Could the Great Depression Occur Again

He is Chairman of Soros Fund Management LCC, a individual investment management firm that serves every bit master counselor to the Breakthrough Group of Funds. He is the writer of The Crunch of Global Capitalism.
When you, equally an investor, as a trader, look out at the earth, 6 months, nine months downward the route, what kinds of things are you looking for?

The financial markets generally are unpredictable. So that 1 has to take different scenarios ... The idea that you can actually predict what'south going to happen contradicts my way of looking at the marketplace.

Actually, I see tremendous imbalance in the earth. A very uneven playing field, which has gotten tilted very badly. I consider it unstable. At the same time, I don't exactly run across what is going to reverse it. Certainly, a slowdown in our economic system would leave the globe extremely vulnerable, considering the U.S. economy is, today, the unmarried engine that is driving this very large plane. So if that engine were to conk out, you lot'd have a very serious problem. Information technology'south a question [of]: Can yous repair the other engines before this one gives out? Considering even though people say that we alive in a new globe, and the by is not relevant ... cyclical fluctuations are not eliminated. That'south my master concern.

... I just want to clarify ... that what you lot accept is a very uneven playing field. Y'all have excess liquidity at the center and a great deficiency of capital letter at the periphery. The coin is still flowing from the periphery towards the center. So we ought to observe a manner to inject liquidity in the periphery. Instead of that, we tin only inject liquidity at the center. The Federal Reserve tin lower interest rates, and has done and then.

What you need is a machinery to provide capital to countries like Brazil, which is where money is fleeing. Interest rates are very loftier. The country is going into recession. So this is what creates a tremendous imbalance, at the moment, which is not sustainable. It could atomic number 82 to ... if this engine now gives out, and then yous have a trouble.

I hateful, in fact, there is a certain danger that because of the injection of liquidity, our financial markets have get overheated. You have signs of speculation, excessive speculation in areas like Cyberspace stocks, and so on. You could conceivably take at some point a crash that would and so accept negative effects on the real economy ... In this country. Then, indirectly, on the residuum of the world ...

He is a Washington-based journalist who has worked in newspapers, magazines and goggle box for over 35 years. His virtually recent book is I Globe, Gear up or Not, The Manic Logic of Global Capitalism.
Many people think this crisis, that's been with us for the concluding nineteen, xx months, is over. What'south your view?

My view is nobody knows still whether this is over or not. Just I would remind people, we've had three or iv faux dawns in the last two years where the newspapers began reporting that recovery was in sight. Near always those judgments were based, non on the real economies in the world, what people were doing and producing and buying, but on financial indicators.

This nowadays moment is very much based on some currencies in Asia that got hammered a year ago, take recovered a chip and now seem stable. Stock markets are reviving in some countries. If you await at the real economies, what'southward actually happening to industry and commerce in those countries, they're nevertheless very negative. So I will experience like we may be coming out of this when I stop seeing unemployment rise in those countries, finish seeing and then many bankruptcies increasing--indicators similar that, the existent health of the economy.

We have, what, 40% of the world in recession or low still?

Yeah, and we have something like one-half the earth in recession or depression. The German economy, which is one of the big [ones], has been contracting for two quarters at present. People in Europe are very nervous about a European-wide recession. The U.Due south., information technology's true, keeps chugging along. On the other paw, we take a negative personal savings rate. People are spending more than they're earning, despite the fact that wages take been increasing. We accept falling profit rates ...

If you were a person who had his or her retirement savings in the stock market, would you lot be worried?

Yes ... I'm among those who felt information technology was an inflated price bubble for a long time, several years, and it keeps going up, defying all sorts of predictions. Nevertheless, ane of ii things has to happen. Either the stock marketplace volition become down considerably. We hope not all at once, merely dramatically ... or those people who have invested their coin in the stock market are going to be disappointed by the render. Just just by the arithmetics--if you paid an over valued price for a stock, you're going to get a smaller return than you lot anticipated. I don't think we can escape from one or two of those consequences.

