There are some important differences between now and the Great Depression.
It’s interesting how narratives evolve.
The current narrative is that this is the biggest economic shock since the Great Depression.
The Great Depression has become our bench mark.
And fair enough. ANZ’s former chief economist reckons we could get to 15% unemployment by June.
Unemployment has never jumped a full 10 percentage points in a couple of months. Ever.
That’s ‘unprecedented’ to borrow another cliché of the times.
But I’m not sure the Great Depression should be our benchmark. To steal yet another cliché, they were different economic times. There’s four important differences.
First, the Great Depression followed the roaring 20s, and some pretty wild periods of excess. There were huge imbalances in investment, consumer discretionary spending, private debt growth and inflation that all had to be unwound.
I’m not sure we would say the same about today. Debt metrics look bubbly, but this is an era of liberalised capital markets and super cheap money. Debt leveraging looks ‘rational’ in that context.
Second, the Great Depression, like most recessions, was triggered by a period of monetary tightening. That hasn’t happened and isn’t happening. In fact, the money printing machines are ramping up again, and we’re looking at the loosest monetary policy settings in human history.
A lot of that cheap funding is designed specifically as liquidity support to stop the banks getting into trouble. In the 1930s, banks were simply allowed to fail, which then had huge down-stream implications. Governments will be avoiding banking collapses at all costs.
Third, going into the Great Depression, fiscal policy was tightened to balance budgets. Right now though, governments are opening up their wallets and splashing the cash around. In the US we’re looking at $2.2 trillion and counting.
Fourth, there has been no trade war such as the Smoot-Hawley 20% tariffs on US imports, which in turn were met by global retaliation and saw global trade collapse in the 1930s.
Sure, there were trade tensions between the US and China coming into this period, but both countries know that a trade war doesn’t help either of them right now.
So look yes, we could see a sizeable hit to the economy. It’s not a stretch from here to hit “worst since the Great Depression” status.
But we know now that a lot of the policy responses to the Great Depression only worked to exacerbate the crisis.
That’s not to say our governments won’t put a foot wrong. I’m sure one of them somewhere will put their foot on a mine.
But we know a lot more about how the economy works now, and that wisdom, should, stop things getting too bad for too long.
So yes, expect some short term pain. Expect a period of adjustment.
But also expect us to come out of it fairly quickly.
This is no Great Depression.