Monday, March 30, 2009

The Second World Depression?

My colleague Tom Fedyszyn notes that we have labelled the military conflagrations that encompassed the entire globe as "World Wars" (and numbered them accordingly).
So why not major economic downturns that are not confined to one country or region?

The 1914-1918 conflict was the "Great War" until 1939; then it became World War One. We talk about the "Great Depression"--perhaps now it is time to think of that as the "First World Depression?" And given the havoc the current crisis is working--especially in terms of bringing down governments--as well as the drops in levels of economic activity, which are now not being compared to the economic downturns of the 1970s and 1980s but what was taking place in the 1930s--are we in the early days of the "Second World Depression?" And should we be worried that in its wake there will be an uptick in conflict? Do World Depressions have to be followed by major wars?\

[A passing note: Robert Cutler at the Asia Times shares some of Fedyszyn's concerns.]

At least in Britain, there was an earlier "great depression" during the later 19th century. The phrase covered a period from the 1870s characterized by economic contraction and deflation. Britain also faced increasing competition from the US and Germany, along with substantial decline in agricultural earnings. Ireland's agrarian economy had a particularly bad time, and the struggle over a smaller economic pie (i.e. dramatically lower earnings) underpinned the revival of nationalism and rural unrest that Charles Stewart Parnell used to promote home rule. Of course, this period of extended stagnation is different from a depression or crash. But there were a series of crashes too that prompted government intervention to buffer populations from economic cycles
The underlying cause of the 1930s depression was I think a saturation of demand in the capital-goods sectors. Production overshot peacetime demand during the First World War and afterwards collapsed in the early 1920s and then more severely in the early 1930s. Unemployment after 1934 remained at about ten percent until 1939-40, when military spending took up the slack.

The current crisis looks more to me like the Panic of 1907, which began with a real estate crash (an insurance crisis after the San Francisco earthquake). But a massive injection of money by J. P. Morgan stabilized the financial system, and underlying demand pulled the world economy back to peacetime growth.

The current situation is different and worse in some respects than 1907 (and of course bad policy today could aggravate it). But I don't see the same physical conditions in the world economy today that existed in 1929.

The sort of war danger that arose in the 1930s resulted from authoritarian solutions to massive unemployment. So far none of the world's great powers seem to be in this kind of danger.

Will's British analogy is closer to what I think lies ahead. The years from 1879 to 1898 saw a number of small wars along the Islamic periphery, in which Britain extended its politico-military influence even as its economy was declining relative to industrializing rivals. The United States today may be repeating this pattern. How long US influence can be sustained is one question, and whether multipolar rivalries sharpen is the other. The conditions of the period 1914-45 resulted from a multipolar world that could not establish a basis for effective peaceful coexistence.
You need to look at the period between 1895-1905 during which the foundations of the European political economy - that had sustained peace for 75 years - began to dissolve.

The War of 1914 followed that dissolution and was followed by the War of 1939.

In our own time, we have gone from the sustained peace of the Cold War which lasted for almost 45 years to a 20-year inter-regum period that has now ended.

The political economy of the Cold War is dead. The political economy of the inter-regum is also dead (US consumer as the engine of global growth).

We have entered un-charted territories. We need to look at, perhaps, to the Indian Ocean basin world before the Rise of the West to glean any lessons regarding a possible multi-polar world economy.

It is indeed interestng that we refer to the least warlike, least bloody 46 years of European history in the last thousand as a species of war.

And I agree we are likely to see a great deal more of war, as it becomes clear that what Reagan did was not to win a "war" but to wreck the political foundations of the Peace of Yalta.
Thanks to Nick Gvosdev for drawing me into terra incognito -- the blogosphere. I have been using the term "Second World Depression" for several months in presentations and in my classroom as a tool to get people to think on a new level. Certainly there is no scientific precision in the term, although I will allow that TV commentators who used to compare today with 2001 continue to go further back into history with each set of new unemployment, GDP, stock market -- and now real estate -- statistics. Indeed, the composite "badness" of these four factors rules out any other recession over the last 70 years. My interest is national security and my point is that we must appreciate the importance of economic factors in the determination of Obama national security policy. Could it be that Admiral Blair is serious when he suggests that today's economic crisis is more troublesome than terrorism or the threat of the Chinese or Russian militaries? If so, should this shape future defense budgets? I argue that this administration will judge the value of its armed forces based on how much it contributes to economic stability and development -- since this is the greatest threat facing America today. If this be true, imagine the programs our services will be asked to cancel. It could be bloody.
Tom Fedyszyn:

I think the economic malaise of US diminishes US power since money is the grease of politics - cajole, co-opt, or bribe.

Without money to buy policy conformance (look at US aide to Egypt as an example) US policy options diminish.

Since much of the military gear is bought and paid for, US can - in principle - use her military forces in lieu of cash. But the usage of these military forces is a one-shot thing; it cannot be repeated since the bullet is spent and there isn’t budget to replace it.

An escape from this conundrum is to re-evaluate, re-trench, and re-duce US commitments and interests abroad

The inter-regum of US-EU pre-ponderance whereby they could get thing for free is over.
I don't claim to be first, but I wrote a brief essay entitled "World Depression II" in November of 2007.

With all those nuclear weapons floating around, it seems doubtful that we can have a good, old-fashioned war any more. In any case, according to economist Robert Higgs, the war brought prosperity only because the Roosevelt administration found it necessary to recruit the American business community, assuring them they might keep their property and some of their profits. There's no guarantee that the Obammunists would do likewise.
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