Saturday, November 22, 2008

What made the Depression Great.

All the movies, I expect.

But seriously, there are lots of people using lots of suspect analogies at this point, and we should at least get straight which terms correspond to what. Yves has some thoughts about this that I can't claim to have completely processed yet, but they are interesting.
... one thing that continues to surprise me is the frequency with which the US in 2007-2008 is being compared to the US of 1929-1930. I've mentioned in passing that China is in the position that the US occupied in the late 1920s: a massive manufacturer that was generating large trade surpluses, to the point where the imbalance was destablizing (under a gold standard, the US was sucking the metal out of its trade partners; the modern analogy is China's massive foreign exchange reserves). And as the US was the epicenter of the Great Depression, we cannot be certain of the trajectory of this economic crisis until we have a sense of how bad things are getting in China and how good its policy responses are.
By the way, the first thing this makes me realize is that my understanding of the Depression is totally deficient. For example, I know that the US saw massive deflation. But at the same time, relative to gold, I also know that the dollar was substantially devalued. So was there actually any deflation at all in terms of gold? I also know that Germany saw hyperinflation and ended up defaulting on its debts. What happened to France and England though. Was the depression inflationary or deflationary? In terms of pounds or francs, or in terms of gold?

Next, we might wonder how useful the great depression is as an analogy is to being with. I mean except for Iraq and parts of Africa, no one has seen the entire productive apparatus of their society bombed with the last decade. Okay, the US has built a lot of houses that are uniquely useless for making more stuff, but this hardly seems comparable in scale.

Also, comparing the US debt to the German debt between the wars also seems a bit suspect. The German debt was basically a monetized grudge. China is likely to be a bit more pragmatic if push comes to shove, and find some way to force the US into Chapter 11 more gracefully, both for our sake and their own. And the Japanese are like lapdogs. I mean this is a culture built around taking direction from teenage girls who dress up like Southern belles. We'll send them two million Barbies and call it even.

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