Thursday, February 11, 2010

It's VERY different this time

It seems I keep running across people's attempts to compare today with the Depression of the 1930s. But as I was going through and updating my charts, I ran across this one of the yield on 10-year Treasury bonds. Bond yields (the 10-year was the longest Treasury maturity available until the mid-1970s) first hit 2.0% in 1941, well after the worst of the Depression and Deflation of the 1930s, and it took until late 1958 before yields rose to the level they are trading at today. In other words, it took the U.S. economy 25 years following the Depression—the low point of the Depression occurred in 1933—to get interest rates up to where they are today. Today the bond market has only taken a little over 13 months (from the end of Dec. '08, when markets were priced to a Depression) to move yields up from 2% to today's 3.7%.

Clearly, there's no comparison between the past year or so and the Depression of the 1930s. In the old days they made Depressions that lasted a long, long time. Nowadays they're over before they even get a chance to start.

If there's anyone we have to thank for short-circuiting this recent depression, it's the Fed. It's amazing how fast a trillion dollars of new money can put an end to the threat of deflation.


Cabodog said...

Isn't inflation about the only way we'll be able to dig ourselves out of this debt mess?

Doesn't inflation increase GDP, this making the debt-to-GDP ratio lower?

Inflation surely makes it easier to pay debt, but just not sure if the USA can stomach higher interest costs on all the government debt.

The Commodity Guy said...

Scott, were you surprised that Bernanke said he would not sell the Fed's holdings, but just let them run off? I had thought that selling the holdings would be a good way to tighten without raising rates and blowing the gov's deficit hole even further. Or maybe, now that he is confirmed, he can actually start clamping down.

septizoniom said...

1. how do you know the time of evaluation is over for present events.

2. your conclusion about the fed suffers from post hoc ergo propter hoc fallacy

Public Library said...

I sort of agree. Everyone assumes it was the Fed and $1T that did the trick.

However, we have no idea if that was the cause of the rebound. Who knows if rational profit seeking minds would not have stepped in at some point.

I personally think the Fed will ultimately cause more harm than does good. There is plenty of precedence to be a little skeptical.

alstry said...


You say this is not worse than The Great Depression but are concerned about the deficit.

It is that deficit that is responsibile for keeping 40,000,000 Americans out of food lines by receving food stamps....which by the way is a material part of WalMart's and other private grocers revenues and profits.

That deficit is in large part responsbile for a massive amount of government spend about 2/3 of all health care dollars about 20% of GDP.

So which is it , are we better off than The Great Depression because we are running a massive deficit or would you prefer the government to cut spending and drive us into The Greatest Depression?

Right now the deficit at all levels is approaching $2 Trillion dollars annually, half of China's this rate, how long do you think we can borrow from John to give to Joe before running out of savings and entering a hyperinflationary spiral?

W.E. Heasley said...

Mr. Grannis:

Spent a lot of time studying The Great Depression in the mid 1970’s (during the Carter Administration).

Studied the Phillips Curve being disproved. Studied plenty about Milton Friedman and studied the discounting of Neo-Keynesianism.

Spent plenty of time looking at the series of serious errors made during the Great Depression by the FDR Administration. Studied the rise of socialism during the 1930’s. Spent time regarding an item, much overlooked, which was the 1921 recession and the Calvin Coolidge Administration response.

Also looked at the thoughts of two young economists: Walter E. Williams and Thomas Sowell. Then there was a fellow named Art Laffer.

All the economic debate of the 1970’s seemed to come to a head when the debate became mainstream public information with the release of the PBS series Freedom to Choose with Milton Friedman. Link to that PBS series is here:

The only comparison of today with the depression of the 1930’s is the misconception of the policies of the FDR Administration. The conception that FDR was some sort of Keynesian follower when in fact he met Keynes for one hour, one time, and came away from the meeting saying Keynes was a mathematician not a political economy scientist. The misconception that the polices of FDR brought the US our of the depression. Henry Morgenthau’s, FDR’s treasury secretary, admission of New Deal policies (big stimulus plans) failure is still haunting.

