A happy shout out to economic historian Price Fishback for reminding us in a piece published in the New York Times that, as bad as things may now seem in the economy, they are nowhere near as bad as during the great depression of the 1930’s in the US.
He begins by saying that economic cycles and downturns are a natural part of the economic cycle [and “nature’s” cycle], but that we may be more sensitive to them now because the big downturns have been coming less frequently since the 1980’s. In other words, we may have gotten a little spoiled and less used to the hardships of the normal business cycle [this lag in business cycles may have something to do with the increasingly loose monetary policy of the last several decades, which climaxed during the reign of “Bubbles” Greenspan].
And according to the theories of Soviet economist Nikolai Kondratiev on the nature of economic supercycles, we are basically due for another big downturn in the world economy. In other words, this is all part of the divine plan and this too shall pass.
But comparison with the Great Depression just doesn’t hold up. Yes the stock market is down about 40% from its highs and real estate has taken a 25%+ beating with possibly more to come, but he “can safely say that the current situation is nowhere near as bad as the situation during the 1930’s . . . the problems of the Great Depression were several magnitudes greater.”
For example, since the Recession began in 2007 until January 2009, the unemployment rate in America has only risen from 4.9% to 7.6%, a level not particularly abnormal by historical standards. In contrast, during the Great Depression unemployment shot up the first year from 2% to over 10%, went to almost 17% the next year, then stayed above 20% for a shocking 4 years.
Then add on another 5 years at a 14% unemployment rate before getting back below 10%. These are far more serious numbers than anything we have seen so far in this economic crisis.
With respect to GDP the numers are even more shocking. While the US economy has been contracting slightly, during the Great Depression GDP plunged 8.6% the first year, 15% the second and a crushing 26% the following 2. These numbers are almost incomprehensible to us today with respect to the amount of pain and suffering and dislocation this would cause in our society. 26% unemployment might bring more serious social unrest than in the past, with urban riots, etc.
And then one must think about the stability of a country such as China if it were to undergo sever economic dislocation. Already there may be 30,000,000 (million) unemployed there, with thousands of factories closing as American consumers are forced to tighten their belts, stop borrowing to buy things they cannot pay for, and start saving for a rainy day. That day is upon us.
If the current global economic crisis is the result of too much easy money and liquidity pumped into the system by the US federal reserve, one has to wonder about the current explosion of the money supply in China. In the first quarter of this year bank loans surged to 4.58 trillion yuan or $670.6 billion US dollars, or more than triple the amount for the same period a year ago. This despite the yearly goal set by the government at only 5 trillion yuan. The lending surge has raised concerns among economists and analysts that non-performing loans will be on the rise since China’s economy is vulnerable to the economic downturn.
Where is all this money going and who is getting these loans? Are they creditworthy consumers, or is China desperately throwing money at the problem like fuel on a future conflagration? Who is going to occupy the millions of office buildings and apartments currently under construction? While the overall money supply and debt levels of the government may not be alarming at the moment, this unprecedented expansion of lending feels ominous. Call it Deja vu.
While the news was good in April of a drop to about 600 billion yuan, the first 3 months of 2009 each saw loan rates above 1 trillion yuan. March saw a record 1.89 trillion yuan worth of loans made. These are worrisome numbers as the Chinese seem to be making some of the same monetary mistakes as the US. Total loans by Chinese financial institutions are up about 30% to 35.55 trillion yuan this year. The “reminbi deposit” (money supply?) is up 26%.
In the upcoming months, new bank loans should keep growing by 400 to 500 billion yuan per month, estimates Liu Yuhui, an economist with the Chinese Academy of Social Sciences (CASS), and new loans for the year should be about 9 trillion yuan.
Can someone help put these numbers in perspective? Please leave your comments!