Eichen­green and O’Rourke: A Tale of Two Depres­sions

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Eco­nomic his­to­ri­ans Barry Eichen­green and Kevin H. O’Rourke are using empir­i­cal data to com­pare this down­turn to the Great Depres­sion. I’ll be refer­ring to and adding to their com­par­i­son in the next Debt­watch (which will be pub­lished late next week, before the RBA’s July meet­ing), but the research is so good that it deserves to be high­lighted now.

Their con­clu­sion is com­pelling:

To sum­marise: the world is cur­rently under­go­ing an eco­nomic shock every bit as big as the Great Depres­sion shock of 1929–30. Look­ing just at the US leads one to over­look how alarm­ing the cur­rent sit­u­a­tion is even in com­par­i­son with 1929–30.

Click here to see the full post;  below I sim­ply link to some of the fig­ures.

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  • ak


    I may gen­er­ally agree but I will pro­pose slightly dif­fer­ent solu­tions.

    1. “The real prob­lem is at the col­lec­tive insti­tu­tional level, where soci­ety is infected with unac­count­able, tyran­ni­cal struc­tures called for-profit, lim­ited-lia­bil­ity cor­po­ra­tions.”

    Being “for profit” doesn’t mean any­thing. There is noth­ing wrong in seek­ing profit in gen­eral. I remem­ber liv­ing in a sys­tem where econ­omy was based on the assump­tion that mak­ing profit was wrong. Every­body com­plained a lot but not too many peo­ple both­ered to work. Peo­ple were mak­ing prof­its by cor­rup­tion and steal­ing.

    2. Some big cor­po­ra­tions behave exactly as you described — if we con­sider the scan­dal with asbestos vic­tims for exam­ple. I worked for 2 years for a big inter­na­tional cor­po­ra­tion — this was so dis­ap­point­ing because we were play­ing inter­nal pol­i­tics rather than doing any­thing use­ful.
    How­ever there are exam­ples of smaller com­pa­nies which are dif­fer­ent. I have worked for small or medium sized pty.ltd com­pa­nies (or equiv­a­lents in Poland) for years and I haven’t seen that “In the pri­vate sec­tor, busi­ness firms are as insti­tu­tion­ally close to total­i­tar­i­an­ism as humans have ever come.” Yes some of my bosses were morons but I dealt with the prob­lem imme­di­ately by find­ing another job.

    You may not be able to deal with this prob­lem in Poland (or some devel­op­ing coun­tries) and gen­er­ally cor­po­rate life can be much more toxic there. Peo­ple tol­er­ate things like not pay­ing wages in time (or not at all). Because it is so hard to find a job and there is no tra­di­tion of work­ing for a com­pany for a year or two and then mov­ing along. The great tra­di­tion of serf­dom is still in place (it was only abol­ished in 1864 in some parts of Poland) — peo­ple will com­plain and then do noth­ing. The tox­i­c­ity is not removed from the sys­tem and real psy­chopaths can thrive. This was another rea­son I finally gave up and resigned from that soci­ety.

    As long as you have com­pe­ti­tion on the job mar­ket and strong trade unions the level of abuse will be lim­ited. How­ever when the cri­sis bites us things may look a bit worse even in Aus­tralia.

    3. “Cor­po­ra­tions are inher­ently inef­fi­cient, and the larger they become, they more inef­fi­cient they are. I see that the only way to make our econ­omy more effi­cient is to democ­ra­tize it. This means insti­tut­ing rep­re­sen­ta­tive democ­racy and self-man­age­ment within firms.” 

    I don’t think that self-man­age­ment is pos­si­ble and that it bring any ben­e­fits. How will you imple­ment or impose it? Imag­ine that we work in a nuclear power plant — what process do you want to self-man­age? Vote whether con­trol rods should be low­ered on not? 

