose jobless benefits by year's end


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Re: The world economy is tracking or doing worse than ...


Thanks for the update on the Tale of Two Depressions essay. 

It does indeed look like Bernanke "Saved The World!"  at this point. Time will tell, of course.

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Re: The world economy is tracking or doing worse than ...


 I agree with what Schiff said about Bernanke's stimulus, it was like giving a heroin addict going through withdrawals a huge dose of herion, he'll feel better in the short term but soon he will need even a larger dose until he gets one large enough to kill him.

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Re: The world economy is tracking or doing worse than ...


     My view is that sBENd Bernanke only procured a temporary reprieve from worse things to come. I think the two biggest things that are different now from the Great Depression era are that at that time we were:

1.) energy independent and a net energy exporter

2.) a creditor nation

We are neither now. Does anybody remember this warning last year?:

Energy tsunami coming, ex-policymakers warn

1 year, 50 days, 16 hours, 9 minutes ago
By H. JOSEF HEBERT, Associated Press


Also, the American midle class is decimated as I showed in "The Wealth Gap and the Collape of the U.S." Stagnant /declining wages, rising medical costs, rising food costs, and rising secondary education costs have taken a toll on the middle class. In this country we now have an oligarchy latin-american style society where 1% of the population controls 99% of the national wealth. Speaking of health care costs, read the following article for a trip down memory lane:

Hospital fees now 400 times the cost in 1934

By Mark S. Jordan
September 2, 2009

HOWARD — Sorting through family papers after her mother, Beulah, passed away, Pauline Henwood McGinnis of Howard was amazed when she found the original, typed bill for her own birth in 1934. The total charge from Mount Vernon’s Mercy Hospital was $30.40.

“I wish that’s what it had cost when I had my five children,” McGinnis said.

Pauline was the third of five children. She said that her father, John Henwood, a machinist at Cooper-Bessemer, managed his money out of his pocket in those days of the Great Depression, and proudly paid the bill in full, in cash, as the family left the hospital every time a child was born. In Pauline’s case, that bill included a hospital room for four days at $3.60 per day. The charge for use of the delivery room was $10, dressings were $5 and laboratory work was $1.

A visit from the stork costs more in 2009, to say the least. Where a hospital room would run a customer $3.60 per day 75 years ago, average room prices in 2009 run from $1,500 to $3,000, depending on location. Even going with the lower end of that spectrum, this shows a staggering increase of 417 times since 1934. The upper end of the range raises the rate to over 800 times higher.

Such a rate of increase is not supported by the inflation that has afflicted the economy in the past three-quarters of a century. If the increase followed the national inflation rate for that period, based on the Consumer Price Index figures compiled by the U.S. government, a hospital room should only have increased to a cost of $57.31 per day. That is still 14.9 times the 1934 cost, although nowhere near the precipitous rise the United States has seen in charges since 1934.

The reverse-avalanche increase did not happen overnight. Comparison with a Knox Community Hospital bill from 1984 shows the cost of a room had increased to $184 per day, more than a 50 times increase. Following the Consumer Price Index, the increase between 1984 and 2009 should only have boosted the cost of a room to $377, not to $1,500 or more.

The reasons for these increases, as identified in a study published in the Government Printing Office’s March 2006 “Monthly Labor Review,” are numerous. One is that the number of health care workers has grown five times over in the past century. Another is that as more care options became available, people began to turn to hospitals for treatment that was once taken care of in the home.

But according to the report, the motivation behind both of these developments was the rise of the modern insurance system. In 1939, 6 percent of American workers had hospital insurance. By 1950, over half of all workers had insurance. By 1970, that figure had increased to 86 percent of working Americans, where it has largely remained. As coverage has grown, so has the tendency to opt for more expensive treatments.

Insurance also encouraged the development of new technologies, another area that has greatly influenced the cost of health care services. Those technologies have helped many people live longer. This longer life, however, has also increased the need for health care to Americans who would not have survived in the past.

Have the increased insurance, technology and costs been worth it?

“Back then, we weren’t rich, we weren’t poor, we were just sort of in the middle,” McGinnis said. “But my mother didn’t have to work away from home. Today it takes both parents to make a living.”

She cited friends and relatives who have reached retirement age, but can’t afford to retire due to the cost of insurance.

At the same time, she said, with the amount hospital bills had increased by the time McGinnis had her five children, she and her husband would not have been able to afford it alone, the way her father did during the Great Depression.

