Are the Great Depression and the Last 11 Years Comparable?

Are the Great Depression and the Last 11 Years Comparable?
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Due to the federal government shutdown in December and January, the Bureau of Economic Analysis (BEA) wasn’t able to provide a preliminary estimate of US GDP for the fourth quarter of 2018. Trying to catch up, agency statisticians have had to scramble. Putting together a single measure of the entire US economy is a herculean task. Businesses must be surveyed, panel data checked and rechecked, and only then the numerous calculations and cross tabulations.

It is exhaustive, so you have to salute the hard-working folks at the BEA for getting something done, anything close, in a condensed timeframe. A preliminary estimate, as was meant for late January, is put together using incomplete data. As more comprehensive sampling comes in, this initial figure is revised leading to a series of three quarterly numbers all for the same quarter. Each subsequent estimate is more accurate, and time consuming, than its predecessor.

For Q4, there’s only time enough for two. There won’t be a preliminary and now the second estimate will be something like a combination; more data than a first but not as complete as a normal revision.

This unusual mutt of a statistic was released yesterday. According to the BEA, real GDP during the fourth quarter of last year increased by 2.55617% (compounded annual rate) over the third quarter. The result seems to have fallen into a kind of hazy gray area; just good enough to keep alive the faint dream of US decoupling from a global economy in far, far worse shape, but not really strong so as to erase all doubts.

In total, GDP averaged $18.57 trillion for all of 2018. This was an increase of 2.88% from 2017’s average. By three thousandths of a percent, last year’s rate beat out 2015’s annual gain to be the highest since 2005 (besting 2006 by three hundredths of a percent). So, once again, stuck in this economic no man’s land; technically the greatest in thirteen years, but not really meaningfully different from them.

Going back to the peak of the last recession, the Great “Recession”, compared to 2007 that $18.57 trillion represents an 18.85% increase in total across eleven years. This is what it really means when growth isn’t growth, when the best year in a long time isn’t even good.

To put this into perspective, the BEA currently estimates real GDP in 1929 was $1.109 trillion (in 2012 dollars). Eleven years later, for 1940, GDP had grown to $1.330 trillion. This 19.89% increase despite the massive contraction to begin the era beats out the current one. In terms of modern calculation of real Gross Domestic Product, the last eleven years in the United States have been worse overall than the Great Depression.

Upon hearing the comparison many people take the underperformance as absurd. The numbers are accurate insofar as any economic statistic may be, the math all checks out. It is the interpretation of them which creates such disbelief. For all the economic faults of the 2010’s, there is no way it can have been worse than the 1930’s.

That’s not really the point, though. There is an aura of precision surrounding the major economic accounts – those including the unemployment rate and labor market headline figures. Did the US economy actually grow by exactly 2.55617% last quarter? Not one chance in a trillion it did.

We are, however, interested in figuring out in which ballpark our game is being played. As a matter of comparison, the trajectory of the current economy has been too much like the worst one imaginable. Whether or not the last eleven years were “worse” than the Great Depression, what GDP tells us in relating the two time periods is that our economy is not nearly enough dissimilar.

That, my friends, is depressing.

To really illustrate this point, we need only compare either one to the Great Inflation. The eleven years of the seventies in the US economy were some of the most forgettable. Rampant monetary incompetence unleashed a tidal wave of destructive, evil (to use Keynes) inflation. And still, eleven years after the peak in 1969 real GDP (accounting for that inflation) had gained 36.77%. Twice as much as the Great “Recession” period.

Really, really depressing.

But all that has changed! That’s what tax cuts and deregulation, the Trump stuff was supposed to be about. The Republicans have charged that the Democrats screwed up the recovery (following the pattern whereby the Democrats claimed the Republicans were the reason a recovery was necessary in the first place). They undid what was politically done and the result was the highest yearly growth rate in over a decade – since before the last crisis.

However, as noted above, 2.88406% isn’t really convincing on that score. If tax reform was a huge boost, finally clearing up economic hurdles for sustainable, meaningful growth to finally begin, then just slightly above 2015 doesn’t really make that case. The 0.00315055047375168 percentage point improvement isn’t in any way likely to represent the dawning of a new era.

Instead, it shows the same old, same old. That’s really the problem, not Republicans and Democrats. They blame each other because that’s the game voters (currently) reward. But while they do, the real problem goes on unfixed year after year so that by eleven years into it we can actually, factually claim these particular years led to lower overall growth than the Great Depression. It doesn’t mean they have been worse, necessarily, but they are in the same ballpark.

As bad as this is, 2.88406% may represent the high-water mark. Arguing about the correct way to frame last year is so last year. There is, outside of political circles, a much more subdued celebration about 2018’s GDP “achievement.” What everyone wants to know instead is what the economy might be like in 2019.

If this was the dawning of a new era, there wouldn’t be so much unease.

It is uncertainty about this year which dominates current thinking. Because of the shutdown, though, we don’t have that many statistics available on the domestic economy for January 2019. The Census Bureau is just now catching up with last December in major accounts like retail sales (despite GDP, these were horrible), manufacturing orders, and US trade (particularly exports).

