Schroders’ economist Keith Wade debates whether we are on the verge of a deep depression akin to that which hit in 1929. He presents three reasons why we will not see a repeat of the Great Depression today.
There are a number of parallels and similarities between the 1920s and today, but the world today is different as the factors which turned a downturn into a depression are far more constrained.
Firstly, in the 1920s the money supply in the contracted and there was a major collapse in the banking system in the US. We are not seeing that today and are unlikely to see that because the Federal Reserve underwrite the banking system, preventing a collapse across the system with one bank knocking into another.
Secondly, today we no longer have the Gold Standard, which played a big part in transmitting the shock from the US to the rest of the world. Today we have very divergent monetary policy. Although the Federal Reserve is preparing us for an interest rate increase, the Bank of Japan, the ECB, are keeping policy very loose with Quantitative Easing which is a big support to global activity.
Finally, trade is nothing like as weak as it was during the depression when it contracted by about 30%. During that period we had tariff wars, protectionism, we had real problems which we are not seeing today. We are not about to enter a second Great Depression, but growth will remain sluggish by past standards. In avoiding the fall we have hampered the recovery.