When people discover that that's the case, that they're not really going to go that 12%, xv% appreciation in their money, maybe they will accept that maturely and simply accept information technology. History tells us that that'south not what happens. What happens is people say, "I'm getting my coin out of here, because I'm not getting what I idea I was promised by the market. And so I'll put it somewhere else." If a lot of people do that at once, then y'all've got a financial panic and crisis.

... ultimately, the problem in the stock markets--yous can debate over whose numbers you're using--but basically those stock markets are predicting a continuation of extraordinary turn a profit levels, double digit profits from companies at the very time those profit rates are coming down and accept been for a twelvemonth and a half at present.

Somebody's got to be wrong. I don't retrieve it'south the companies. They can see what's happening ... The plummet in demand in overseas markets and the falling crisis for goods ... that put a squeeze on American companies even if they aren't big overseas exporters, because you've got all these foreign appurtenances pouring in here. It makes it impossible for a company to raise its prices. Probably it has to cut prices. That squeezes profits. If you lot squeeze profits long enough, then the company's got to cut back on new investment. You lot meet you're in a chain of bad events. That's where we are. Maybe we'll glide out of it and bottom out and things will turn effectually, simply I wouldn't bet my mortgage on that at this point.

Looking at the global economy, you think we're at a disquisitional moment and that we have been for the last twelvemonth or half year. What is your sense? What is it based on?

The critical moment that faces the global system now is: Volition governments be wise enough to learn from these catastrophic events and reform the system? That is, impose some rules on, specially, global financial markets, but some other aspects besides. Not to shut it down, but to keep it alive and moderate its pace and help countries protect themselves against the ravages of fickle financiers running in and out of their economic system.

I am gloomy at the moment because I don't encounter much prospect of those reforms being washed seriously in a timely manner. If they're not, and then information technology is very clear that we'll be dorsum in crisis, whether that's vi months or 18 months or two years from at present, I don't know and nobody else could say. But the fundamentals are now articulate and we're not acting on them ...

He is a well known military strategist and consultant, and Senior Fellow at the Heart for Strategic and International Studies in Washington DC. He is the author of Turbo Capitalism: Winners and Losers in the Global Economy.
Practice y'all think the possibility of a global recession, if not depression, is a very real i correct at present?

As we speak, the possibility of a global recession is a very real one. On the one hand, you lot take the base of the world economy. You have the impoverishment that comes from very depression commodity prices stretching from Wisconsin to Republic of chile, Wisconsin pork bellies, Chile copper, everything in between, the oil in Venezuela, and so on. It affects entire countries ... Somebody should exist out there pumping demand into the system. Instead of pumping demand, we accept the Us running a surplus because of the politics of information technology.

... Now, what was avoided would be the coherent, united, harmonious, and smart intervention by the authorities. Given what happened final October when the crash took place, there were some waves and panic, and people were suddenly agape that they wouldn't have a alimony, their mutual funds would disappear. People asked themselves how much money they still had invested in the quondam-fashioned way, you know, just past putting it in bonds and banks.

At that moment, there was no harmonious response. Information technology was all done by the American Federal Reserve. Alan Greenspan and the Federal Reserve acted. Everybody else talked or did nothing ... I don't think [the Federal Reserve is] going to be sufficient to prevent the [next] crash, which will come up sooner or later ...

... It's like having a great ball there on the top of an incline of a gradient and when accelerated down, the only thing supporting it is merely the Federal Reserve, the American regulatory financial and command organisation, considering no global mechanism has been ready; no coordination has really been prepare between the American and the Europe and the Japanese economic controlling entities.

At most, there is a liaison between the central banks, but they just control monetary policy, then nosotros have a contradiction here. We have a global economy with no global financial control mechanism. Therefore, a crash is only a question of time.

He is the former Deputy Undersecretary of the Commerce Department nether the Clinton administration and is now president of an international informational firm. He is also an offshoot professor of international and public affairs at Columbia Academy.
You ... [have] compared global economic science to plate tectonics ...

