this is like 1873, not 1929

Discussion in 'Economics' started by Mav88, Oct 16, 2008.

  1. Mav88

    Mav88

    so says this damn interesting article

    http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18


    When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

    ....


    The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

    But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.....


    If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)...

     
  2. Mav88

    Mav88

    Perhaps that is what Paulson and Bernanke are reading and trying to prevent. I don't really know but the parallels are interesting.
     
  3. bernanke is preventing a repeat of the 30's depression. during that time, the fed tightened their monetary policy and increased interest rates, and bernanke believed it turned a recession into a depression.

    that's why he's been pouring money into the economy and aggressively lowering rates.
     
  4. Well,
    Nelson says that the long term effects of the 1873 crisis were "perverse" and that the "Gilded Age" began in the US - with "robber barons" and "excesses of wealth" displayed by the "US upper class", as well as strong population growth.
    http://en.wikipedia.org/wiki/Gilded_Age

    I think that seems a bit unlikely now. Also, this crisis emerged from the US, and not elsewhere.
    Religious fundamentalism - well, that is already in place in the US - hasn't gone away.
    Finally, with the enormous US debt, there seem to be long-term problems looming there.
     
  5. The Bank of North America, the US first central bank, collapsed in 1875.
     
  6. I agree that 1873 has much closer parallels than 1929, but don't you think when traders today reference '29, what they're concerned about is a "long period of market decline and extreme stagnation in the economy" rather than the causes?

    After all, do we really care as much about "why" as the fact "everything is weak and the market is down for a long time"?

    Recessions differ from Depressions in that recessions are short-term, orchestrated events... which can be easily turned around by the Fed taking its foot off the brake and stepping on the gas.

    Depressions are much longer and weaker... requiring fundamental reform of prior poor practices.... to remove the economic rot.

    If those distinctions are correct, we've likely got a depression to contend with...
     
  7. TGregg

    TGregg

  8. Scary, scary times.

    Without job growth, and indeed, industrial growth, I do not see any light at 'the end of the tunnel.'
     
  9. Humpy

    Humpy

    Spot on with your diagnosis gnome.
    The US has fundamental problems with its economic model. It used to slaughter European competition but even here it's not the force it used to be.
    Obama and McCain have both found the change word to try and get elected but it may be too difficult for the winner to change anything except cosmetically. The lobbies are entrenched to suit themselves, not the country. Wage imbalances and fairness have been so denegrated in the past that there isn't likely to be much change there either.
    So the probability is that just enough is done and a lot of PR hot air will happen but not much else.
    US industry is on the ropes. Why should top management care if it means a wage cut etc. to fix it !!
    :(
     
    #10     Oct 16, 2008