The Great Depression parallels... busted

[bart]

<center>The Great Depression parallels... busted</center>



The following monthly charts compare a few important data series during the periods starting September 1929 and October 2007, and simply measure the changes in growth or contraction. The actual facts are much different than most think or believe.




<center>http://www.nowandfutures.com/images/depression_comp_stack1.png</center>

There are truly huge differences between then and now in the following statistics:

M1 is up about 25% more now than during an equivalent period during the Great Depression, and shows positive growth.
M2 is up about 22% more now than during an equivalent period during the Great Depression, and shows positive growth.
M3 is up about 23% more now than during an equivalent period during the Great Depression, and shows positive growth.
Bank credit is up about 22% more now than during an equivalent period during the Great Depression, and shows positive growth.
Current GDP is up about 5% more now than during an equivalent period during the Great Depression, and still shows positive growth.

As rough definitions, M1 is composed of cash and checking accounts, M2 adds in savings deposits and CDs under $100,000 and money markets funds (excluding IRA or Keogh money market fund balances), and M3 adds in CDs over $100,000 and institutional money market mutual funds and a few other items. Bank credit is "Bank Credit of All Commercial Banks" (TOTBKCR).





<center>http://www.nowandfutures.com/images/depression_comp_stack3.png</center>



The Industrial Production index is about 14% higher now than then, but has fallen about 14% since October 2007. It's not as bad as then.
Federal government debt is up about 24% more now than during an equivalent period during the Great Depression, and shows significant positive growth.
Velocity (the speed with which money moves through an economy) is down about 39% now when compared to the Great Depression, and in our opinion is the primary item holding back much higher inflation. Inflationary expectations are being heavily managed by the Fed and government, etc.
The Dow is about 24% higher now than then, but volatility makes the comparisons a bit dicey.







<center>http://www.nowandfutures.com/images/depression_comp_stack2.png</center>

These are simply various rate comparisons at the beginning of the most recent month, with a comparison to the equivalent month in the 1930s. They are not differences since the beginning either the Great Depression or the stock market peak in October 2007.


CPI is about 7.5% higher now than during an equivalent period during the Great Depression. If John Williams of shadowstats.com CPI corrections are used, then CPI is about 13% higher now, and also shows positive growth.
The discount rate (the rate at which banks borrow from each other) is 2.5% lower now than during an equivalent period during the Great Depression.
The 10 year Treasury Note is about the same when compared to an equivalent period during the Great Depression. It is a true parallel, if one does not adjust the rates for inflation differences, in which case it's about 7% lower now than during the Great Depression.
Unemployment is about 7% lower now than during an equivalent period during the Great Depression, when using the "official" U3 unemployment rate. However, in our opinion the U6 unemployment rate from the Bureau of Labor Statistics is a much better rate to use for comparisons since its definition is much closer to the U3 rate definition from the 1930s. It is a true parallel when U3 is compared to U6, and the unemployment rates are virtually identical.







Data sources: Federal Reserve, Federal Reserve archives, Bureau of Labor Statistics
Changes between then and now were calculated by taking the percentage growth from September 1929 mostly to April 1931 figures, which is the same amount of months between October 2007 and May 2009. Adjustments were made when data was not available for May 2009.

The charts above are maintained on our Great Depression page.

[dummass]

How would things change if we used Oct. 2008, rather than 2007?

[metalman]

good stuff el barto!

¿dónde es la espiral de deflación?

[Sapiens]

Bart,

I think you may enjoy this, with particular attention to page 418...

http://cafr1.com/STATES/FEDERAL-RESERVE/FR2008AR.pdf

[bart]

How would things change if we used Oct. 2008, rather than 2007?

The picture would look worse for now, but it would also completely lose the depression parallel value.


good stuff el barto!

¿dónde es la espiral de deflación?

*hug* ;)

(He who shall not be named) delenda est... :eek: :rolleyes: ;)



Bart,

I think you may enjoy this, with particular attention to page 418...

http://cafr1.com/STATES/FEDERAL-RESERVE/FR2008AR.pdf

Thanks Sapiens. :)

That page is basically a recap of the weekly H.4.1 report, and has some great (if ugly) data.
The entire report is in my queue for when my next shipment of round tuits arrive.

