Is 2009 tracking a 1930 Great Depression scenario?

Submitted by Edward Harrison of the site Credit Writedowns.

With more and more major economists predicting recovery sometime later this year, many have forgotten that downside risks remain. Berner, Roubini, Volcker, Krugman and Bernanke have all come out essentially saying they would not be surprised to see a ‘technical’ recovery at some point later this year. Robert Gordon has gone as far as to suggest we could be in recovery already – at least in the United States. I too have called for a Q4 or Q1 recovery. So, is it off to the races?

Hardly. I don’t have to convince many readers at Credit Writedowns or Naked Capitalism that there is a darker scenario which threatens recovery. Many of you see this according to preliminary results from a recent poll I conducted. Nevertheless, let me use this post as a reminder of that downside scenario with some commentary from economists. David Rosenberg is not the only major bearish economist that sees a very troubling economic outlook.

First, a post by Wolfgang Munchau in the FT reveals that much of the economic data of late has actually been disappointing despite the rally in shares and corporate bonds.

Last week, the green shoots shrivelled. In South Korea, China and Germany, exports were declining once again. In the US, the Federal Reserve’s Beige Book said “economic conditions remained weak or deteriorated further during the period from mid-April through May”.

The March signs of revival turned out to be little more than a technical inventory correction, with no change in the underlying trend. The world economy is still contracting, though perhaps not quite as fast as at the start of the year.

As an analysis by economists Barry Eichengreen and Kevin O’Rourke* shows, global industrial output is still on the same trajectory as it was during 1930. The only question is whether we can avoid 1931 and 1932.

Munchau argues we can avoid a 1931 and 1932 scenario only if we see a marked change in the present policy response in major economies. But, Munchau’s analysis makes one wonder why he finds the situation so dire for the global economy. Why does Wolfgang Munchau think 2009 is tracking 1930? The answer comes in the Eichengreen – O’Rourke data he references. It is truly stunning: when one looks at statistics like industrial production, this downturn is looking as bad as the Great Depression. Here is how it is summarized at the economic site Vox.

The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

Now I happened to listen to Barry Eichengreen make his case on Tom Keene’s show at Bloomberg Radio this past Thursday. The interview makes for interesting listening and it gives you greater granularity on his view for the global economy. I have provided the podcast clip below. (By the way, if you don’t already subscribe to Keene’s podcast, Bloomberg on the Economy, do it. They have great guests. Here is the link.)

I recommend you read the Eichengreen – O’Rourke article (the graphs are amazing). With that as background, the Munchau piece will be more powerful. Afterwards, have a go and listen to the Bloomberg podcast. The combination will leave you with a very good understanding of the downside risk for the global economy.


A Tale of Two Depressions – Vox
Optimism is not enough for a global recovery – Wolfgang Munchau, FT
Depression Dynamic Ensues as Markets Revisit 1930s – Eichengreen (March), Bloomberg

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. sukiewa

    Japan invaded Manchuria and de facto started the Sino-Japanese War in Sept 18th, 1931. The war machine was on even earlier than that. It was several years before the European powers and the US turned their on. Hence explained the 25% gap for the Japanese comparison.

  2. Andrew Bissell

    What, exactly, is the change in policy response that Munchau is advocating to avoid a 1930s-style collapse? Because as far as I can tell we are using all the policy sledgehammers that the monetarists *and* the Keynesians advocate (viz. massive liquidity infusions, and huge public deficit spending [to such a degree that strain is being placed on the market for long-dated government securities]) and it's getting us absolutely nowhere.

    Please tell me Munchau is not simply asking for a bigger sledgehammer.

  3. sanjay

    I am as bearish as anybody on the economy- but to use a comparison between current industrial production and that in 1930 is just shoddy analysis without at least acknowledging and adjusting to reflect the fact that manufacturing employs far fewer people and accounts for much of GDP currently than it did in 1930.

    I don't know but perhaps part of the problems of the 30's because economist were focusing on agriculture rather than industrial production?

    Sometimes I think we "over think" There is about 4trillion in bad debt- i.e. spending that shouldn't have happened except for the lax lending. Without that 4 trillion there would have been no growth in the US economy during that period. What has changed or will substitute for that spending?

  4. Hal Horvath

    I mean Wolf agrees the key fact is the private debt leverage ratio — what has to be reduced before the ability to maintain stimulus is spent. Past that, I offer a specific new idea.

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