I can see many parallels between the (first) Great Depression and what is emerging across the financial planet today, especially in the West. Below I summarise the Great Depression and consider how our modern world is travelling along a similar trajectory. Will taking this parallel path take us into the second Great Depression and an even more hellish destination beyond?
The First Great Depression
The Great Depression was preceded by WWI, a financial indulgence that plunged governments into huge deficits. During the 1920’s governments pursued growth as a way to clear their debts processes that intentionally or not rewarded the strong and tolerated the weak. Countries implemented policies, such as lower taxes that reward the fittest, the strongest and reduced payments to the unproductive. Governments tried to achieve recovery by rewarding the strongest elements of society; banks failed, tax rates were lowered, unions were marginalised, the middle class were squeezed, poverty exploded while stocks surged only to in 1929 crash. With GNP falling and unemployment rising, countries then adopted self-protective actions; interest rates were lowered and trade tariffs were increased.
By 1932 shares were down hugely, globally thousands of banks had failed, bank deposits were lost and the money supply contracted, GNPs had collapsed, millions had lost their jobs, commodity prices had fallen as did international trade. The protective measures of lowering interest and higher tariffs designed to protect productive industries failed. The world was firmly in the grip of the first Great Depression.
With all fiscal options exhausted, money supplies were expanded, taxes were raised and governments spending increased.
The experience of depression was followed by wide spread political change; incumbent governments fell and were replaced by politicians offering a new deal, a new direction and most importantly hope. Initially these new governments created further instability and uncertainty, but eventually their new measures began to take hold and the slow long road of recovery began. Over the next few years GNPs, although patchy, generally rose and unemployment generally fell.
In 1936 Germany fully recovered from the Great Depression, a feat that was made possible through heavy deficit spending on their military. The United States only truly began emerging from the Depression In 1939 by borrowing and spending $1 billion, to build up its armed forces. Between 1939 and 1941 U.S. manufacturing exploded 50%! Economically the world had emerged from the economic depression, through a period of political upheaval, but was now headed for the calamity of global war.
The above summary, although generalised, holds many parallels about the situation we are in today and may well point the way to the future. The first Great Depression was preceded by the deficit inducing World War I. The second Great Depression has been preceded by a combination of three great indulgences: the Global Financial (real estate-banking) Crisis, the wars in Iraq and Afghanistan and the largess of Europe’s spending.
The Second Great Depression
In the early part of the 21st Century governments pursued growth as a painless way of reducing their debts. This strategy is destined to fail, but it is still being given every chance. During this period the rich are being rewarded for their endeavours while the poor while being grudgingly supported are in reality suffering. There are calls, especially in the USA, for even lower taxes for the rich and for even lower payments to the poor. The ‘job creators’ are saying that they are the only channels through which recovery can flow. They are following a well worn and fruitless path.
The results of sticking to this strategy will be the same as in the 1930s; more failing banks, lower tax receipts, unions marginalised, the middle class being squeezed, poverty exploding and a massive decline in share values. The industrial engines of the West will not alone be sufficient to correct this crisis. Greater deficits and inequalities are all that will result. More is needed.
Other measures will be adopted. Given that low interest rates are already in place the next measure that will be called for is trade protection; tariffs and quotas. “How long can European producers survive if they are required to suffer under the unfair competition executed by emerging producers like China?” They can’t, they need what the producers in the 1930’s required, government imposed defensive walls are essential - tariffs. If they are to support the West then they must be protected, no matter what impact this action will have on the wider world. “We must firstly look after ourselves.”
Implementing self protective measures contract international trade. This will cause further falls in shares, dozens more banks to fail, deposits with financial institutions lost and commodity prices falling. This stagnation will cause the money supply to contract causing further falls in GDPs and millions more losing their jobs. It will bring about a second Great Depression. The protective measures of higher tariffs, designed to protect productive local industries, will actually result in numerous campaigners becoming impaled on stakes of their own wishing. With the world firmly in the grip of the Second Great Depression and all fiscal options exhausted, central banks everywhere will expand their money supplies. And then the great swing from deflation to inflation will begin.