I had to do a double take on the file name - at a quick first glance it looked like it was FOOBAR.pdf ... :D

[dummass]

[quote=bart;105590]The picture would look worse for now, but it would also completely lose the depression parallel value.

I asked because I'm sure that I have seen it done that way somewhere.... The idea was to start with the stock market crash in October (1929 vs. 2008). I'm not sure what "completely lose the depression parallel value" means? I must be missing something. :confused:

[bart]

I asked because I'm sure that I have seen it done that way somewhere.... The idea was to start with the stock market crash in October (1929 vs. 2008). I'm not sure what "completely lose the depression parallel value" means? I must be missing something. :confused:


The stock market peaked in October 2007, not 2008.

[dummass]

All right, you are looking at the peak and I am looking at the crash.

I'm not trying to pick a fight; it's just a different perspective.

Depending on the index chosen, the NASDAQ for instance, you could have started your analysis on March 10th 2000, the all-time intraday high.

For most people, 2007 was still a good year. Stock traders were doing fine, with plenty of volatility. 2008, on the other hand, kicked the stool out. I doubt J6P had a clue that the market had turned from bull to bear in 2007. Nobody expects the stock market to go up every year. What if the market had closed one dollar higher in 2006? Would you then, by some divine rule, be required to start the graph in 2006?

For most people, the market crash (Oct. 2008) was the "event." That was the moment they woke up. That was when they changed their behavior. You can say the same for (Oct. 1929). It's a different perspective and it changes everything, in terms of your analysis.

[bart]

No worries... and starting the chart series when the Dow peaked in January 2000, or when the Nasdaq peaked in March 2000 makes little truly significant difference in the charts and their message even though it may be quite counter intuitive to you.

Starting them in October 2008 very close to a significant bottom does make a difference though of course, and not just because it completely destroys the basic very important message that the Great Depression monetary & fiscal parallels are bogus.
There are lots of other issues with it, like the time period being too short to produce a meaningful message or conclusion, or that the Dow had already fallen about 35% and the Nasdaq by about 40% since their 2007 peaks, or that the majority never wakes up and sees the handwriting on the wall until far into the crisis or mania or similar.

[vanvaley1]

So it's too early to call this a soft-landing depression or a hard-landing recession?

[FRED]

So it's too early to call this a soft-landing depression or a hard-landing recession?

As forecast generally here since 2005, and specifically forecast to start Q4 2007, it is more serious than the intentionally created recessions of the early 1980s. But also as forecast, not a deflationary depression as in the 1930s, but rather inflationary due to the application of monetary policy prescriptions "learned" by central bankers after the 1930s U.S. experience and 1990s Japan experience.

[dummass]

No worries... and starting the chart series when the Dow peaked in January 2000, or when the Nasdaq peaked in March 2000 makes little truly significant difference in the charts and their message even though it may be quite counter intuitive to you.

Starting them in October 2008 very close to a significant bottom does make a difference though of course, and not just because it completely destroys the basic very important message that the Great Depression monetary & fiscal parallels are bogus.
There are lots of other issues with it, like the time period being too short to produce a meaningful message or conclusion, or that the Dow had already fallen about 35% and the Nasdaq by about 40% since their 2007 peaks, or that the majority never wakes up and sees the handwriting on the wall until far into the crisis or mania or similar.

Perhaps, the "event" that I was referring to (Oct 2009 v. Oct 1929) was not so much a stock market event as a deflationary event. In both cases, the stock market "crash" was merely a reflection of the deflationary forces at work. Since other assets were also in play during that period, such as bonds and other assets, it may limit our discussion to focus on such a narrow gauge.

If the point of your analysis is to determine if there are true parallels, in economic terms, between the two periods, then correctly determining the point in time to start said analysis has significant implication. If, on the other hand, it is your intent to prove your thesis, that there were no parallels, then the narrow gauge and time period of your choosing will undoubtedly help your case.

As a side note, I use the word deflation in broad terms, which should include disinflation, as used here at iTulip.

[bart]

Cool - glad we're in general agreement.