    Trade Unions can eas­ily become a part of the prob­lem not a part of the solu­tion if they are to self-man­age (for exam­ple in the US in the fallen auto­mo­tive indus­try). They play an extremely impor­tant role that is to defend rights of employ­ees. They must be empow­ered to do so. But they should have noth­ing to do with man­ag­ing. The proper way to fight cor­po­ra­tionism is to level the play­ing field for com­pe­ti­tion by remov­ing unfair advan­tage (abus­ing patent law, toxic mar­ket­ing, lob­by­ing and cor­rup­tion). To find an accept­able way of wind­ing down bank­rupt “too big to fall” cor­po­ra­tions. In fact a hun­dred years ago there were anti-trust laws in place — where are they gone now? Cor­po­ra­tion exec­u­tives have found their way to the cor­ri­dors of power. Two sep­a­rate pow­ers have fused into one. What is the real power of ACCC and influ­ence of con­sumer organ­i­sa­tions, why are they so tooth­less? So maybe this is what we need to fix?

    This is how democ­racy works in cor­po­ra­tions: If you are a co-owner it is your prop­erty and you can decide what to do. The only way to stop the cast of unac­count­able man­agers pay­ing them­selves mil­lions of dol­lars in bonuses by steal­ing money from the own­ers of the firm is to restore rights of share­hold­ers. I know that this direc­tion is exactly the oppo­site to what syn­di­cal­ists pro­pose but I want more cap­i­tal­ism not less. In every small com­pany I worked for there was no abuse of power by hired man­agers because they were kept on a short leash by the own­ers.

    Some big nat­ural monop­oly firms should prob­a­bly be run by the state.

    The sep­a­ra­tion of pow­ers is the foun­da­tion of the mod­ern demo­c­ra­tic soci­ety. Dif­fer­ent pow­ers check each other. This is a dynamic process based on the con­flict of inter­ests. If you remove that con­flict of inter­est and encour­age peo­ple to coop­er­ate the only pos­si­ble out­come is cor­rup­tion. I cor­rectly antic­i­pated that process in 1990 when we were reform­ing the way stu­dents cor­po­ra­tion was run at my uni­ver­sity in Poland. I strongly opposed giv­ing any power to spend money to the stu­dents rep­re­sen­ta­tion body. I wanted to limit their role to fight­ing for inter­ests of the stu­dents for exam­ple by forc­ing cam­pus admin­is­tra­tion to improve liv­ing con­di­tions in the dor­mi­to­ries. How­ever my col­leagues were smarter, they wanted a bet­ter solu­tion. They wanted to give man­ag­ing pow­ers to the elected rep­re­sen­ta­tion of stu­dents — and they won. The guy who pro­posed that was one of the most decent and moral peo­ple I have ever met — he just wanted a bet­ter world.

    Guess what hap­pened next. The stu­dents cor­po­ra­tion become a mag­net for guys who wanted to make easy money. Then one cam­pus build­ing was pri­va­tised — sold to a “stu­dents foun­da­tion” or some­thing like that (I don’t remem­ber). It hap­pened a few years after I grad­u­ated so it was not my busi­ness to fight these guys. Even­tu­ally the police stepped in but the “stu­dents” were smarter — there was a fire in the build­ing and all the doc­u­ments were burned…

    Don’t tell me that in Aus­tralia peo­ple are less cor­rupt. The level of cor­rup­tion at the city coun­cil level regard­ing devel­op­ment appli­ca­tion approvals is prob­a­bly the same in Aus­tralia as in Poland. What is good in Aus­tralia is that there are fewer places where you put a lion in charge of look­ing after the lamb.

    That’s why I think that syn­di­cal­ism as a solu­tion to all our prob­lems is dead even before it has been born. If peo­ple want to start a coop­er­a­tive or give share options to all the employ­ees — that’s great. This can work. But I don’t believe in retro­fitting “self-gov­er­nance” to exist­ing cor­po­rate mon­sters. They will become even more cor­rupt cor­po­rate mon­sters.