Faced with rising inflation, gross unemployment, expanding government austerity, their lifestyles collapsing, the People will rise up and demand political change. Incumbent governments will be toppled by politicians offering radical new deals, new directions and most importantly hope. These new governments will not be democratic; some will void the liberties previously enjoyed by all. Given the challenges and the ridiculousness and radicalism of their solutions, these new administrations will only have faltering success. They will seek new alliances and deals, but faced with increasingly chronic shortages of even the basic necessities, these new regimes will need more than just allies to justify their continued existence these new regimes will also need enemies. As night descends, new (but old and familiar) industries will be developed and new destinies chosen, where only the strongest will survive.
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10 Comments on this Article show/hide all
Where to begin?
So many doomsters around and so many pointing to history.
Fortunately we have history to teach us where mistakes were made.
Most importantly the world economy is so globalised these days in comparison to then. So much of our manufacturing and other processes are located overseas so putting up trade barriers won't work.
The "West" is now only 1 and a but Billion. The Developing and Developed (China) are 5 and a bit Billion - growing strongly. Back at the time of the GD, the figures were much much different and there was no real driver for the global economy other than "The West" - not so now.
Besides, it seems as if the US is already well on the mend, judging from latest and trend data. Its still the biggest economy so any growth there, coupled with China etc, is a very positive backdrop.
Arguably you could say that the EU's existing trade barriers have not helped the economy. Protecting poor and inefficient manufacturers, service providers, farms, etc just isn't sensible. Personally I'd do away with all trade barriers globally. Those inefficiencies and the associated costs (of monitoring and also end prices/extra taxes) only hold back the global economy and better integration/understanding and erode inequalities.
Tax, as Cowperthwaite found and proved, is the grit in the engine of progress. Keep taxes low, increase efficiencies and then we'll all be better off long term.
Well, I can dream can't I? Can't let all the doomsters have their own way.
D
DJP,
"Arguably you could say that the EU's existing trade barriers have not helped the economy. Protecting poor and inefficient manufacturers, service providers, farms, etc just isn't sensible. Personally I'd do away with all trade barriers globally. Those inefficiencies and the associated costs (of monitoring and also end prices/extra taxes) only hold back the global economy and better integration/understanding and erode inequalities. "
Indeed. I will rejoice the day CAP gets abolished, and all the pointless red tape/health & safety related bureaucracy that emanates from Brussels is is disbanded - the need to stimulate growth(and thus employment) necessitates an absence of the latter which impinge on small and medium size businesses.
And we would all be better off if CAP was abolished(bar the pesky French of course!)
Bar the French? More like bar French farmers, I'd say...
I do think we're in for a tough time, but conditions political, economic, demographic and technological are so different now from the 1930s that it makes comparisons very difficult - so difficult I'm not sure they have a great deal of value in telling us how things will pan out.
djp
I think it is a pity when excusers point to inefficient Western manufacturers, service providers and farms etc. as a key reason for the West’s economic decline. It is also a pity when these people placidly accept the transfer of economic power from the West to the East (China), without really appreciating either why this has happened or what the long term consequences will be.
There are many reasons behind the current economic crisis that threatens to decline into a depression. In my mind these can be grouped into the weakness and the naivety of the West on the one hand and the hardness and superior, strategies and tactics of the East on the other.
The indulgent deficit spending by Western governments is a chronic weakness, a mass delusion that assumes the West is entitled to a certain standard of living. The inhibiting power of popular democracy has neutered many good political policies. Democracy, like any political system which is too weak to do what is right and too prone to avoid unpopular choices, will sew and reap the seeds of its own destruction. The questions the West now faces is how do we become strong and wise, how do we overcome our own weaknesses and largely unconscious self destructive behaviours.
The decline of Western societies has not solely been the result of or own passivity and weaknesses. It has also been the direct result of China’s (et al) enticements, strategies and seductions. These competitors (arguably opponents) have adopted long term strategies aimed at furthering their own societies climbing up the rank of nations. These nations have regarded their growth achievements as matters for national pride. They have rigorously implemented pragmatic self serving multi-thread strategies, over decades, that cumulatively have indirectly contributed to the destruction of much of the West’s manufacturing base and now increasing economic impoverishment. Some of their less savoury their tactics are well known, but these things are not the raw issue, the raw issue is that they set out to win to defeat the west and the west did not appreciate their intent. Faced with competitors who used all available means to achieve their goals, the fault of the West was not manufacturing and farming inefficiency, it was a societal wide naivety of the realities of the world in which they lived. The questions the West now faces is how do we become strong and wise, how do we overcome our passivity, which to date has been little more than an unconscious self destructive behaviour.