[dummass]

We are? ok...now I'm really confused. :confused:

[dummass]

Since we are in general agreement, can you change the date of your analysis? I'd like to see if a parallel exists when the October 2008 date is used. I'd do it myself, but I don't know how. :D

[metalman]

Since we are in general agreement, can you change the date of your analysis? I'd like to see if a parallel exists when the October 2008 date is used. I'd do it myself, but I don't know how. :D

prefer dec 2007... start of the debt deflation bear market after that...

[dummass]

I'm willing to compromise on the date, but it should be a common factor that existed during both time periods. Was there a debt deflation bear market in 1929? If so, when did it begin?

Edit: What makes the two periods (1929 and 2008) unique? Is it the stock market going down? Or is it the Post-Credit Collapse? Or is it Asset Deflation? Bank failures?

Once we have the "event" nailed down, then the proper time-line can be drawn. Until then, no conclusions can be made. Perhaps we need more time, more data...?

[sishya]

Nice Graphs. So I think this time it will not be as bad as Great Depression but something in between a Great Depression and a normal recession ? I am a little concerned about unemployment rate and velocity of money. If Govt relaxes lending standards and people are in dire straits, probably people will take out loans for normal consumption, then later write off some loans(as third world Govt's do), extend unemployment benefits - possibly velocity can at least not drop so fast ? I am a little scared of delation. I have grown in places where inflation is 15% all the time and it is not that bad. deflation is something I experienced something first time in my life since last year and don't like it, though I can pick up things cheap.

[bart]

I was waiting for the chart requests to calm down in order to do new ones all at one time - it's a non trivial task.

Here they are starting in Jan 2000:

http://www.nowandfutures.com/images/t_depression_comp_stack1_2000.png

http://www.nowandfutures.com/images/t_depression_comp_stack2_2000.png

http://www.nowandfutures.com/images/t_depression_comp_stack3_2000.png


Starting Dec 2007:

http://www.nowandfutures.com/images/t_depression_comp_stack1_2007.png

http://www.nowandfutures.com/images/t_depression_comp_stack2_2007.png

http://www.nowandfutures.com/images/t_depression_comp_stack3_2007.png


Starting Oct 2008:

http://www.nowandfutures.com/images/t_depression_comp_stack1_2008.png

http://www.nowandfutures.com/images/t_depression_comp_stack2_2008.png

http://www.nowandfutures.com/images/t_depression_comp_stack3_2008.png

[thedanimal]

Bart,

Thank you for all your graphs and analysis, and for your generosity in sharing them with all of us! I greatly appreciate it.

-Dan

[bart]

Nice Graphs. So I think this time it will not be as bad as Great Depression but something in between a Great Depression and a normal recession ? I am a little concerned about unemployment rate and velocity of money. If Govt relaxes lending standards and people are in dire straits, probably people will take out loans for normal consumption, then later write off some loans(as third world Govt's do), extend unemployment benefits - possibly velocity can at least not drop so fast ? I am a little scared of deflation. I have grown in places where inflation is 15% all the time and it is not that bad. deflation is something I experienced something first time in my life since last year and don't like it, though I can pick up things cheap.


My always somewhat cloudy crystal ball has me agreeing - that it'll be between a deep recession and depression and with elements of both the 1930s and 1970s, much like the iTulip expectation - aka KaPoom.
The chances of a "double dip" recession are also growing - aka KaKaPoom. ;)

It'll also be quite the roller coaster ride as the titanic forces of inflation and disinflation/deflation (with continual government fiddling and intervention) battle it out both in the US and on the world stage. I can't overstress the roller coaster ride concept enough, primarily due to that long 4 letter word - "politics".

"The basics" are regaining and will regain much of their forgotten true importance, as more portfolios and lives are thrown into upheaval. On the brighter side, many more are becoming aware of what's really going on and taking wise and defensive actions... and stocking up on tinfoil. ;)

[sishya]

I was waiting for the chart requests to calm down in order to do new ones all at one time - it's a non trivial task.