Despite this blackout, throughout 2018 there was every indication that this time the US economy is lagging the global direction. This was, after all, the brief flirtation with “decoupling.” Some saw Europe and China’s economies struggling and mistook them to be Europe and China’s economies. With markets a mess to finish up 2018 and US data toward the end of the year trending lower, GDP, too, it seems more likely China and Europe are leading the global economy with the US merely pulling up the rear.

The latest on China is not good. Yesterday, its National Bureau of Statistics (NBS) reported deeper contraction in the vast manufacturing sector. The official Purchasing Managers Index (PMI) for that sector fell to 49.2 – in February. That’s the lowest since February 2016, the worst month of the last global downturn.

The component for new export orders slumped to 45.2, the lowest in this proxy for global trade since 2009!

Bolstering the growing concerns about trade is Japan. The Japanese economy is tied, at the margins, very closely to the Chinese as well as Europe’s. Industrial Production there, according to estimates also released this week, plummeted to begin 2019. Down 3.7% (seasonally adjusted) from December, it’s the worst level of production in Japan (mostly manufacturing) since 2016.

One Economist from Capital Economics was quoted in the Financial Times remarking:

“All told, it seems that the economy slowed sharply at the start of 2019, which should rattle policymakers at the Bank of Japan and should trigger a renewed debate about possible easing measures.”

And there it is. What in the world have they been doing all this time? Possible easing measures.

More than anywhere else around the planet, the Japanese and their central bank have been tolerating “easing” for two generations. The Bank of Japan broke every major rule of sanity and prudence with QQE. That was almost six years ago.

It’s time to realize the big correlation and big picture. The more “easing” that is done around the world the more the rest of the world is stuck in the same economic ballpark as the 1930’s. This doesn’t mean monetary policy is directly responsible, but it does prove two things which do lead us toward an escape.

The first is the most obvious – it isn’t easing. You can call it whatever you like but the one thing you can’t say is that it has been effective. Every major economy is wedged in a rut of sub-optimal growth, dooming the lesser economies to even worse fates. The only thing monetary policies tell us is how big the problem is; the more central banks do, the larger the obstruction it must be.

And if monetary easing isn’t actually easing, then central bankers have no idea what they are doing. None. They believe it is easing (or, more precisely, they believe that you believe that it is, therefore it is). This would very strongly suggest since these Economists can’t find a way to fix the economy they aren’t likely to know what’s really wrong with it. Typical, non-standard, or emergency, none of these monetary solutions amount to anything like that.

We live in a non-linear world. This means time is a major component in the equation. Squandering time is itself an enormous cost. Einstein probably never said that compounding is the most powerful force in the universe, but the reason the quote is attributed to him is the obvious truth in it. Rate of change is everything. Hoping to get close to 3% every so often is a disaster.

You have to go all the way back to 2005 for the last time the US economy did better than 3%. Accounting for the fact that two of those thirteen years since were negative, one very negative, the Great “Recession” presents us with two problems rolled into one. There was a huge contraction maybe not of the same scale as the early 1930’s but the economy that emerged from it was the part that has been worse.

The global monetary panic of 2008 broke the global economy. It can never get going enough before it is pulled back into reverse. The best that happens is small improvements in discrete spurts punctuated by global financial turmoil which in economic terms announces the end of these “good” parts. This is what 2018 was really about.

In May 2017, the Head of Research for the BIS, Hyun Song Shin, undoubtedly stunned his audience at an Asia Development Bank conference when he told them:

“Behind the financial channel of exchange rates is a dense matrix of financial claims in dollars. The global economy is a matrix, not a collection of islands, and the matrix does not respect geography. A European bank lending dollars to an Asian borrower by drawing dollars from a US money market fund has its liabilities in New York and assets in Asia, but headquarters in London or Paris.”

But like Q4 US GDP, Mr. Shin’s uncovering of the truth can be taken either way. Is his realization cause for hope, or despair? On the one hand, it’s good that someone in some quasi-official capacity finally put two and two together. On the other, what might it say about our chances that it took just one guy so long to do the math?

More importantly, that was two years ago and yet “possible easing measures” remains the conventional “wisdom.” The Bank of Japan is almost surely going to add to QQE rather than heed what “dense matrix of financial claims in dollars” actually means for Japan as well as China and the rest of the world. I seriously doubt Jay Powell will ever take seriously these words.

Milton Friedman diagnosed this specific malady just before he passed away in 2006. I don’t mean he understood the eurodollar as global currency, he didn’t. It was instead a fundamentally political observation, something his career had made him intimately familiar with.

Friedman couldn’t have known that it would lead to such a prolonged period proving him right. What’s favorable to a central bank, starting with the word easing, comes at our already considerable expense.

“The difficulty of having people understand monetary theory is very simple—the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case—the story—in a way that is favorable to the central banks.”

GDP isn’t really precise, but that doesn’t mean it isn’t useful. Maybe the last eleven years aren’t nearly as bad as those during the Great Depression. That it’s even debatable using GDP is math that no central banker can honestly discount. All they can do is claim 2.88406101638314% is a good year and hope you are impressed instead by the number of decimal places.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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