However, its all summed up very nicely in Amity Shlaes’ book The Forgotten Man, A New History of the Great Depression. Don’t know if it’s a “new history” as all this information was heavily studied and debated in the 1970’s. On the other hand, it may be new to people in 2010 who never studied the Great Depression and have the misconception of the FDR Administration and its policies.

Scott Grannis said...

Cabodog: Inflation is an effective antidote to too much debt: it makes the burden of debt lighter, and it helps raise the asset prices that underlie debt. But it brings with it all sorts of unpleasant consequences.

I'm trying to be objective, however, and not jump to the conclusion that the Fed's huge quantitative easing was inflationary, when perhaps it was simply necessary to offset a huge increase in money demand. If the latter, it would still go a long way towards avoiding deflation and its negative consequences. The Depression was seriously aggravated by deflationary monetary policy.

Scott Grannis said...

Burt: Bernanke seems to be trying hard to avoid upsetting applecarts. Letting the debt run off and using traditional reserve-draining methods could eliminate about half the excess reserves in 2-3 years, by my rough calculations. Whether that is enough to avoid a big inflationary problem, however, is anyone's guess at this point.

Scott Grannis said...

Burt: Bernanke seems to be trying hard to avoid upsetting applecarts. Letting the debt run off and using traditional reserve-draining methods could eliminate about half the excess reserves in 2-3 years, by my rough calculations. Whether that is enough to avoid a big inflationary problem, however, is anyone's guess at this point.

Scott Grannis said...

septizonium and Public: I may have jumped to an unfounded conclusion, as you suggest. But the parallels and lack thereof between the past 18 months and the 1930s are very intriguing. I do believe, regardless, that the Fed's quantitative easing program deserves credit for avoiding a lot of nasty consequences that would have surfaced had they not bought 1 trillion of securities.

The fact that inflationary symptoms are still hard to find (outside of the gold price of course), suggests that Fed ease was not inflationary.

But I agree that it is perhaps too early to come to definitive conclusions.

Scott Grannis said...

WEH: Thanks for those comments. I heartily agree with you that Amity Shlaes' book is a must-read. FDR's policies were enormously bad for the economy, and that is a story that has not gotten hardly any press. But the Fed was also responsible for aggravating things. The combination of a huge government expansion and deflationary monetary policy was the one-two punch that knocked the economy out.

W.E. Heasley said...

Mr. Grannis:

Agree with you on the monetary aspect during the great depression.

Bernanke deployed QE, but personally would rather have John B. Taylor unwind QE. Have no problem with the Fed hiring Taylor for that specific unwind. Bernanke is highly intelligent but Taylor is better suited for the unwind as he is very, very good at seeing ahead of the curve.

Also, Larry Summers knows better on the fiscal side. All we can surmise is that drinking five hundred diet sodas per day is bad for economic thought.

Huntington Hartford said...

I wonder if inflation alone is a viable path. Too many government liabilities are entitlements tied to inflation & cost of living adjustments. They will be marked up with inflation.

Scott Grannis said...

WEH: John Taylor is high on my list of Bernanke replacements. Larry Summers should be put out to pasture.

Bill said...

Wasn't the worst of the depression in '31-'32? I believe the stock market was up 50% in '33 and GDP had a healthy growth spurt as well. Unemployment may have peaked that year but it declined until '37 when FDR tried to balance the budget and sent the economy back into recession.

Scott Grannis said...

The low point in real GDP came in '33-34. That was the criteria I used.

ronrasch said...

Thanks for starting a wonderful thread Scott. I hope that huge productivity increases through new technology will happen in time to grow us out of debt.

Scott Grannis said...

ronrasch: I think we're going to need some help from more rational policies in Washington. We've got to spend less, and we've got to stop thinking that redistributing income will "jump start" our economy. We need to start using intelligent tax incentives so that our entrepreneurs have the proper incentives to pull us out of this ditch we're in.

Scott Grannis said...

Huntington H: As you note, there is no free lunch. Inflation can wipe out debt problems, but it also creates many new problems. On balance, inflating your way out of debt is a fool's choice. Much better to have no inflation all the time.