Jul
Nowadays, it seems that every expert and his dog is predicting a Great Depression and this fact alone should make it clear that perhaps it would be wise to think things through a bit more carefully. Time and time again, the ChinaFund.com team has explained that while stereotypes have played and continue to play a crucial role in evolutionary terms (otherwise, we would be overwhelmed by the hundreds upon hundreds of simple decisions we have to always make in a “paralysis by analysis” framework), they are oftentimes extremely dangerous as far as the financial dimension of life is concerned.
Why?
Simply because a lot of developments tend to be too complex or let us call them non-linear for a stereotype-driven modus operandi to make sense.
Moving on to specifics, the comparison between the post-1929 Great Depression and 2020’s situation, it only takes a bit of historical know-how to understand that we are dealing with remarkably different conditions at this point in time: different incentive structures, a different political system, different geopolitical circumstances and the list could go on and on.
Let us dwell on political decision-makers a bit.
In the aftermath of the 1929 crash, President Herbert Hoover was initially of the opinion (encouraged by the thinkers who influenced him, of course) that the free market must be allowed to reach some kind of an equilibrium situation and as such, the initial strategy revolved around non-interventionism. With the benefit of hindsight, we now know that the effects were disastrous, to the point of the average citizens calling the newspapers many were forced to use to keep themselves warm “Hoover blankets” or using the term “Hoovervilles” to refer to the shanty towns built by now-homeless Americans out of sheer desperation. Eventually, a paradigm shift ended up being demanded and ultimately manifesting itself, with president Franklin Delano Roosevelt and his New Deal in the spotlight.
Fast-forward to the present and… do we really identify obvious symmetry?
No.
On the one hand, in light of the fact that for example in the United States, the Republican Party is in charge (right-leaning politicians), some would have expected conditions of non-interventionism to once again present themselves. However, the exact opposite happened. From Democrats to Republicans and even libertarians, pretty much everyone agreed that no, letting the market reach equilibrium on its own was not an option and that unprecedented monetary as well as fiscal stimulus was necessary: from once again lowering interest rates to zero, providing unlimited liquidity and even eliminating the need for banking system reserves as far as the Federal Reserve is concerned to an initial bipartisan economic stimulus program in the $2 trillion zone, which included anything from bailouts of corporations in affected industries to handing out checks to the average American citizen.
To put it differently, pretty much the exact opposite in terms of let’s “economic policy Zeitgeist” compared to the Great Depression.
Does this mean the proverbial day has been saved?
No, it simply means a solution has been chosen that is remarkably different to the post-1929 one and as such, Great Depression comparisons aren’t necessarily extremely compelling.
But, and therein lies the key to understanding our viewpoint, it’s important to understand what we know and especially what we do not know. While we know that the post-1929 policies had disastrous consequences, we do not “know” that the current measures will have positive long-term effects. This is an unprecedented situation and as such, we don’t know anything other than the fact that the measures chosen are strikingly different this time around.
In a positive scenario, yes, the day could theoretically be changed and central bankers as well as policy makers be considered modern-day heroes.
Realistically speaking, however, it isn’t that difficult to envision scenarios in which the exact opposite happens and things go terribly wrong. It’s just that this time around, the “terribly wrong” scenarios don’t involve a deflationary framework which leads to a “Great Depression” but perhaps an inflationary one which leads to a “Great Inflation” and the same principle is valid when it comes to what might happen next: in the post-1929 world, we went from a non-interventionist framework (Hoover) to an interventionist one (Roosevelt) whereas in the present, the exact opposite might happen, with society starting out with an interventionist modus operandi and moving on to a non-interventionist one.
Of course, this is nothing but pure speculation at this point.
As mentioned previously, time will tell if today’s central bankers and government officials will be considered heroes who saved the economy through their aggressive policies or, on the contrary, villains that sent the world around them toward an uncontrollable inflationary spiral. We simply do not know and can only speculate.
What we do know however is that for the time being, the road which has been chosen by decision makers from all over the world is remarkably different if we are to compare it to the road initially chosen by Hoover. As such, to finally address the question which constitutes the title of this post, we need to understand that no, we do not have enough reasons to be convinced that the post-pandemic economic lockdown which has occurred all over the world will lead to another Great Depression (an ultra-deflationary scenario). If anything, we have valid reasons to be concerned about the exact opposite: the fact that significant risk factors point to a higher probability of dealing with the ultra-inflationary (not to be confused with hyper-inflationary!) dimension this time around.
Of course, the ChinaFund.com team will continue monitoring events carefully, as they unfold, and sharing its findings with readers and especially clients. Should you be interested in picking the brains of the ChinaFund.com team members so as to tackle your concerns in greater detail, simply visit the Contact section of our website and let us know what we can be of assistance with.