... When you await at the global economy, one way to view it is using a plate tectonic model where there are mistake lines all the style around. When there's a shift of 1 of these fault lines, peculiarly a big shift, information technology tin can exist felt all the way around the world and we saw that last summer.

There was a fault line underneath the Russian economy. Information technology shifted. The bear upon was on Brazil where there was some other mistake line which shifted and caused a problem throughout Latin America. You saw that with the Asian financial crisis where there were fault lines under a number of these economies that we reset into disequilibrium equally a result of besides much capital and as well many strange-denominated loans coming in while currencies were valued wrong ... Well, that fault line moved and what happened? Demand savage off enormously, and that'south how the energy was passed through this system of economic plate tectonics, if you lot will, and it affected the countries of Latin America. Why? Because most of them consign commodities--40% of Chile's exports is copper, and forty% of their exports goes to Asia. Then at that time all of a sudden you've got a event in Chile.

Even to this mean solar day there are mistake lines that could shift and could ready off another set up of these things. Wall Street with an Net bubble in the middle of information technology is a fault line. Japan with a weak fiscal arrangement and uncertainty about whether the authorities's latest round of reforms subsequently round of reforms over the class of the past decade, are going to work is some other error line. China, with the value of the yuan and whether they're going to devalue, is some other fault line. A spreading war in Kosovo, a conflict in the Center Due east most the source of oil, these are fault lines that exist out in that location. We have to recognize that in the global fiscal system correct at present these aren't isolated, these aren't remote from us. They can impact us and they can impact other markets in a fairly immediate way.

And so you don't think that this rolling crisis is over?

... Personally, I'one thousand a little worried because I think there is a bubble in the heart of the Wall Street economy. No one should have whatever confidence in the Japanese ability to ready their problems, because they haven't been able to do it so far and they haven't taken sufficiently dramatic steps, although they may. The Chinese could exist spooked by a multifariousness of other things and need exports to produce difficult currency ... We are withal in an era or menses in which confidence is not restored, and until it is restored, until there is a deep sense that we're back on the upward runway, we stand up vulnerable to upsets similar the upsets we've seen in the past year.

Is there a danger that the wrong lessons are existence fatigued from the crisis of the last year and a half, two years?

... Not only is there a danger, there's a certainty that the incorrect lessons are being drawn by some people. By virtually of the people at the center of the international financial arrangement, are the wrong lessons being fatigued? I don't know. I don't encounter the IMF existence highly responsive to this. I don't see it having learned its lessons. I meet that lending $five billion more to Russia seems to me to be at best an bookkeeping transaction, at worst another waste of money. I run across nonetheless an absenteeism to be able to address questions of social equity in an effective way, and and then these things will accept a while to formulate, simply the full general trend within the markets is to be fairly thoughtful about this at the highest levels, and there is a general movement toward agreement things better ...

Part of the problem is that in emerging markets, only as some of them are not highly liquid financial markets, they are not highly liquid information markets, and every bit a result a little bad information tin cause quite an upset just equally an inflow of too much money or an outflow of also much money can cause quite an upset of these markets.

And then they're still volatile? They're nevertheless erratic?

Volatility is the toughest issue to deal with because the pipelines are getting bigger and bigger through which money goes. It allows it to go in quickly. It allows it to get out chop-chop. The amount of information people accept allows them to make decisions very quickly. The mentality of a lot of these investors is not a long-term mentality in terms of the portfolio investors, and volatility is a large adventure for a lot of these places. That's why you'll encounter some kind of modified capital controls in a lot of these countries growing fifty-fifty though that has non been for a long time the policy of international fiscal institutions.

It's but inevitable in a medium- and a small-scale-sized country that they want to protect themselves against that kind of disequilibrium. Y'all will always run into greed and self-interest drive markets to places that reason wouldn't.