In reply to djpreston, post #1
Tax, as Cowperthwaite found and proved, is the grit in the engine of progress. Keep taxes low, increase efficiencies and then we'll all be better off long term.
100% spot on Darron. The only trouble with that is politicians’ standing in the way with their addiction to power, spending taxpayer’s money as a means of holding onto it!
Well, I can dream can't I?
Yup, that’s all it is I’m afraid ;-\
Sir John Cowperthwaite's Obituary :-
http://www.telegraph.co.uk/news/obituaries/1508696/Sir-John-Cowperthwaite.html
davjo, fangorn and djpreston
The phenomenal growth of Hong Kong during the period (1961- 1971) when John Cowperthwaite was Financial Secretary of Hong Kong had its seeds in victory of Chinese Communist Party in 1949 and the devastating death and chaos that engulfed much of China following that. This period of harsh unremitting revolution across China generated hundreds of thousands of refugees many of whom fled the harshness for the relative tranquillity of Hong Kong.
Many of these refugees were previously rich farmers and capitalists. Far from being illiterate unskilled peasants they were people who set out to build better lives, by applying their education, management and trading skills. In the 1950s and 60s Hong Kong underwent a period of massive geo-political shift. Hong Kong was the continual beneficiary of cheap, plentiful, talented and motivated refugees. It was these enterprising people who transformed Hong Kong. It was they who were the real bedrock (the seeds) on which modern Hong Kong was built. The role of their new British-capitalist overlords was mainly to stand aside and not get in the way.
Arguably, the acts of British were far from the acts of kind benefactors. It seems highly unlikely that the British set out to nurture an extreme laissez-faire economy in Hong Kong, which they knew in advance would blossom. It is much more likely that their primary objective was to avoid spending unnecessary British money on Chinese refugees. Unknowingly, rather than intentionally, the British were administering a fiscal experiment that succeeded. It was not their skills as administrators that brought about prosperity, but a combination of luck and the skills of the Chinese refugees brought with them.
To point to low taxes as the reason for the phenomenal success of Hong Kong is little more than a convenient and distorted rewriting of history. To argue that the solution of the current global crisis lies in adopting the harsh measures applied by the British on the people of Hong Kong has little relevance to the current global economic problems and is in my view little more than the expression of right wing rhetoric.
To point to low taxes as the reason for the phenomenal success of Hong Kong.......is in my view little more than the expression of right wing rhetoric.
Hoho!! If railing against government raising taxes to fund spending the equivalent of £10,000 per head for every man, woman and child in the land, not to mention local taxes, off balance sheet borrowing and future unfunded pension liabilities, is right wing rhetoric, then I'd like to know what left wing dogma is ;-)
davjo
My figures show that the Government currently spends closer to £11,000 per person per year thyan the £10,000 you quoted. Tragically it borrows £2,000 of this and there does not seem to be realistic way this Government can change path.
The reason we are destined for financial collapse is that the mix of British skills, aspirations, industry and demographics, not to mention the accumulated debts, mean that the dice has been already been cast and it will take something gigantic, such as a war, to move the UK economy from its current path.
I do not accept that low tax Hong Kong model is in any way applicable to the UK. The reason being that the two societies are simply too different. The Lonely Planet Guide summarises the earlier situation in Hong Kong as follows: "Much of Hong Kong’s success depended on an enormous pool of cheap labour from China, often directed by entrepreneurs seeking refuge from the Communist mainland. Working conditions in those early years of economic revolution were often Dickensian: 16-hour days, unsafe working conditions, low wages and child labour were all common. Refugee workers endured, and some even earned their way out of poverty into prosperity. The Hong Kong government, under international pressure, eventually began to establish and enforce labour standards, and the situation gradually improved." The UK populace will have none of this austerity. They will not be used as cheap labour, there are far too few entrepreneurial leaders, they will not work in anything like Dickensian conditions, child labour is out of the question as are 16-hour days etc.
The situation remains a Government borrowing to avoid the political and social pain of balancing the books. The long term results of this avoidance will be endless poverty, indebtedness and possibly total collapse and civil conflict.
My main point is that without dealing with general nature of our UK people, which remains one of relative contentment and ignorance of what lies down their track, they will not fundamentally change their behaviours and circumstances. For your comparison to apply the UK would must become more desperate and like the 'Chinese' profile quoted above. To me the idea of trying to motivate our unwilling populace through tax cuts seems most likely to hasten the demise of the UK economy into national insolvency.
