Watch: Is the Second Great Depression approaching? The case against
In the second part of a two part series in which we debate whether we are on the verge of a depression akin to that which hit in 1929, Chief Economist and Strategist Keith Wade presents three reasons why we will not see a repeat of the Great Depression today.
19 Aug 2015
The case against the second Great Depression
I can see a number of parallels and similarities between the 1920s and today, but the world today is different as the factors which turned a downturn into a depression are far more constrained.
- In the 1920s the money supply contracted and there was a major collapse in the banking system in the US. We are not seeing that today and there is unlikely to be a repeat because the Federal Reserve underwrites the banking system, preventing a collapse.
- Today we no longer have the Gold Standard, which played a big part in transmitting the shock from the US to the rest of the world. Today we have very divergent monetary policy: although the Federal Reserve is preparing us for an interest rate increase the Bank of Japan and the ECB are keeping policy very loose with quantitative easing, which is a big support to global activity.
- Trade is nothing like as weak as it was during the depression when it contracted by about 30%. During that period we had tariff wars, protectionism, we had real problems which we are not seeing today.
We are not about to enter a second Great Depression, but growth will remain sluggish by past standards.
See Craig Botham set out his case for a second Great depression