  • nanks

    It won’t make any dif­fer­ence what sys­tem you put in place if power is allowed to con­cen­trate ‘in space and time’. If power can reside in indi­vid­u­als for any length of time then indi­vid­u­als who seek only power and only the advance­ment of their par­tic­u­lar inter­ests will grav­i­tate towards con­trol of those posi­tions — posi­tions that allow them to fur­ther their inter­ests and their inter­ests alone.
    I am think­ing here of organ­i­sa­tions of a size large enough to have some power beyond their imme­di­ate busi­ness. Govt, pri­vate, what­ever,
    But even with spread­ing the power around there is always the risk of a ‘hit and run’ oper­a­tion like ak men­tions with regard to the stu­dent union. But at least they hit and dis­ap­pear rather than keep on hit­ting year after year.
    The bal­anc­ing of power is the trick that we have not worked out yet, but I think move­ment away from hav­ing indi­vid­u­als hold posi­tions of power more or less in per­pe­tu­ity would be an improve­ment.

  • GSM

    The US dol­lar seems to be fail­ing at this level which may well indi­cate another test of the $ lows. If we are expect­ing an out­right defla­tion­ary sce­nario, the dol­lar should be hold­ing up here. When it clearly is not. 

    Behind the cur­tain things may be closer to col­lapse than we pos­si­bly realise. I see Harry Shultz is expectin a bank hol­i­day in the US.

  • ak


    Let me rephrase what I have already writ­ten. I can be totally wrong but we are talk­ing about two cur­ren­cies.

    1. USD as a domes­tic cur­rency — the defla­tion (caused by the destruc­tion of M3) is obvi­ous and what­ever Steve wrote still holds no mat­ter how much M1 they cre­ate as long as it is not as much as in Zim­babwe,

    2. USD as the global reserve cur­rency. We need to look at the amount of M3 out­side of the US econ­omy. QE and all the tricks related to the cur­rent account deficit do mat­ter a lot. M3 is in the form of bonds and the amount is ris­ing.


    If I have Trea­sury bonds can I sell them and buy oil or cop­per? Yes they are liq­uid they can be traded on the CME forex exchange in 2 mouse-clicks if you have a proper appli­ca­tion.


    And T-Bonds they are denom­i­nated in USD, they are a form of Amer­i­can cur­rency. It doesn’t mat­ter at all whether I have phys­i­cal green­backs or T-Bonds.

    So no defla­tion at all in this envi­ron­ment and a sig­nif­i­cant pos­si­bil­ity of infla­tion in the form of the falling exchange rate. What you have already observed.

    So they will get what they want. But for us here in Aus­tralia this may not be good at all. 

    Does it make sense or have I mis­un­der­stood some­thing?

  • I agree there boma–and it’s good this time to have the evi­dence of a col­lapse in world trade as a con­se­quence of a Depres­sion rather than a cause of it, well-pre-dat­ing any attempt by gov­ern­ments to restrict the ben­e­fits of any domes­tic stim­u­lus poli­cies to the domes­tic econ­omy via trade restric­tion mea­sures.

    I have no doubt that restric­tive trade poli­cies will come into being in the near future in a num­ber of countries–and dri­ven as much by mani­acs in power (as Phillip noted recently) as by any sound alter­na­tive to the neclas­si­cal non­sense of com­par­a­tive advan­tage. But it will be obvi­ous by then that world trade plunged prior to such mea­sures.

    Inci­den­tally I am cur­rently play­ing tourist in Europe, en route to a math­e­mat­i­cal mod­el­ling con­fer­ence in Bonn early next month. I will undoubt­edly be a bit slow in admin­is­tra­tive tasks like approv­ing posts from new mem­bers (or old ones when the spam fil­ter gets in the way) so please be patient on that front.

  • Lyon­wiss

    The rules that gov­ern the soci­eties (US, UK and other devel­oped coun­tries) at the fore­front of cap­i­tal­ism are bro­ken. The analy­sis and the pro­posed reg­u­la­tory reforms so far are super­fi­cial and almost cer­tainly inef­fec­tive, as they do not address many of the fun­da­men­tal issues, such as moral haz­ard, which are at the heart of the finan­cial and eco­nomic break­down.

