Governments are slowly releasing economic activity to awaken the world from its induced coma. The true nature of modern capitalism, however, which differs vastly from the world of the 1930s, may mean that a rapid restart may be slow despite the hope, or dare I say, dream of politicians during this election year.
The Great Depression, triggered by the US stock market crash of 1929, resulted in a world GDP drop of 15%. The fundamentals of the economy of the 20’s and 30s were based on increasing productivity from the industrial age, an emerging middle class, and newly created but lightly regulated financial structures. The unprecedented growth that preceded was largely fueled by excess consumption by a population that saw their cumulative wealth double between 1920 to 1929. The stock market, with very few controls in place, overheated and crashed because company values were overinflated due to excessive market speculation. The double whammy of the drought-induced Dust Bowl in the heartland of America created the perfect storm for economic ruin. In the environment of an early global economy, with growing financial and trade interconnections among developed economies, the ripples from the sharp declines in world trade that followed the 1929 crash led to massive bank failures in Europe and Latin America.
Many US-centric historians laud FDR’s New Deal as the perfect antidote to the Depression. The expansionary ambitions of a nationalist Germany, however, led industrial production within its Axis Coalition and the response by the Allies to bolster production, all contributed to the start of the recovery that emerged in the Pre and Post war global economy. None of this however, happened overnight. It took over a decade for unemployment and food lines to disappear from the industrialized world. Even as nations moved more toward nationalism, global prosperity did not quite return until the 1950s and beyond.
I give that historical context as a backdrop to today’s realities.
Western economies have over time shifted from production to consumption, and manufacturing has shifted to nations with lower labour costs and other favourable factors of production. Economic value in western developed nations no longer exist in the factories that produce physical goods but in the intrinsic value of brands and intellectual property rights, and in the power of their consumer markets. In this age of free flow of information, those information-based assets have slowly leaked into the rest of the world to where assembly giants in Asia have been able to reproduce versions, and even credible copies of brands with ease. The expensive brands with huge profit margins that fuel Western consumption no longer have exclusivity, as cheaper alternatives permeate the barriers of pricing, trademarks and patents.
The closure that the world is currently experiencing has frozen the very core of remaining American and Western economic activity. The instantaneous closure of malls, restaurants, Hollywood, amusement parks, night clubs, sporting events and concerts, and the resulting chopping off of incomes at the core of the consumer class, has created a subsequent halt in both supply and demand for western high value goods and services. Consumers are forced to stay at home and to consume only basic goods and services. The freeze has halted the purchase of expensive handbags and shoes, dining in high-priced restaurants, attendance at pricy sporting events or concerts, and expensive vacations in exclusive resorts and spas. It has also slowed the production of inputs into those activities, with the most profound impact being the slowing down of production of perishable foods in reaction to the slow demand from the high-wastage consumption by retail food and hospitality industries.
The ripple impact of this fall in demand and supply in a global supply chain is immense. Garment manufacturers in Asia that account for some 60% of the world’s clothing supply are now facing huge lay-offs of workers. Agriculture and energy producers in every country is grappling with over-supply and storage problems, and concerns about how to plan for uncertain future demands. Tourism-dependent states have already seen massive job and capital losses in the short term, and are facing an uncertain future as airlines, cruise and leisure companies watch in horror as their business models disappear in front of their eyes.
FDRs New Deal in the 1930s brought investment in infrastructure to fuel job creation, and brought many innovations in social protection, labour relations and financial regulations which restored the masses’ faith in the American economy. None of those innovations are necessary today, as they all already exist, which severely limits the tools in governments’ toolbox. The only options today exist in the form of economic stimulus and in finding ways to restore supply chains, and confidence by consumers in western economies that the intrinsic value of consumer brands beyond their actual cost, those iPhones, BMWs and Manhattan apartments, is worth the sweat, drudgery, and health risks of modern toil.
Until average western personal and corporate incomes stabilize and the compulsion to stay at home ends, recovery may remain in the realms of hope and dreams.
The impact of World War II?
In my opinion WWII was actually a positive contributor to the global economy post 1945, despite the devastation and high death rate. The ensuing years benefitted from the military technology; eg aviation, energy, etc, the industrial complex that was perfected, and the market created by the Marshall Plan for the rebuilding of Europe and Japan.