“We had insurance,” McGinnis said

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Re: The world economy is tracking or doing worse than ...

Al least during the great depression the coins were actually worth something......they had some form of real metal of value in them. Not now! Even a penny is now missing most of it's copper. Makes you think how bogus things really are.

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Steve Keen on A Tale of Two Depressions

Steve Keen's commentary on this recent update to A Tale of Two Depressions

So “green shoots”, or selective reporting? There is no doubt that the immense government stimulus packages across the world have slowed the rush into Depression. But the force that caused the crisis in the first place—excessive private debt accumulated in a Ponzi Scheme laundered through share and house-price bubbles—is still with us. Until that debt is addressed, the downward rush of deleveraging is likely to resume as soon as governments wind back their spending in the false hope that the crisis is over.


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Re: Steve Keen on A Tale of Two Depressions

Tuesday, October 13, 2009

Today, I put my quant hat on (a small one, to be sure) and go trawling in stockmarket data, specifically the historical performance of S&P 500 over six months. The reason I chose six months for my yardstick is because shares bottomed out in March 2009, i.e. six months ago.
  • First, the raw performance data going back to 1871 in chart form (click to enlarge).
From -40% to +40% In Six Months

Data: Robert Schiller/Yale

One immediate observation is that the market has just swung from one near record (-40%) to another (+40%) between March and September 2009. Since 1871, only the Great Depression era exhibited greater swings in share prices.
  • How unusual is such an event, from a statistical standpoint? Let's look at the next chart, a familiar distribution histogram (click to enlarge). The median 6-month performance is +3.1% (the mean is 2.7%) and the standard deviation around it (known as sigma, denoted by the Greek letter "σ") is 12.2%.

Back in March we were in -3σ territory and at the end of September at +3σ. A three-sigma event has, by definition, only a 0.27% chance of occurrence (i.e. 99.73% of the data are inside the -3 to +3 sigma band) if the data are normally distributed (which they are not, in the case of share prices). The swing from one extreme occurrence to the next has been very, very fast.

How often does S&P 500 move from -40% to +40% within six months, i.e. how frequent are such sharply positive V-type reversals? We can identify only two previous occurrences, and they both happened between May 1932 and September 1933 (see chart below, click to enlarge).

Extreme V-Type Reversals Only Happened Before In 1932-33

How can we explain what has happened in the last six months? What is the market anticipating?

This extraordinarily rare performance indicates speculators' bets that Mr. Bernanke's massive monetarist experiment will succeed. To wit, that his enormous bailout of the financial system will prevent the credit crisis from mutating into a virulent economic crisis.

How accurate is the speculators' analysis? Well... let's just say that they're largely talking their own book. People who now call the shots in the Fed, Treasury and White House are confirmed monetarists from the Milton Friedman - Alan Greenspan school of thought, itself harking as far back as Irving Fisher, the infamous "permanent high plateau" economist who lost a fortune in the stockmarket after the 1929 Crash because he simply couldn't believe the Fed would be so conservative.

By reverse analogy, could it be that the economy will continue weakening despite the Fed's largesse? That's what I think, because today's fundamental economic problem is not a lack of adequate liquidity (and the Fed can only affect that), but a lack of enough earned income to properly service the enormous debt that households have assumed. In other words, it's a solvency problem, and it necessarily affects personal consumption expenditures, the very heart of the economy (70% of GDP).

Look at the chart below, tracking household debt as a percentage of total compensation of employees, which I use as a proxy for earned income (click to enlarge). In just the few years after 2000 it zoomed from 113% to 180%. That's a serious challenge to solvency, no matter how low the Fed keeps rates.

Sudden Debt

I am not going to attempt a conclusion, today. Instead, since I still have my quant hat on, I am left wondering what are the statistical chances of the Fed succeeding in overcoming a massive debt-to-income imbalance with just monetary tools.

I don't know the answer- and can't know - because the data sample is tiny: just one occurrence, and it's still going on.

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Credit Crisis

You know how many times a day I notice on the media a prediction of what our future economy holds. While some forecasts turn out to be true, others are false. The truth is our economy could go up, down, or stay the exact same; either way there is much to the prediction side because everyone can say they know what they're talking about when you will find only three possibilities to choose from. Now our economy is failing so bad that we will all be applying for payday loans and starving because of the credit crisis. This is really an observation of what our economy has been doing, not really a prediction.Our economy is not stable because many believe that the investment banker is the one who is getting richer and richer.The one who is investing for a house loan is the one who is really suffering from the credit crisis.

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