    Reg­u­la­tors world­wide have been talk­ing about curb­ing exec­u­tive remu­ner­a­tion against inap­pro­pri­ate risk tak­ing. What risk tak­ing? For the mas­ters of the uni­verse, heads they win, tails they win and every­one else loses. See how they reward them­selves after los­ing hun­dreds of bil­lions of share­hold­ers’ and tax­pay­ers’ money:


    Con­trast this with demands on the inno­cent vic­tims of the global finan­cial cri­sis:


    The rules have got to change. Just in case any­one sug­gests a rev­o­lu­tion; there may be other ways of think­ing about a solu­tion. Here is a very inter­est­ing sug­ges­tion about chang­ing rules:


  • Bill


    I love it: inter­nal M3 defla­tion ver­sus exter­nal M3 infla­tion in a spi­ralling death-match. It seems like this (exter­nal M3 inflation)is pre­cisely what Bernanke thinks will ‘bal­ance the ship’and save the US from a Greater Depres­sion…

    Unfor­tu­nately, as we know, exter­nal M3 infla­tion relies on China (or add ran­dom trade sur­plus coun­tries here) buy­ing Ts, which relies on China (exports –25%+) sell­ing rub­bish to US con­sumers, which relies on US con­sumers access­ing — via credit lever­age — an end­lessly ris­ing sup­ply of … you guessed it … inflat­ing inter­nal M3

    But isn’t US inter­nal M3 deflat­ing in the biggest bust since the orig­i­nal Great Depres­sion? Hmmm… I think you’re on to some­thing…

  • Philip


    It’s unfor­tu­nate that you believe in benev­o­lent auto­crats run­ning the econ­omy than malev­o­lent auto­crats. This is a vari­ant of the “good king, bad king” debate, which for a lib­er­tar­ian such as myself is an utterly point­less dis­cus­sion. Democ­racy and self-man­age­ment are ends in them­selves — this does not need jus­ti­fi­ca­tion in a free soci­ety. While there are plenty of peo­ple in soci­ety who are will­ing to pas­sively sub­mit to insti­tu­tions of dom­i­na­tion and hier­ar­chy, there exists those who believe soci­ety and the econ­omy should not be run by auto­crats.

    I never did say that seek­ing profit was a prob­lem in itself, what I men­tioned was an inher­ent aspect of the cor­po­ra­tion which causes prob­lems pre­cisely because these insti­tu­tions don’t act accord­ing to mar­ket prin­ci­ples.

    Whether SMEs func­tion closer to the mar­ket ideal is irre­spec­tive of their orga­ni­za­tional struc­ture. Whether a firm has 10 or 10,000 employ­ees, it will retain its authoritarian/totalitarian struc­ture regard­less of its size. Smaller is bet­ter as it would limit a firm’s abil­ity to exter­nal­ize costs, rent-seek and com­mit crime.


    Cer­tainly a great deal of reg­u­la­tion and laws need to be updated/changed. How­ever, no mat­ter how good the changes are, cor­po­rate power will break them down, whether it takes years or decades.


    Steve does make an inter­est­ing point about the col­lapse in trade. It has been argued that trade col­lapsed dur­ing GD1 due to pro­tec­tion­ist mea­sures imple­mented by gov­ern­ments though it is more likely it col­lapsed due to debt defla­tion. This time around no one can con­ceive of such an argu­ment as trade col­lapsed far before any addi­tional pro­tec­tion­ist mea­sures, such as tar­iffs and quo­tas, were increased.

  • Tel
  • Lyon­wiss


    Has any­one asked the ques­tion whether the gold depos­i­tory insti­tu­tions are Ponzi schemes? If there is no one there reg­u­larly count­ing the phys­i­cal gold against the claims, how do we know the gold is really all there. After all, fiat money and frac­tional reserve bank­ing are sup­posed to have orig­i­nated when gold­smiths issued claims with­out actual gold hold­ings, as they were count­ing on the fact that few peo­ple actu­ally asked to take phys­i­cal deliv­ery of their gold. Most investors of Mad­off funds never with­drew their money, until it was too late when the scam was exposed.

