[The
Telegraph, U.K.]
Financial Times Deutschland, Germany
The Crash: Time
for a New Superlative?
"International trade plummeted
during November, December and January, with far stronger force than during the
Great Depression. … Between 1929 and 1932, total trade volumes fell slightly
more than 25 percent. This will likely be reached this year - even without a
new era of protectionism."
By Wolfgang Münchau
Translated By Jonathan Lobsien
February 11, 2009
Germany
- Financial Times Deutschland - Original Article (German)
There are increasing signs
that the current economic crisis will be worse than the Great Depression. There
is a danger that we won't pull ourselves out of the rapid downward spiral for a
long time to come.
Is it too early for a new
superlative? At first we spoke of the worst economic crisis since reunification
[of Germany]. Then it was the worst since the Second World War. Now, anxious
observers are wondering: Is it possible that this crisis will be even worse
than the Great Depression?
Those who answer "no"
- with great certainty - bring the following arguments into play: In the United
States, gross national product sank more than 30 percent between 1929 and 1933.
The unemployment rate soared from just over 3 percent to 25 percent. It's
fairly safe to say that during this crisis, such an order of magnitude will not
be reached. Unlike back then, now we have stable social systems, so that even a
sharp rise in unemployment won't manage to lead to a complete collapse in consumption.
None of our central banks pursues a deflationary policy. This time,
governments won't attempt to offset revenue losses with higher taxes. And
finally, today we have no gold standard ,
which was one of the main reasons America sparked a global crisis during the
1930's.
Until recently, even I made such
arguments. Today, I'm not so sure. The free fall continues.
International trade plummeted
during November, December and January, with far stronger force than during the
Great Depression. In November, global trade volumes nosedived a full 6 percent
compared to the month before. German exports, which fell just under 11 percent,
receded a further 4 percent in December. Experts forecast further declines in
the first quarter on an order of magnitude of 7 percent. When added up, these
losses equal a decline of over 20 percent within the space of only five months.
Between 1929 and 1932, total trade volumes fell slightly more than 25 percent. This
will likely be reached this year - even without a new era of protectionism.
China's consumer price index indicates deflationary
threat - too few dollars chasing too many goods.
[Click
graphic for larger version]
Because the economic stimulus
in both the United States and this country [Germany] will only begin to show its
effect from the third quarter [July-September, 2009], the global economic
freefall will continue unabated until the summer. I wouldn't be surprised if we
had another four million unemployed in Germany this year - with a strong upward
trend in the coming year.
Posted by WORLDMEETS.US
But this gloomy
prognosis by itself would still not justify concluding that the crisis is worse
than the Great Depression of the 1930s. This would require a sustained negative
interaction between the real economy and the financial sector. As long as the
economy doesn't click back into gear, the finance sector will remain stalled
due to toxic credit assets. It will remain stalled as long as there's a lack of liquidity in the market, which is why housing prices are plunging and
unemployment and bankruptcy rates are rising. Conversely, the real economy will
not achive growth until financial managers can fulfill their key
function, namely, providing the economy with a sufficient supply of credit.
At the moment, I don't see
how we emerge from this vicious circle without a strategic approach to
restoring a functioning financial system. Since a large part of the American
financial sector is insolvent, it is my opinion that this can hardly be realized
without nationalization or a government-backed "Bad Bank."
Job loss comparison for past three American recessions:
Current recession in green.
[Click
graphic for larger version]
To be sure, the Obama Administration
isn't unprepared for this. American economist Jeffrey Sachs recently made a
very interesting proposal for how we might be able to get out of this mess . His
prescription: establish a public "Bad Bank," which would pick up
toxic securities from banks and in return receive a convertible bond, a loan
which would later be convertible to ordinary shares. The trick to Sachs'
proposal is that the conversion ratio depends on revenues. When the necessary depreciation
of toxic debt is higher than the assets of the bank, the bank will
automatically fall into possession of the state, which will then liquidate it.
In other cases, the state gains a share of the bank, the amount of which will
be measured by revenues.
NO ALTERNATIVE TO THE
RADICAL
Such proposals are certainly
radical, because they end up leading to large waves of nationalization. But I
see no real alternative to the radical. Meanwhile, with U.S. government looking
to buy securities from banks, the program envisioned by Washington on Tuesday for
rescuing the financial sector is yet another attempt to solve the problem with
complicated, technical hullabaloo. And since the economic recovery package put
forth by the White House and Congress has been beaten black and blue, there is little
reason to believe that we'll emerge from this downward spiral with the policies
of new President Barack Obama.
But that's exactly what
worked for the Americans in the 1930's. Although growth rates did indeed remain
disappointing, unemployment fell dramatically. President Franklin D. Roosevelt's
New Deal brought the crisis to an end, even if there were stops and starts, for
example during the recession of 1937.
Whether that will also work
for us isn't at all clear. In almost every country, the policy is to push for
an effective solution to the acute problems in the financial sector. And even
the best stimulus package won't help in this area - and most of these packages
are rather mediocre.
Posted by WORLDMEETS.US
That is precisely the real
danger of this crisis. It's not that the unemployment rate will rise to 30
percent, but rather that we won’t emerge from our Depression for a long
time to come. That's just how it happened in Japan.
CLICK
HERE FOR GERMAN VERSION
[Posted by WORLDMEETS.US February 11, 3:15pm]