Are we really heading for a second Great Depression?

Soup kitchens. Dole queues. Jarrow marches. Bank failures. Trade wars. Falling prices. Desperate poverty. Dust bowls. Fascism. The long descent into war.

That was the 1930s and it was the world conjured up by Christine Lagarde, the managing director of the International Monetary Fund (IMF) on Thursday night.

A failure of the international community to cooperate to sort out Europe’s sovereign debt crisis risked, she said, “retraction, rising protectionism, isolation. This is exactly the description of what happened in the 1930s and what followed is not something we are looking forward to”.

Clearly not. But is Lagarde right? Are we really heading inexorably into a second Great Depression? Or is the head of the IMF, unwisely perhaps, making us all feel more depressed than we need to be?

There are certainly reasons to be concerned about the state of the world.


To the extent that a depression can be defined as a prolonged period of sub-trend growth, then what we have experienced since 2008 has been a depression. Many countries — including the UK — have struggled to recover from the collapse of asset-price bubbles — and now face the prospect of double-dip recessions.

What’s more, financial systems remain fragile, as reflected in the decision by Fitch to downgrade some of the biggest beasts of banking, such as Barclays and Goldman Sachs. Central banks are allowing banks access to unlimited quantities of cheap money so that they can meet their day-to-day funding needs. Some of these banks, particularly in Europe, are probably teetering on the brink, which makes Lagarde’s comments all the more dangerous.

Doomsday blog
It is not difficult to conjure up doomsday scenarios. Here are just three.

First, the global financial system is exposed as a giant pyramid selling scheme — piles of dodgy loans leveraged up against inadequate capital base. The house of cards collapses and the global economy implodes.

Second, the global economy is panning out the way Marx said it would, in a race to the bottom as the owners of capital look for ever-cheaper sources of labour to prevent profits falling, leading eventually to class war.

Third, the stresses and strains in the global economy are symptoms of a planet operating well beyond its carrying capacity. Environmental Armageddon awaits.

Were any of these dystopian visions of the future come to pass, they would make the 1930s seem pretty benign by comparison.

All that said, there are big differences between the world of 2011 and that of 1931. For one thing, in the west we are all a lot richer than we were 80 years ago and have more fat to live off.

Emerging economies, such as China, Brazil and India, have been growing fast and while all three have wobbled recently, they are still expanding at a fair old lick.

Mistakes of the past
Prices are rising not falling, unemployment is nowhere near as high as it was during the Great Depression and for those unfortunate enough to be out of work, welfare states are bigger and more generous. It will take some feat of imagination to watch the crowds surging into the shops looking for bargains on Boxing Day and see Britain as a world of soup kitchens.

There is poverty, but it’s not nearly so widespread nor as desperate as it was in the 1930s.

Finally, the current crop of policy makers — or at least some of them — are trying to learn from the mistakes of the past.

They are trying to keep the banks in business, they are boosting the global money supply to prevent deflation and, by and large, resisting the temptation to retreat into isolationism. Europe is something of a special case because it does appear to have a nostalgia for the policy inflexibility of the 1930s when, for example, France’s refusal to come off the gold standard meant it was comfortably the worst-performing of all the great powers.

So Lagarde is right to be worried about Europe and entitled to warn the rest of the world of the consequences of inaction. There is potential for things to turn very nasty and only a fool would say otherwise.

But comparisons with the 1930s are misplaced and — by focusing on the short-term need for growth at the expense of tackling longer-term problems — mistaken as well. —

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Larry Elliott
Guest Author

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