Wednesday, 16 December 2009

Dr. Doom with a scary warning

No not Jeff Mount (CA water’s Dr. Doom), I’m talking about Nouriel Roubini, the bearish economist who famously predicted the Great Recession (plenty of economists called a recession, but Roubini stands out among the few who got the magnitude correct).

Roubini thinks the political environment could be setting us up for a double dip, drawing parallels to 1937. I don’t think this is going to happen, but I wouldn’t completely rule out Roubini’s double dip scenario and recent history tells us we should pay attention to Dr. Doom’s warnings.


Today we look at the links between the current economic conditions and those of the 1930s, another era where the threats of sovereign defaults and inflation worries loomed large. A lengthy recent analysis by RGE’s Mikka Pineda identifies striking similarities in U.S. inflation attitudes between the mid-1930s, when the U.S. began to show signs of recovery from the Depression, and 2009. Americans during the Great Depression voiced the same concerns about excess bank reserves, budget deficits, competitive devaluations and commodities speculation as they do today. Even dissenting arguments followed the same script in both eras. The eerie resemblance in the psychological and economic backdrop of the mid-1930s and 2009—both historic junctures when recovery was thought to have begun—raises concerns that the U.S. could be on the edge of a double-dip.

A stroll through the archives of TIME magazine and The New York Times reveals other similarities in the reactions of Americans today to fiscal and monetary easing and the reactions of their forebears of the mid-1930s. When the U.S. economy began to recover from the Great Depression, widespread fear of credit inflation, currency inflation and public debt inflation drove the Federal Reserve Board to hike reserve requirements by 50% and prompted Congress to slash spending. A premature retraction of economic stimulus, among other things, pushed the U.S. back into recession. In terms of GDP growth, there was a brief recession lasting only about a year from autumn 1937. Business leaders at the time called it a mere “business recession” to whittle down excess capacity and high inventories built up in response to rising commodity prices. To everyone else, particularly those laborers considered “excess capacity,” the economy’s fragile recovery took a big step back. Deflation took hold of the country for another two years and unemployment spiked to 20% and didn’t drop below 15% until 1940. Property prices and stock markets languished below their pre-1929 levels until World War II shocked production back to life.

Today the U.S. is experiencing a similar situation with hawks calling for the immediate exit from both loose fiscal and monetary policy even amid high unemployment. Though past is not prologue, learning from past mistakes can make a considerable difference.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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