Updated: Apr 10
“What we are experiencing has no comparison other than the Great Depression of 1929.” said Bruno Lemaire, the french minister for Economy and Finance two weeks ago at a press conference. Fears that countries could fall into depression grow as major economic activity has halted following the draconian measures taken by governments and the significant resulting consumption impediment. Though the current worldwide economic downturn we are entering into is indeed similar in some ways to that of 1929, many aspects make the situation genuinely different.
Similarities indeed exist:
On march 16th of this year, the historical 12,9% tumble Dow Jones witnessed was indeed 1% lower than the black thursday's. For its part, S&P500 has even known two of its six worst plummets since its creation : -9,5% on march 12th 2020 and -12% on march 2020 against 12,9% on october 28th 1929 and 9,9% on november 6th 1929. The level of volatility is notably comparable to those of 1929 and 2008 and demonstrates the particular high uncertainty feeling among investors. On tuesday 24th, after a short and strong bearish market episode, Dow Jones indeed showed one of its highest bounce since the 30s with a surprising +11,4% rise at the close. However, this bull market is part of an overall downward trend just as it was in 1929. So here is it obvious to notice the notable similarities on the financial markets between these two crisis.
Dow Jones fluctuations now and in 1929: Nautilus Cap Research
Thereafter, another common aspect is the severe social impact of the current economic crisis. It could even be worse if the pandemic situation remains and becomes lengthty. According to theSaint-Louis’s FED CEO, James Bullar, US job market could undergo a dreadful shock at very short term and see its unemployment rate climbing to reach 30%, much higher than the 24,5% Great Depression peak. The declining GDP is also relevant to look at as we know that between 1929 and 1933, it suffered a 26,7% downward in the US while Goldman Sachs forecasts a 24% plummet for the second quarter of 2020. Specialists also estimate a 42% drop in the Chinese GDP for the first quarter. This shows that such an economic shockwave has definitely nothing to do with all we could have seen since 1930.
Back in the 30s, despite the FED eased its monetary policy, it also made major mistakes leading first the US economy and then the rest of the world in an unprecedented disaster. The depression used to ruin the economy for more than a decade entailing significant industrial production plummet as well as a soaring unemployment rate.
Now, the context is thoroughly different and we’ve learnt how not to reproduce such harmful measures for the economy. Firstly, while the FED system is now entirely centralized, it wasn’t the case in 1929. At that time, each district had a governor setting its own policies and often, they didn’t all advocate the same solutions to problems and a consensus was thus difficult to reach. Thereafter, when the FED noticed its gold was flowing out, risking to no longer ensuring its commitment to back the currency, it decided to rise interest rates*. It also limited money injections plunging the economy back into recession in the 1937. It’s also relevant to remember that between 1929 and 1933, the FED didn’t bail out bankrupt banks and waited the Roosevelt’s recovery plan to be released to start saving them. In contrast, last month, we have seen central banks swiftly and pragmatically reacting to the crisis vowing to do “whatever it take” to save the economy from disaster. Governments also have the same logic they certainly didn’t in the 30s to take unprecedented measures and are ready to significantly increase their debts. While the US are now unveiling their plan to increase their government spending by 10% of their GDP, they prefered to reduce it down to 25% in 1932, at the worst period of the Depression. Not needless to remember that the lack of social security and unemployment insurance made the situation sweepingly different and inflicted a lot more economic pain.
Furthermore, the origins of the nowaday economic crisis are also fundamentally differents. Indeed, we are in a never-seen-before situation. While the 1929 dire collapse of the real economy was purely triggered by speculation on financial market, the underlying cause of that we are currently facing is only sanitary and totally exogenous to the financial system. 90 years ago, the crisis first started with the stock market crash followed by a regional banking panic in 1930 before spreading across the whole banking and financial system leading to an international financial crisis in 1933. it is consequently only in a second stage that the real economy was affected. The course of the events is now the total opposite. The near absence of economic activity due to general lockdowns entails financial and market difficulties.
Though we can indeed make comparisons between both the 1929 and the current crisis, we can notice that the situations are fundamentally different. First and foremost, we have seen that unilateralism with which governments used to act in 1929 no longer exists. The cooperation is now embodied by the G20 allowing the 20 most important countries to find an agreement on how to tackle an economic issue. Secondly, while the Great Depression and the economic crisis resulted from a very located financial crisis, it is now a crisis affecting the real economy that has an impact on the financial markets. Thirdly, we can see that the biggest difference lies in the responses of nations and governments to address the crisis.
Finally, we can say that Bruno Lemaire's statement is to be taken with tweezers and we especially have the feeling that he seems to have clustered two distinct events, the black thursday’s stock market crash on one hand and the resulting Great Depression on the other.
*The gold standard law required the FED to hold at least 40% of the currency it issued in gold. The FED used to raise interest rates to increase its gold stock and conversely.
Édouard Wauquier - Head of Corporate Finance