Bill Emmott - International Author & Adviser


A Great Depression Like 1929?
Corriere della Sera - June 11th 2008

America should be flattered. Despite all the talk of its decline, in the aftermath of the Iraq war and now the subprime mortgage crisis, and despite claims in a new book by a prominent commentator, Fareed Zakaria of Newsweek, that we are in a "post-American world", government leaders still treat the United States as the country that they most love to bash. Venezuela´s Hugo Chavez has made a career out of it. The latest convert is Dimitri Medvedev, Russia´s new president, with his accusation made on June 7th that America is dragging the world to a new 1929, to a new Great Depression. Clearly, we are still in an America-centred world. Fortunately, however, there is no sign that President Medvedev´s accusation is either fair or accurate.

            Certainly, the American economy is in a weak state. House prices are falling, consumer spending is weak and the unemployment has jumped from 5% of the workforce in April to 5.5% in May. There may well be worse to come, during the next six months or more. Yet perhaps President Medvedev should take note of the fact that even after that jump in unemployment, America´s jobless rate is still lower than Russia´s (6.6%). And, before he makes comparisons with 1929, he might do well to note that unlike in the 1930s America has not seen its banking system collapse: the only substantial failure, that of the Bear Stearns investment bank, was dealt with swiftly through a takeover by JP Morgan Chase and an injection of liquidity by the Federal Reserve. It hasn´t even had a stockmarket crash.

            Comparisons with 1929 and the Great Depression are often made by people who wish to make a situation seem more dramatic than it really is, or who just have no real analysis to offer. In my 28 years as a journalist, I think I have probably heard the 1929 comparison made during at least half a dozen economic or financial crises. It has never been even close to being true. Only Japan in the 1990s following its stockmarket crash has born any real comparison with 1929, yet in the Japanese case too what was striking was how different its economic fate was from that of America in the 1930s: stagnation, not depression, a modest rise in unemployment, not a catastrophic one.

            In fact, if historical analogies truly interest President Medvedev, he would do better to look at the 1970s rather than the 1930s if he wants to understand the problems the world is facing. A sharp devaluation of the dollar by President Richard Nixon in 1971; an oil-price shock in 1973; spreading inflation in more and more countries; a surge in food prices; a slowdown in economic growth. That is what happened then, and it is also what is happening now.

              A crucial difference, though, is that while in the 1970s it was the rich countries that suffered most from inflation, this time the acceleration of price rises has been most marked in the big emerging markets: China (8.5% inflation), India (7.9%), Brazil (5%). Oh, and the other one of the so-called BRICs: Russia, with inflation of 15%. Compared with these, America´s 3.9% and the euro area´s 3.6% inflation rates look modest. President Medvedev and his (or should we say Prime Minister Putin´s) government is proving unable either to control inflation or to produce oil effectively: despite record oil prices, Russian oil output is now expected to fall, thanks to a lack of investment.

If he is really worried about the world economy, President Medvedev should be doing something about both of those problems. In fact, higher Russian oil output would contribute a great deal to lowering oil prices for all of us and making it easier to reduce inflation. Then, the European Central Bank and the Fed would be able to cut their interest rates, boosting their economies. Rather than wasting energy on bashing America, it is time Russia devoted some energy to sorting out its own economic problems.


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