With global trade down more than in 1930, is this the Greatest Depression?
This morning I wrote about Paul Krugman telling the World Business Forum that global trade had fallen more in the current recession than it did in 1930, the year after the crash of 1929. Although the global economy has shown signs of improvement since April 2009, a widely discussed article by economists Barry Eichengreen and Kevin O'Rourke, A Tale of Two Depressions, argues that the current recession was worse during its first ninth months than the comparable time during the Great Depression.
Before getting into the details, I was a bit shocked to see Krugman's finding because in March 2008, I wrote a piece, Is This The Greatest Depression? My argument back then was that some simple math argued that it would not take much of a decline in the bulging portfolios of toxic waste balancing shakily on a sliver of equity to wipe out all the capital on the books of banks and hedge funds. But I had not bargained on the U.S. throwing $23.7 trillion against the problem.
In April, Eichengreen and O'Rourke argued that "the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak." They also noted that during that same period, global stock markets fell even faster during the current recession than they did in the Great Depression.
These two also argued that global trade fell much faster in the current recession than in the 1929 to 1930 period. Krugman, who appears to have read this article, also noted that this trend was alarming given the prominence of trade destruction's role as a factor compounding the Great Depression in the economics literature.
The silver lining in all this is that between April and September, when the co-authors published an update to their original paper, there has been improvement in global economic activity. Their conclusion is, "The downward spiral in global trade volumes has abated, and [June 2009] data show a modest uptick."
What remains to be seen is whether all that government money going into the global economy will prime the pump for the private sector or whether the only way to sustain that growth is through massive infusions of additional government money.