THE UNDERRATED DANGER
The German economy grows again - recalling the crisis of the 1930s. At that time there were also good numbers and stock market booms followed by disappointments
By Thomas Fischermann
[This article published in: SIE ZEIT, Nr.34, 8/13/2009 is translated from the German on the World Wide Web, http://images.zeit.de/text/2009/34/Weltwirtschaft.]
The upswing comes at last! "Investment bankers see an upward trend," we read in the New York Times. "More Progress in the Business World," the Wall Street Journal exclaims. "Economists See Signs of a Recovery," "Tremendous Ascent on the Stock Exchanges," others announce. Some papers report that a certain bishop Campbell rebuked the great "mistrust" in the world of international financial investors. Economic recovery is regarded as simply unnecessary.
These headlines seem familiar in August 2009 - but they come from 1931. They were printed in the middle of the Great Depression of the US, in the darkest economic period of the 20th century.
At that time encouraging economic statistics were underlined with rallies on the stock markets and euphoric commentaries of experts. They always ended quickly. The economies and the stock exchanges first experienced a lasting recovery after 1933 - on the basis of a drastically shriveled real economy. Every fourth employed person in America had no job any more.
Europe experienced an optimistic spring 1931. The international financial market problems seemed overcome, until the credit institute in Vienna went bankrupt in May. At the beginning of 1931, a stock market boom gained momentum on Wall Street, which was followed by a banking crisis. "The most important discovery from 1931 is that every beginning recovery was immediately killed by a banking crisis," said Kevin O'Rourke, economic historian and crisis expert at Trinity College in Dublin. At the end of 1931, international capital investors were sure that America was run down. They escaped from the dollar and from US stocks. In June 1932, the stock exchange went up again - until September.
Can anything be learned for 2009?
Only with the greatest caution, many economists say. Ultimately the Great Depression was much worse than today's worldwide economic crisis. Barry Eichengreen, an economist at the University of California at Berkeley, disagrees. The history of 1931 and 1932 could be repeated. All euphoria could soon disappear. The economy could shrivel again toward the end of the year and the stock prices could fall. "That is conceivable," Eichengreen says.
Incoming orders could increase for some countries (like Germany). But how long will this last? Many businesses are optimistic and expect better sales. But will their customers join in? In the US, people have lived above their means for years and now must permanently lower their living standard. In America as in Europe, economists expect a tremendous rise in unemployment in the fall. This does not mean people will shop more.
Secondly, no one should doubt that nasty surprises still threaten through the world financial system as in the 1930s. We know from experience this can grievously affect the psyche. The worldwide speculative bubble around American mortgage credits has burst but this only concerns private real estate credits. The great collapse on the market for commercial real estate may still be imminent. Then banks, hedge funds and insurers could be laid low.
Thirdly, the reaction of politics today is completely different than in the 1930s but this does not guarantee stability. Today states resist with enormous economic programs, bailout packages for the banking sector and a lax monetary policy against the crisis. At that time the world still suffered under the corset of the gold standard... The US government becomes massively debt-heavy. Perhaps the world will soon witness again a dollar flight like 1932.
The tendency to short-winded feverish attacks among investors may be even greater than at that time. Investors all over the world have long parked vast sums of money in loans and cash because they did not want to take any risks. But what will they do when the fear of deflation suddenly changes into a fear of inflation, when a loss in value threatens their parked funds? That can happen very quickly in these times of heavily indebted states and easy central bank money. Then one buys gold and raw materials, stocks, real estate and speculative investments in distant countries. This could happen suddenly and then the bang comes.
"The Quiet Coup" by Simon Johnson:
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