  • Bill


    As we have dis­cussed before regard­ing gold revert­ing to its his­tor­i­cal role as a cur­rency in cir­cum­stances such as these: I had spec­u­lated that gold must fall in a $US defla­tion, ceteris paribus (all other things being equal) if $US are dis­ap­pear­ing up their own bum in the US

    How­ever, if gold has been ille­git­i­mately short-sold in a futures-based global reverse-Ponzi scheme which is about to blow up — as your H.P. story seems to imply — then it is not nec­es­sar­ily the case that gold needs to fall at all against $US. It may need to rise sig­nif­i­cantly (along with sil­ver) to re-bal­ance the shorts.

    I think BTB needs to be alerted to this pos­si­bil­ity.


  • The Out­back Ora­cle

    Hi JS re the dates cho­sen. I will ask “Bart” and get back to you. The first offi­cial quar­ter of neg­a­tive growth in the USA is in Q4 2007. Offi­cially, this was fol­lowed by a cou­ple of quar­ters of growth.
    Again, with­out going to all the charts, (it’s 11 pm Sun­day!) I sus­pect you would find that Real GDP adjusted for CPI as per John Williams’ “shad­ow­stats” (CPI with­out lies)would show that the reces­sion did start in the USA in Oct 07.
    Of course your point is well taken. The dates that we choose as start­ing points make one heck of a dif­fer­ence as to how a chart looks. Bart is not one to fudge things. He is not push­ing any barrow…just pro­duces a myr­iad of charts!

  • The Out­back Ora­cle


    I agree with your obser­rva­tions re debtor and cred­i­tor coun­tries. Thank you for your input from the writ­ings directly from that time. I have been bang­ing on about this for years (decades in fact)to any­one who would lis­ten. Few lis­tened and none took any notice of me.…understandable per­haps to those who know me!
    The debtor coun­try has far fewer options with regard to stim­u­lat­ing their econ­omy, par­tic­u­larly towards what ought be the end of the reces­sion.
    Fur­ther in an envi­ron­ment such as today where the whole world, both debtor and cred­i­tor, has gone on a stim­u­lus ram­page, the pos­si­bil­ity of out of con­trol inter­est rates in debtor coun­tries looks to me to be extremely high.
    Our fear­less lead­ers (in their total igno­rance and under the influ­ence of that idiot from Trea­sury) have embarked on a high risk path given that we are such a heav­ily indebted nation.

  • royle­fam­ily
  • ned

    Hi Tel,
    That story (the bust­ing of the COMEX) has been around for at least 6 months now, I heard it in Decem­ber last year. Take it as you will, but I see it as wish­ful think­ing on behalf of gold bugs and con­spir­acy the­o­rists. It is con­sis­tant with the line of “the gold price is being sup­pressed” and “the banks are all short sell­ing gold to keep the price down”. I would say pro­ceed with cau­tion.

  • Bull­turned­bear

    Hi Bill,

    I am try­ing not to get sucked into dis­cussing gold. Gold has too many reli­gious fol­low­ers, which takes the fun out of dis­cussing it.

    I will com­ment about sil­ver though. I think sil­ver may be a bet­ter pre­dic­tor or proxy for where the econ­omy is going. Sil­ver is an indus­trial metal, so as aggre­gate pro­duc­tion falls, the price of sil­ver should fall. This is some­what true, although spec­u­la­tion and positive/negative mood can always dis­tort “the rule”.

    So, where is sil­ver at. Using an elliot wave count. I count sil­ver either just com­plet­ing or about to com­plete a small 4th wave bounce, in an over­all down trend. This will be fol­lowed (if my count is right) by a small 5th wave fall. The price of sil­ver will fall below $13.60 (the 3rd wave low) and I guess a low around $13.00 to $13.20 will develop. Wave 5 may extend lower though. 