He was a tiptop portfolio manager for George Soros's Quantum Fund, a individual investment fund, from 1992 to 1995. He left the coin management concern in 1996.
It'south similar we're talking about some chess game in the sky. Most of us don't even take any idea ... that this game is going on.

Aye, I recollect that'due south partially true. The nature of the abstruse thinking that'south going on in the investment community is sometimes discernible through comments you see in the financial pages. Simply the mode in which all of these prices that impact employment and how goods are bought and sold and what countries experience boom and which countries are in stagnation, I don't think that that connection between how the investor-trader world is setting prices and then the existent consequences is well established.

Or well known to ordinary folks ...

... We're seeing Russia, much of Latin America, about of Asia, get through episodes in their economies, in their economic life, that are as deep and damaging and painful and profound as the Swell Low was in the Us. At the same time, the U.s. is an economy which is characterized by its proportionately smaller exposure to international merchandise and international influences, and our stock market'due south at an best high. We're at a fourth dimension when people are almost religious in their worship of markets. The market is now our master. If you espouse a social goal in America today, someone will say to you, "No, the market won't support that."

The market is a tool. Nosotros should have a political and social consensus on what our objectives are every bit a social club and use markets to facilitate that. Just now the servant's the master. Information technology's about every bit if the market is a religious icon. I see that mirrored in the very, very high valuation of the United States stock market place and the tremendous conviction that citizens have throughout the country that the United states of america is good, is correct. The free market is groovy, and the stock market is where you put your money.

People used to put their bank balances into gold or bank accounts or CDs, so-chosen safe things. The stock market was considered risky. Now the stock market is where everybody puts their money 'cause that's considered safe and lucrative. That's a bothersome notion to me. As I mentioned earlier, making coin is almost changes in perception. Our society has such conviction now that the stock market place is a good place. That perception is reflected in prices. The modify in perception that's going to make stocks go up farther is becoming even more optimistic.

... The ability for perception to alter and change valuation in the stock market seems to me budgeted the time when the only news that volition exist meaningful is bad news. That will change your perception. That will make my dentist stop lecturing me about how I have to be in the stock market with all of my wealth considering, four out of v years, it'due south improve than bonds. We're at a dangerous bespeak with regard to equities in the United states of america, and I mentioned it'due south a piffling scrap similar fiddling while Rome burns 'crusade the world is struggling all around the states right now. And if the United States runs into a downward spiral, failing stock prices ...

Soros has said if things don't alter, in that location is the existent danger and possibility that nosotros are headed for a worldwide recession, if not low.

Yep.

Practice you lot share that fear?

I think that George is authentic. At that place's an old saying by a at present deceased journalist, American, named Christopher Lash, and he said, "Meritocracies are only stable if a large number of people are winners. Otherwise they alter the rules."

In the economic outcome, if the Usa is successful and the rest of the world goes through the kind of transitions and violence that they have in recent years, and that persists, and for instance, if the U.Due south. slows down, we've talked most it, and it amplifies the pain in other areas, they will not view themselves as bad performers in this system. They will try to change the system.

The nature of the trading system in the globe and commerce is at risk in the current time, because big number of people are suffering; large numbers of people have had their lives disrupted and had their expectations nearly the continuity for growth and progress and employment and wealth accumulation shaken to its foundation. And that sows the seeds of political dissent and the impetus to a alter in the way the world is organized.

He is the Ford International Professor of International Economics at MIT. He specializes in international trade and finance and his about recent book is The Return of Low Economics.
What is the biggest question in your heed today?

Oh, the biggest question is what about the big advanced countries? This is an enormous homo tragedy. But and so far, it'south only affected people who didn't accept that much money to brainstorm with. So in dollars and cents terms, it doesn't really thing that much. The question is: Can this affair spread to us? Past us, I hateful, basically, all the advanced countries, all of the rich, stable, democratic countries of the outset world.