Starting Oct 2008:

http://www.nowandfutures.com/images/t_depression_comp_stack1_2008.png

http://www.nowandfutures.com/images/t_depression_comp_stack2_2008.png

http://www.nowandfutures.com/images/t_depression_comp_stack3_2008.png


http://www.nowandfutures.com/images/t_depression_comp_stack1_2008.png

GDP grew ~15% between 9/1929 to 12/1929. That is surprising - if so then it looks to be directly related to velocity of Money as shown below in your Graph. Only Velocity looks like the Major factor for the growth in GDP in 1929. All other things were worse of at 1929 compared to 2008, but GDP still grew ?

http://www.nowandfutures.com/images/t_depression_comp_stack3_2008.png

Comparison for current recession - from 2007 looks better than 2008.

[bart]

[chart]

GDP grew ~15% between 9/1929 to 12/1929. That is surprising - if so then it looks to be directly related to velocity of Money as shown below in your Graph. Only Velocity looks like the Major factor for the growth in GDP in 1929. All other things were worse of at 1929 compared to 2008, but GDP still grew ?

[chart]

Comparison for current recession - from 2007 looks better than 2008.


I urge lots of caution in interpretation. Not only is the time period ultra short at 3 months for GDP and therefore quite "noisy", but there's *always* a lag in GDP response. The GDP growth in late 1929 was related more to monetary & fiscal actions from 1927-8 as well as mania effects.

On the 2nd chart, we're much further from the stock market peak in May 2009 than we were in April 1930 and the lagged effects of monetary and fiscal actions have had much more time to show themselves... and therefore show a bogus picture in my opinion.

[dummass]

Thanks Bart,

I didn't realize that 1/09 was our most recent data point. You are right, of course, the data is statistically insignificant. Perhaps we can indulge upon your generosity, again, six months from now, when we have a little bit more data? ;):)

[dummass]

Here is a similar analysis, done on a world wide basis. They used April 2008 (not sure why). Maybe it gave them the fit they were looking for?

http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image001_5F00_3F6CCE20.jpg
Source: Eichengreen and O'Rourke (2009) and IMF.



file:///C:/Users/home/AppData/Local/Temp/moz-screenshot-5.png
Updated Figure 2. World Stock Markets, Now vs Then (updated)
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image002_5F00_5AA52721.jpg

Updated Figure 3. The Volume of World Trade, Now vs Then (updated)
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image003_5F00_680B3A27.jpg


Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image004_5F00_4379ACA3.jpg
Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.


Figure 5. Money Supplies, 19 Countries, Now vs Then
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image005_5F00_7ECD1261.jpg
Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.


Figure 6. Government Budget Surpluses, Now vs Then
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image006_5F00_01099B1E.jpg
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.


New Figure 5. Industrial output, four big Europeans, then and now
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image007_5F00_0E6FAE24.jpg
New Figure 6. Industrial output, four Non-Europeans, then and now.
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image008_5F00_70912A22.jpg


New Figure 7: Industrial output, four small Europeans, then and now.
http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image009_5F00_2BE48FE1.jpg

Link to full article: http://www.voxeu.org/index.php?q=node/3421

[bart]

Here is a similar analysis, done on a world wide basis. They used April 2008 (not sure why). Maybe it gave them the fit they were looking for?


Bear Stearns went down at the end of March 2008, and that was a world event.

I notice he also used June 1929 for world stock markets - most other key world markets peaked before the US did.

[vinoveri]

If Govt relaxes lending standards and people are in dire straits, probably people will take out loans for normal consumption, then later write off some loans(as third world Govt's do), extend unemployment benefits - possibly velocity can at least not drop so fast ? I am a little scared of delation. I have grown in places where inflation is 15% all the time and it is not that bad. deflation is something I experienced something first time in my life since last year and don't like it, though I can pick up things cheap.

you've identified the essence of society-wide moral hazard my friend.
why should any rational actor not borrow now to consume with foreknowledge that their default will be written off later?
the problem of course is that no economy can "borrow and spend itself into prosperity" - it may however borrow and invest its way there if those investments are properly allocated.

couldn't disagree more. inflation reward debtors, and leverage using speculators, and encourages consumption, and discourages savings and frugality generally.
Inflation is systematic wealth transfer (read theft)

[bart]

Here is a similar analysis, done on a world wide basis. They used April 2008 (not sure why). Maybe it gave them the fit they were looking for?

[charts]

Link to full article: http://www.voxeu.org/index.php?q=node/3421



I probably wasn't clear enough in my prior post.

