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The “Tale of Two Depressions” updates an earlier column (“up to April 2009) that graphically compared many aspects of global economic activity in the Great Depression and the recent past. The key findings of this comparison are: 1) many aspects of real economic activity are closely following the downward path of the Great Depression;  2) the stock markets have fallen much faster and further than they did following 1929; 3) monetary and fiscal stimulus measures have been much greater now than in 1929-31. Here are several key figures from the article:

If we were to continue the path of the Great Depression, real economic activity would have still a lot further to fall, and the stock market, though it has fallen a lot this time, would still have another 50% decline to go. Still, if the Great Depression is a guide, the stock market now is well below the level it was at the same relative point in time.

To me, the real question that these charts raise relates to the effectiveness of the fiscal and monetary measures that have been taken this time. Here are some comparison charts:

Clearly, short-term interest rates were lower initially and have since been pushed down to unprecedented levels.

The money supply, which is another indicator of monetary policy, is shown starting 4 years before the downturn (unlike the prior charts):

The authors comment on this chart:

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Fiscal policy, as represented by government surpluses or deficits, is shown again starting 4 years before the downturn.

While monetary policy is wildly different than following 1929, fiscal policy is much less radically different. If we look at year 5 (2009), the fiscal deficit is about 2% of GDP. In 1930, it was zero; but 2% of GDP is not very significant. In 2010, the deficit is projected to be much larger, over 5%, compared to still zero in 1931.

The burning question is whether these differences are enough to push the world economy onto a different, more positive path than occurred in the 1930’s. There are certainly skeptics, especially followers of the Austrian school of economics. The current prevailing view, though, is that these measures, plus more that will be tried if these seem inadequate, will succeed. This seems overly sanguine to me. Rather, I think it is best to view us as in the midst of a grand economic experiment on the largest scale ever tried. Experiments, by their very nature, have uncertain outcomes.

We have already seen one part of the policy armada begin to come apart: the pushing down of long-term interest rates in order to make mortgages cheaper and house purchases more affordable. In the last month, the market has turned sour on US Treasuries. Yields on ten-year Treasuries have risen remarkably this year. The yield on the benchmark 10-year Treasury due May 2019 ended last week at 3.83 percent, up from the low this year of 2.14 percent on Jan. 15 (Bloomberg). Rising long term Treasury yields have pushed up mortgage rates from a low of 4.75% just a little over a month ago to a current 5.45%.

The rise in Treasury yields is being attributed to the massive deficits (the flip side of the economic stimulus). The federal government is going to need to sell $2 trillion of bonds to cover the deficit. There is skepticism in the market that this amount will be saleable at current yields, especially given the concern that all of the monetary measure will lead to inflation. Clearly, not everything is under the control of central government policy makers.