Then far, by and large it hasn't, but at that place are some scary things out there. The Japanese are adequately close to entering into a deflationary screw. The United States had one heck of a scare in the fall when the bond market froze. I recollect a Fed official in a private meeting, when people asked him what are we going to do nigh this, [he] said, "Pray," which was non very encouraging. We got out of that. We don't quite know how. And so the scary question, the big question is: How immune are the large advanced economies? I'd requite yous 10 to 1 odds that it's not the 1930s again for those economies, but those are not the kinds of odds I'd like to be hearing.

Aren't nosotros already seeing [people] in the oil industry, steel manufacture, in this country get-go to feel the furnishings?

Yep. Clearly some groups are hurt, because they are dependent on those markets, or one style or some other are straight in the path of this tempest. On the whole, the The states' economic system remains astonishingly prosperous in the face of what's going on there. There'south no necessary reason why that can't keep. But then, there was no necessary reason for whatsoever of this to happen. So you've got to be concerned. The great revelation here is that we don't know what we're doing also as we thought we did. Problems nosotros thought were solved are non solved. Economic analysts similar me, economical managers similar the people at Treasury, hopefully know something, just don't know as much equally we idea we did. That ways that bug that we thought were impossible may plow out to be quite real in the modernistic world.

In your Strange Diplomacy article, you talked about whether or non governments would have enough steps to stimulate need at this moment ...

If you look at ii of the three great centers in the advanced earth, Nippon, kickoff and foremost, and then also Europe, you first to wonder, what are they thinking? Wait at Japan right at present. Information technology'southward an economy that's been shrinking for the past two years. Prices are falling. Wages are falling, which never happens. You say, "Well, they must be moving sky and earth to become that economy moving again." The answer is, they aren't. They're spending a lot of money on public works, but they're not printing a lot of money. When the yen surged in value for complicated market place reasons, which is a terrible thing for an economy that's on the verge of a deflationary spiral, the Japanese really seem to be proud of it.

So that's scary. That'southward making me wonder, is it really possible that hither in the mod world, there are people who don't understand fifty-fifty that much and are prepared to take those kinds of risks with a big economy? If you wait at Europe, where they talk nigh price stability and are sitting there once more on the edge of deflation, yous wonder, are they prepared to practice what's necessary?

Meaning, spend coin?

Well, in particular, impress money. Y'all print money, and you spend money. Impress money is the easier alternative and the preferred one, if y'all can do it. Again, the Europeans start to talk about the virtues of the strong Euro, which is the concluding thing they demand correct now. What worries me almost Nihon and Europe is the people in charge seem to be like the erstwhile line about French generals, prepared to fight the last war. They remember very well the inflation of the 1970s and early 1980s. They remember the excesses of speculation in their markets during the bubbly economy in Japan during the 1980s. Here, they are in a world which is that world turned upside down, where the articulate and present danger is deflation, non inflation; where the problem is crashing asset prices, non overvalued ones. They don't seem to be prepared to make the mental shift. And when they practise, it might exist too late.

Add into that mix the U.Due south. economic system running a [budget] surplus. Isn't that a trouble at this moment in time?

... Well, so far that's not a problem, because U.S. consumers are making upwardly for it. What happened is the U.Due south. government has gone from heavy dissaving to substantial saving. But U.S. consumers decided to stop saving birthday at the same time, and so information technology hasn't created a trouble.

I'm less worried about the U.S. I don't think that we are a contractionary strength in the globe now, or are likely to exist. And in Greenspan I trust--not really, only the fact is, that the U.S., whatsoever criticisms y'all can make about its policies and for the rest of the world, our domestic policies are more flexible, more than open up minded, than that of anyplace else. That is one of our great strengths ...

If Asia heads into depression and Europe is in a deflationary bicycle, how long do we think that we are protected?

Oh, nosotros have to movement fast. The world is not all that integrated. It is possible to accept prosperity in the U.S. while the rest of the earth is in trouble. Information technology'due south possible in principle, just we'll take to move fast. If there is a slump that spreads to the first world oustside the U.S., so we have got to cut interest rates, start spending that budget surplus ... The Great Low would accept been easy to cease in 1930. It was very hard to get out of by 1935. The bespeak is, that the time to human action would exist quickly. I recall Washington understands that. Famous last words?

