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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75 Responses to Eichengreen and O’Rourke: A Tale of Two Depressions

  1. ak says:


    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.

  2. nanks says:

    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.

  3. GSM says:

    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.

  4. ak says:


    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?

  5. Steve Keen says:

    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.

  6. Lyonwiss says:

    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:


  7. Bill says:


    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…

  8. Philip says:


    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.

  9. Lyonwiss says:


    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.

  10. Bill says:


    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.


  11. The Outback Oracle says:

    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!

  12. The Outback Oracle says:


    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.

  13. ned says:

    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.

  14. Bullturnedbear says:

    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.

  15. Peter Si says:

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

  16. Ernie says:

    Peter Si, try this site:


    – Ernie.

  17. DrewRiskManager says:

    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.


  18. Bill says:

    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…


  19. mahaish says:

    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.

  20. mahaish says:

    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.

  21. Bullturnedbear says:

    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.

  22. Peter Si says:

    Hi Ernie,

    thanks for the link.

  23. BrightSpark1 says:

    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.

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