The starting dates used in those charts are quite bogus to say the least considering the author was trying to make a Great Depression parallel.
Here are a few dates from Romer on when the GD started in various countries and as you can see April 1929 was an extremely poor date to use for comparison.

<table x:str="" style="border-collapse: collapse; width: 124pt;" border="0" cellpadding="0" cellspacing="0" width="165"><col style="width: 76pt;" width="101"> <col style="width: 48pt;" width="64"> <tbody><tr style="height: 13.2pt;" height="18" valign="bottom"> <td class="xl28" colspan="2" style="height: 13.2pt; width: 124pt;" height="18" width="165">
</td></tr><tr style="height: 13.2pt;" height="18" valign="bottom"><td class="xl28" style="height: 13.2pt;" height="18">
</td><td class="xl28">
</td></tr><tr style="height: 26.4pt;" height="35" valign="bottom"><td class="xl28" style="height: 26.4pt;" height="35">Country</td> <td class="xl28">Depression Began</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">United States</td> <td class="xl29">1929,3</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Great Britain</td> <td class="xl29">1930,1</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Germany</td> <td class="xl29">1928,1</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">France</td> <td class="xl29">1930,2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Canada</td> <td class="xl29">1929,2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Switzerland</td> <td class="xl29">1929,4</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Czechoslovakia</td> <td class="xl29">1929,4</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Italy</td> <td class="xl29">1929,3</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Belgium</td> <td class="xl29">1929,3</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Netherlands</td> <td class="xl29">1929,4</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Sweden</td> <td class="xl29">1930,2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Denmark</td> <td class="xl29">1930,4</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Poland</td> <td class="xl29">1929,1</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Argentina</td> <td class="xl29">1929,2</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Brazil</td> <td class="xl29">1928,3</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">Japan</td> <td class="xl29">1930,1</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">India</td> <td class="xl29">1929,4</td> </tr> <tr style="height: 13.2pt;" height="18" valign="bottom"> <td style="height: 13.2pt;" height="18">South Africa</td> <td class="xl29">1930,1</td> </tr> </tbody></table>




And then we have that money supply chart starting in both 1925 and 2004, another very poor choice of dates at best... let alone that it appears from here that neither credit nor gov't debt was included in the figures.

[c1ue]

Great stuff as we're all expecting, bart.

As for why this is important: isn't understanding whether we are faced with a 2nd Great Depression important when Bernanke is chartered with (and acting as if) fighting Great Depression II?

[bart]

As for why this is important: isn't understanding whether we are faced with a 2nd Great Depression important when Bernanke is chartered with (and acting as if) fighting Great Depression II?

You got it... and those two charts really aggravate me. I just spent quite a while to build another one for the stock market comparison, and even visually estimated the data from the non iTulip one... and its just plain wrong!

Using the basic idea as noted above that the article was about the GD and that the starting dates of the GD were in no way, shape or form started around June 1929 - I brought the data forward 3-4 months to match up with Sept 1929 and also used the most recent closing prices of many world stock markets.

The black is of course the Dow from 9/1929 on, the red is from the chart with an incorrect starting date and the hot pink is the Dow Jones World Index... and its also a spaghetti chart since someone will inevitably ask "What about ____ stock market?".

But the bottom line is in all three extra dark lines... and shows that world stock markets are NOT currently worse than the comparable period of the Great Depression.

http://www.nowandfutures.com/images/bear_markets_world1929_today.png



Here's the incorrect chart, for comparison.

http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/jmotb062209image002_5F00_5AA52721.jpg

[dummass]

It all looks ugly to me. My guess, it will look even worse as we get more data.

[bart]

Here's the one on global money supply, which again is just plain wrong or misleading.



The one I just built:

http://www.nowandfutures.com/images/money_supply_world1929_today.png





The misleading or incorrect one:

http://www.itulip.com/forums/../images/worldmoneysupply.gif



I urge extreme caution for anyone trying to draw conclusions from those misleading or outright wrong charts.

This is not the Great Depression II - from either a monetary or fiscal viewpoint.

[bart]

...
My guess, it will look even worse as we get more data.


Perhaps, but at least looking at charts which match the periods isn't misleading.