He is the Galen L. Stone Professor of International Trade at Harvard Academy and the Managing director of the Center for International Development. He has served as an economical counselor to governments in Latin American, Eastern Europe, Russian federation, Asia and Africa.
A growing number of observers have pointed out similarities in certain trends in the 1990s that were too trends in the 1930s. You've written some about that yourself ...

There's a question whether 1999 is 1929. We had a booming stock market in 1929 and then went into the world'southward greatest depression. We have a booming stock market in 1999. Will the chimera somehow burst, and then nosotros enter depression? Well, some things are not dissimilar. The volatility of international capital played a big role in the onset of the Peachy Depression. The volatility of international majuscule is obviously destabilizing markets today.

There is, in my view, one key difference, though. I remember information technology really is so central that the analogy doesn't hold in the terminate. In 1929, the globe was on a gold standard. That meant that every major currency in the world was linking the value of its currency to gold ... with the cost of the currency fix to gold, you couldn't really do very much in terms of expanding the money supply in a depression, and so on. We only got out of the Nifty Low as countries got off the gold standard, which was a long, backbreaking, tumultuous and, somewhen, tragic process.

The good news for 1999 is, nosotros are not on a golden standard. We have independent national currencies or regional currencies, in the case of the euro. If we did become into a recession, something that's always possible for the U.Due south. or Europe, we could lower involvement rates and expand the coin supply without worrying about the price of aureate.

If the whole world went into recession, all the major fundamental banks could cut involvement rates and expand the money supply. Indeed, final summer in 1998, when there was an intense moment of fright after the Russian default of a worldwide credit crunch, the Federal Reserve Board cut interest rates several times and successfully overcame that fear. I recollect that was important to a skillful monetary policy. And so this is the big departure in my view. Could it happen once more? Information technology would take absolutely horrendous policy mistakes. The organization itself is a lot safer right now, because we are not bound past the directly jacket of the gilded standard.

Practise you lot think that the stock marketplace bubble, but more than, the sense of American prosperity, is ever going to be affected past what is happening in the rest of the world?

The U.S. is in a chip of a euphoric mood. Euphorias come up to an cease. Nosotros hope they don't come to an end with a recession, much less a crash. There's a lot of forcefulness in the U.Southward., but there'south a lot of froth also. The froth will blow off. We're going to accept to face up to some realities that nosotros're not fully facing up to right now.

X years ago, there was a lot of euphoria about Japan ... [and] fear in the U.S., that we're about to be taken over or fully owned by Japan. Well, this was a lot of hysterical market place misunderstanding. Opinions in markets simply bounce off of each other. We see it happening again.

The U.S. has a audio economy. It also has a cyclical economy. It also has stock market values right now that are hard to explain on historical norms. While it's always possible that everything can exist based on the new economy, it's also quite possible that nosotros're doing a lilliputian fleck of exaggeration in just how wonderful things are.

Do you take any sense that Washington policy makers are reconsidering some of the policies? ...

I recall within a limited range of problems, they're thinking, "What about substitution charge per unit recommendations? What virtually brusk term upper-case letter flows?" There is some discussion of some real issues. The broader result of the real part of the U.S., the strange assistance attribute of that, who's going to pay for the security of a global economy? No, we are non doing any broad rethinking right now. This is the end of an assistants. That's usually a pretty terrible time for any real ambitious thinking.

Does that worry you?

I've been worried all through this decade. I'g more worried at the end of the decade than I am at the get-go of the decade, considering you lot take so many of the poor countries of the world in utter crisis right now. I don't see that crisis getting amend. I don't come across much real and serious attention. By serious, I mean something that might price us something.

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Source: https://www.pbs.org/wgbh/pages/frontline/shows/crash/etc/again.html