Worse than the Great Depression?

[Toro]

I would say this.

First, somewhere I have a link detailing the changes in the absolute numbers of employment during the Great Depression but I cannot find it. Actually, I am too lazy to search for it. But the total number of jobs lost in the first year of Great Depression far outstrips the total number of jobs lost thus far, and the economy was much smaller then.

Second, you are absolutely correct about the industrial economy being far greater as a percentage of the economy in 1930. However, that is plus for the economy today. The service economy is far more stable than the industrial economy, for a variety of reasons. Using the industrial economy in an era where intangible intellectual capital is far more ubiquitous in the creation of wealth is not really a good comparison for the general structure of the economy.

Third, GDP is a lagging indicator and it does include government spending. But government spending is one reason why this will not be a repeat of the Great Depression. Government acts as a counter-cyclical stabilizer that was nowhere near as prevalent as it is today.

You will notice in the graphs that GDP fell from about $96 billion to $78 billion in the first 18 months of the Depression, a decline of nearly 20%. Over the 18 months since the beginning of this recession, GDP is essentially flat and is down about 3% since the peak.

 

[eagleseven]

I would say this.

First, somewhere I have a link detailing the changes in the absolute numbers of employment during the Great Depression but I cannot find it. Actually, I am too lazy to search for it. But the total number of jobs lost in the first year of Great Depression far outstrips the total number of jobs lost thus far, and the economy was much smaller then.

Agreed, this is the brightest spot so far.

Second, you are absolutely correct about the industrial economy being far greater as a percentage of the economy in 1930. However, that is plus for the economy today. The service economy is far more stable than the industrial economy, for a variety of reasons. Using the industrial economy in an era where intangible intellectual capital is far more ubiquitous in the creation of wealth is not really a good comparison for the general structure of the economy.

Does true value come from intellectual capital, or when intellectual capital is converted into goods? People have always had ideas, but they often lacked the means to act upon them. Today, the world is lacking the physical capital to benefit from the intellectual capital, so to speak.

Third, GDP is a lagging indicator and it does include government spending. But government spending is one reason why this will not be a repeat of the Great Depression. Government acts as a counter-cyclical stabilizer that was nowhere near as prevalent as it is today.

This is the conventional wisdom, and I hope you are right, for all our sakes. But I don't share your optimism, given the recent actions of the world's central banks. In fact, my OP article stated that massive Central Bank intervention is the trump card that makes the current situation very unpredictable. Will they make things better, or make things worse? Time will tell.

The theory is disputed, and this is the first world-sized experiment. We'll see if interventionism works.

You will notice in the graphs that GDP fell from about $96 billion to $78 billion in the first 18 months of the Depression, a decline of nearly 20%. Over the 18 months since the beginning of this recession, GDP is essentially flat and is down about 3% since the peak.

Indeed. In 1930, however, the US Government had a net surplus, with savings and a gold standard.

In 2009, we have no standard, a net deficit, and have spent nearly 14% of the GDP we don't have. 20%-14% = 6%, so we should expect a 6% GDP drop, roughly speaking. While 3% is not nearly as high as 6%, the numbers are similar enough to be seriously compared.

Also, that percentage does not include US consumption on personal and business credit. If you factor out all forms of credit, I believe you'll find that the current US and Great Depression GDP drops are far more similar than they initially appear.

Remember, in 1930, there were no credit-cards, and very few home equity lines of credit. The GDP does not include such factors into its calculation.

 

[Toro]

Does true value come from intellectual capital, or when intellectual capital is converted into goods? People have always had ideas, but they often lacked the means to act upon them. Today, the world is lacking the physical capital to benefit from the intellectual capital, so to speak.

True value comes from intellectual capital, not the goods. Industrial production is merely intellectual capital manufactured.

Look at the semiconductor industry. The value added is in the intellectual design of the chips. Most semiconductor companies then manufacture the chips offshore since production is commoditized.

The value added is in intellectual capital. It always has been.

This is the conventional wisdom, and I hope you are right, for all our sakes. But I don't share your optimism, given the recent actions of the world's central banks. In fact, my OP article stated that massive Central Bank intervention is the trump card that makes the current situation very unpredictable. Will they make things better, or make things worse? Time will tell.

Oh, I have little doubt that the actions of the central banks will have massive secondary and tertiary effects. The question is whether or not the effects are worth saving the financial system. I have no doubt that the Fed and the government saved the financial system. But we will have substandard growth for some time to come. Whether the costs outweigh the benefits, as you say, we will see.

Indeed. In 1930, however, the US Government had a net surplus, with savings and a gold standard.

In 2009, we have no standard, a net deficit, and have spent nearly 14% of the GDP we don't have. 20%-14% = 6%, so we should expect a 6% GDP drop, roughly speaking. While 3% is not nearly as high as 6%, the numbers are similar enough to be seriously compared.

Also, that percentage does not include US consumption on personal and business credit. If you factor out all forms of credit, I believe you'll find that the current US and Great Depression GDP drops are far more similar than they initially appear.

Remember, in 1930, there were no credit-cards, and very few home equity lines of credit. The GDP does not include such factors into its calculation.

The 14% in GDP is not being spent all at once. In fact, it will not all be spent this year.

The drop in credit is absolutely massive. The amount of new reserves created by the Fed in no way comes close to what has been destroyed. However, I am wondering about how much that really matters? It matters a lot, for certain, but the biggest creation of debt has been in the financial system. In the meantime, monetary velocity has been dropping for decades. That makes me think that a good part of the debt created was merely stored in the financial system and not circulated, creating little value only for the insiders of the financial firms. I have no idea if this is true or not, but I've been thinking a lot about that lately.

As for not being on the gold standard, that is a good thing. The Fed had to raise interest rates from 1.5% to 3.5% in 1931 to stem the outflow of gold, which contributed to the last downleg of the Depression.