Are we heading for another Great Depression?
According to this article, "What Caused the Great Depression of the 1930's?", the three main factors that caused it were;
- The over-stimulated economic euphoria of the 1920s.
- The draconian monetary policy pursued by the Federal Reserve Bank from 1930-1933.
- The sudden rise of global protectionism leading to the collapse of world trade. The dramatic rise of income taxes in 1932 may have also prolonged the downturn.
While I'm no economist, I like to consider that I am a realist and that signs for a global slow-down are certainly imminent.
While the world has never again seen a recession as grand as the Great Depression, there have been some hiccups throughout our history; the Japanese slow-down of the '90's and even the stock market crash in 1987 produced some ripples in the economic world. And while legislators have tried to smooth the way forward, evening out the highs and lows of fiscal policy, it seems that many have not seen the economic Tsunami appear on the horizon. At the least, not expecting it so soon.
What is this looming phenomena? Global oil prices.
Petrol here in Australia is already at a high of $1.40+ per litre and the news is that we're heading for a possible $5+ per litre in the short-term. Can you imagine the ramifications of a 350% increase on the most required energy source in western civilization?
The world has now been riding the benefits of a global economy that has been booming for some time. It seems, however, that we didn't expect to see the effects of oil prices for quite a few years yet. And in our apathy we've been caught napping on the beach.
In contrast to the Great Depression we have already encountered the first point of an "over-stimulated economic euphoria". Depending on whether world legislators have a knee-jerk reaction to this problem will describe history's architecture. Already businesses are feeling the effects of high oil prices and it will become very tempting for governments to implement policies that could have devastating effects.
Watch this space...
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Comments
I don't know about Australia but I think it's possible that the U.S. is going to hit a depression soon. Interesting post.
Posted by: Tim MMF | July 12, 2006 10:14 AM
I'm more optimistic. Part of my reasoning is as follows (there are a lot of other factors and some of these can be debated at length):
1.oil prices are at record prices (in nominal terms) because global economic growth is so strong. The same economic growth that has driven up the price of oil makes the global economic outlook quite positive. If there was simply not enough oil to meet economic needs that would be a different matter (we will get to that point one day but supply today is adequate for our needs);
2.interest rates are still low by historical standards in both nominal and real terms and liquidity is still very high. Sure there have been some interest rate rises and some token action (mostly talk) about tightening liquidity in some markets, but nowhere near enough has been done at this level to trigger a major recession/depression;
3.trade barriers around the world are still being reduced. There is a long way to go and there is the occasional step backwards, but the trend is still towards more liberal trade regulations;
4.the causes of the Great Depression of the 1930s are well known and at least some of them can be avoided by not repeating the policy mistakes made by politicians and central bankers at the time.
There are some other positive factors and a number of negative factors (specifically the US debt, the US deficit, the US consumer, housing markets in some countries and disruption events like a war in Iran or Korea) as well. Normal economic cycles including the possibility of a less severe or normal recession is always a possibility but my (very amateur) assessment is that the risk of a global depression to rival the 1930s is quite low. That said, as a matter of prudence, I have been stress testing my investments and my lifestyle to see how well we would withstand an economic downturn.
Posted by: traineeinvestor | July 12, 2006 4:51 PM