FlightoftheKiwi
Don't get me wrong, I understand and agree with much of what you say but I don't agree that the UK is necessarily on a path to depression. I think it's high risk that we are, only because we've got lily-livered politicians who haven't got the guts to do what is necessary.
As someone who's knocking on a bit and who has voted Liberal or Labour for most of my life before the last decade, I'll tell you what I'd do to get us out of the mess we're in :-
Firstly I'd slash 20% off government spending with immediate effect. How? Things like 10% cut in pay for all in government employ earning over £25k. Impose rather more public sector draconian pension rights than is presently on offer. Slash NHS spending, welfare etc. Is there any point in keeping frail old codgers alive long enough through expensive intervention to eek out their existence in a nursing home? As one such nearish term candidate, I'm damned if I think so. Cut overseas military expenditure by pulling out of the pointless Afghan campaign and letting Argentina have the Falklands etc. etc.
Secondly, I'd cut VAT to 15%, abolish 50% tax rate and cut corporation tax. Get rid of masses of employment regulation, more quangos etc. etc..
OK, that's armchair knockabout stuff and it ain't gonna happen but my message is one of free enterprise and smaller government. I spent 90% of my working life exposed to the market as a self-employed builder. At times in the early days, it was tough and I and my wife on one occasion actually went potato picking to keep the wolf from the door, simply because there was no other option. Not that we complained, indeed we were pleased to have the opportunity. The point being, today's culture of entitlement to government issued money has gone way overboard and has cramped enterprise in the people of this land. It's all too easy to settle for a government handout instead of getting off one's backside and doing something positive to earn a living. I remember 50 odd years ago as a 17 year old hankering to work for myself, asking my retired Grandfather, who had run a successful post war building business employing 50 blokes, what he thought of going it alone at that time. He replied that he wished he was my age because the opportunities of the day were massively more than at any time during his life. I reckon those opportuinities have multiplied many times since then, no more so than today, given the right encouraging environmental backdrop which only politicians can provide.
As Maggie once famously said "the trouble with socialism is that sooner or later you run out of somebody else's money". An absolute truism today! We need somebody like her right now to turn the tables. In a way, it's a pity that Incapability Brown wasn't returned to power. By now we'd have been in an even deeper mess which just might have provided the sort of opportunity for a Maggie-like saviour to emerge!
Seasonal greetings to all. Hic ;-)
If you take the Lonely Planet as a historically sound text, unfortunately the conclusions you're going to derive are likely to be entirely biased in a socialist manner - I accept the likely counter-argument of treating a Daily Telegraph obituary in the same way leads to biased conclusions.
However, to describe Cowperthwaite's Hong Kong model as based on taxation only is a subtle error - the lack of government interference in areas it should stay out of (i.e. only things that are necessary for security and prosperity and which can't reasonably be provided by the household sector) was the real philosophy behind the model - low taxes & no government debt (that has to be repaid by future generations - socialists have not just run out of somebody else's money, they've also used up all our children's and grandchildren's money too - now that's immoral) are the beneficial outcomes of the philosophy.
Doesn't the bizarre argument against Cowperthwaite's conservative philosophy that says that the resulting success only occurred because of the evils of Mao's communist philosophy require a contortion too far? As the obituary states, social conditions in Hong Kong improved, and I'm sure they improved in a sustainable and irreversible way because they happened without government fiat. Through personal experience I can tell you with certainty that the socialist experiment & massive government interference in India (combined with high tax rates and low tax takes due to evasion) over the decades since independence from Britain has not improved social conditions for the poor - only the limited liberalisation of the economy since 1991 has achieved an improvement in their lot.
Lady Thatcher and President Reagan received huge backing from the actually 'working' class rather than the work-shy class precisely because they understood that whilst conservative policies might not pander to their pockets immediately, in the long run, the aggregate pie would grow and their children would be more prosperous as opposed to our children, who will have to work incredibly hard just to avoid the fate of the Greeks.
I suggest that the author reads "The Forgotten Man" by Amity Shlaes if he / she wishes to write knowledgeably about the Great Depression, and any parallels that might be drawn between then and now - i.e. between Presidents Hoover, Roosevelt and Obama, and the unintended (but usually malign) consequences of government interference.
"Everybody is entitled to their own opinions, nobody is entitled to their own facts." the late Daniel Patrick Moynihan (Democrat, US Senator)