History and the Current Economic Climate
By Phin Upham
What is the cause of the economic downturn in the U.S.? Without mentioning uncertain heuristic adjustments, U.S. industries excluding real estate have been weakening since 1980 in GDP terms. This has been going on even though there were deceptive gains in asset valuations, which in part happened because of reduced volatility, the false hope for productivity gains, and the leverage which compounded the problem. However, this was not the case after the Great Depression. When WWII ended the country’s economy grew at record-breaking speed.
Investors often examine the situation of the world by looking into the past for similar examples. For instance, Federal Reserve Chairman Ben Bernanke has often relied on his knowledge of the Great Depression to help the U.S. out of the current economic downtown, which means he believes there is a likeness between both times.
So the question is: how can we learn from the past and apply it to the present? The following quotes suggest three different views:
1) “Those who forget the past are doomed to repeat it.”
2) “Those who live in the past can never move forward.”
3) “History doesn’t repeat itself but it rhymes.”
While it’s helpful to compare the present and the past, it’s more important to select the right analogies and understand the differences between them. Although vital, analogies have their limitations.
So what event in history is similar to this crisis? The first might be the technology bubble of 1999. Although it’s likely that this bubble has popped, it was impressive enough to make great headway in telecommunications and the internet. The second analogy could be the crisis in 1982 that was led by the oil crisis. During that time increased oil prices and disorganization led to nominal inflation rates. In response to this problem, Volker made the right choices and the US came out of the crisis and into a time of great productivity.
Or, our economic slowdown might be compared to Japan in the 1980s. In response to their crisis, the country became an exporter to the US and kept a high savings rate. Of course it’s tempting to compare our current economic slump to the Great Depression, but it’s more appropriate to compare the US in the Great Depression to China at this time.