By William Rees-Mogg | 15 April 2008
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Could the world be on the brink of another Great Depression such as the slump of the early Thirties? The managing director of the International Monetary Fund, Dominique Strauss-Kahn, has warned us of the risk. I respect the expertise of IMF forecasting. Last Wednesday the IMF published its World Economic Outlook. It has lowered its previous forecasts of global economic growth, including those for [the UK] and America. 'Risks to the global projection are tilted to the down side, especially those related to the possibility of a full-blown credit crunch.'
The report said the dislocation, which began last August, was: 'The largest financial shock since the Great Depression.' This was followed on Thursday by an address given to ministers in Washington by Mr Strauss-Kahn. He said there was only limited time to repair the financial system after 'the worst crisis since the Great Depression'. He warned of the threat from 'fire and ice', that is from rising inflation and slumping growth.
In the Seventies, we had to become accustomed to the fact that the oilprice inflation was acting as a brake on the world economy; the word ' stagflation' was coined to describe that combination of rising prices with declining growth. There is ample evidence that stagflation has returned. Of course, the present crisis is not an exact repeat of the Great Depression. The pattern is not the same. In the late Twenties the mood of the US was highly confident, stock-market prices were high and rising, and so was debt.
Strangely enough, the panic that interrupted this American dream began in London. A crooked English financier, Clarence Hatry, was trying to merge major UK steel companies, and was issuing stocks to cover the deal. Some of the stocks were fraudulent— the same certificates had been printed twice and given as security to different leading banks. An alert clerk spotted the discrepancy. On September 20, 1929, the fraud became known and the Hatry empire collapsed. He was jailed for fraud. The Bank of England raised interest rates to protect the London market. American money flowed in to Britain to take advantage of the higher London rates.
There was less money available for brokers' loans in New York. In the week beginning October 21, the New York stock market plunged; it was not to recover its 1929 peak until 15 years later. American industry did not recover its full confidence until after the outbreak of the Second World War in 1939. The 1929 pattern in New York was one of gross over-confidence, rising prices and rising debt; there was a stock-market boom; that was followed by the panic crash, accompanied by the revelation of several frauds. The panic was the signal for further falls in prices, debt liquidation and deflation. The higher the boom, the steeper and longer is likely to be the recession.
British heavy industry was already in recession in the late Twenties, and Britain therefore had a comparatively mild recession in the early Thirties. America had enjoyed a confident boom in the Twenties, and therefore had a deeper and more prolonged recession. One can tick off factors that applied to both the Great Depression and to the present crisis. Both have been primarily monetary crises, springing from fluctuations in the availability of funds. In the late Twenties, American funds went into the stock market; in the early 2000s, both in Britain and the US, the bubble was in housing. Debt levels naturally rose. Banks invented new ways of leveraging investments, thereby earning fees and interest.
In the Twenties, Wall Street banks floated new investment trusts that often invested in each other. This was known as 'pig on pork'. As Tom Lehrer sang: 'We will all go together when we go.' They went. On the other hand, the Great Depression was primarily a Great Deflation; after the stock market crash, confidence vanished as prices fell; in Mr Strauss-Kahn's terms, the world economy was frozen in ice.
Most people still feared inflation, since they were still close to the German hyperinflation of 1923, but the crisis after 1929 was one of falling prices. Nowadays there is more inflation, particularly in oil and food prices, and also rising inflation spreading in the expanding Asian countries, particularly China. I find the greatest anxiety among experts is not now the banks, dangerous though the credit crunch has been. Bankers behaved, in too many cases, with recklessness and poor judgment. Yet bank failures have been a recurrent feature in banking history. The greater worries are the prices of oil and food.
In Britain we are now becoming familiar, if not at all comfortable, with the idea of crude oil at more than $100 a barrel, and of heavily taxed petrol at more than £1 a litre. The oil price enters into almost everything— and particularly into the production and distribution of foodstuffs. In the past 18 months food prices have risen by about half. If the Chinese and Indian middle classes continue to move towards European eating patterns, and if arable land is used to grow biofuels, the prices of grains will rise to a level that cannot be afforded by the poorest.
Food-price inflation leads to starvation, and parts of Africa are already on the verge of famine. In Britain, we must expect prices to continue to move in both directions. Energy prices, subject to political risks and political shortages, may continue to rise; food prices are almost certain to do so. House prices may follow the American model, where they have fallen by up to 30%. The Government will try hard to keep up optimism. Chancellor Alistair Darling's forecasts for 2008 and 2009 are notably more optimistic than those of the IMF. The key year for the global economy may be 2010. That is also the last year in which Gordon Brown can call a General Election. The growth in 2008 and 2009 is likely to be lower and slower than Mr Darling hopes.
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Normxxx
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