    After the next short term low is in, the trend for sil­ver should turn up again. Sil­ver should rise in a larger degree wave 2, cor­rect­ing most of the fall from $16.25. For this count to hold, sil­ver can­not go above $16.25 before it turns down again.

    The very inter­est­ing part of all this is that after the wave 2 bounce will come wave 3. Wave 3 will likely head towards or go below $8.60 over the next year or so.

    If this fore­cast devel­ops, I will take it as a very strong sig­nal that the depres­sion is well and truly under­way.

  • Peter Si

    Does any­one know where I can find graphs of gold and sil­ver prices?

  • Ernie

    Peter Si, try this site:


    - Ernie.

  • DrewRiskMan­ager

    If any­one would like to see The ascent of money again or missed one of the parts in the series, you can find all 6 here.


  • Bill

    Thank you BTB,

    Once again — crys­tal clear and per­sua­sive analy­sis. I also agree that the par­tic­u­lar topic I brought up has prob­a­bly been well and truly exhausted by now, and I’ll leave it be. There are much more inter­est­ing aspects of this build­ing Greater Depres­sion to dis­cuss in any case…


  • mahaish

    hi bill,

    we would tru­ely have carved out for our­selves a lit­tle piece hell if gold were ever to become a com­mon medium of exchange and replace the cur­rency in this mod­ern world.

    the state has the power to tax and hence to con­trol the cur­rency. so for gold to replace state fiat cur­rency, the state would need to loose the rule of law, and hence the abil­ity to con­trol the cur­rency.

    i can see noth­ing short of a civil war or rev­o­lu­tion that would cre­ate the con­di­tions for such a sce­nario. and even still the cur­rency will most likely be pre­served at all costs

    any­thing short of this, the incli­na­tion for the state will be to moni­tise its way out of trou­ble, put up trade bar­ri­ers, and con­fis­cate or make ille­gal any­thing that would under­mine its abil­ity to con­trol the cur­rency, and if you are the US, strike out at any­one who stands in your way through the bar­rell of gun.

    whether such sce­nar­ios emerge in the g20 over the next 30 years, we’ll have to see, as we lurch from one cri­sis to another.

    civil war and rev­o­lu­tion, words i hope we do not have use too often in describ­ing our col­lec­tive expe­ri­ence over the next 30 years.

  • mahaish

    hi out­back,

    i’ve lost a few cof­fee com­pan­ions myself , given the way i’ve banged on about the debt over the last 5 years.

    no one likes bad news bears.

  • Bull­turned­bear

    Hi Mahaish,

    I know what you mean. I have been steadily los­ing clients for 2 years now. Some have lis­tened. Some have told me I am too extreme and some just don’t want to know.

    I try to keep my “extreme” views to myself but I find it too hard to hold back some times. 

    When the stock mar­ket flips back to bear­ish again (if it does of course) it will be eas­ier to make our case again.

    At the moment peo­ple are being deceived by bear mar­ket rally pos­i­tive sen­ti­ment. When that flips con­fu­sion will reign and fear supreme.

  • Peter Si

    Hi Ernie,

    thanks for the link.

  • BrightSpark1

    Hello Mahaish and Out­back Ora­cle

    I am now receiv­ing invi­ta­tions from cof­fee com­pan­ions who had pre­vi­ously found my bang­ings on for the last few decades, odi­ous. They have noticed the green shoots in some local build­ing sites and are now seek­ing advice. Not so per­mibull now. “What do I do with my super, its going down!!” “My 10% PA “invest­ments” with builders are lost I’m told that I might get 30% of my cap­i­tal in the full­ness of time”!!

    The “econ­o­mists” I know are now dodg­ing my ques­tion on why it is OK to turn for­eign debt into gov­ern­ment debt when for­eign debt “does not mat­ter” and gov­ern­ment (“National”) debt does mat­ter.

    No doubt they will all be pleased to know that they are stim­u­lat­ing the Ger­man auto indus­try.