Is a Second Great Depression on the Horizon?

From Doomsday Preppers to Pandemic, Netflix has released a variety of shows to get you ready for the looming ‘apocalypse’. Whilst humanity has a great challenge ahead of itself, I certainly don’t think Netflix is a suitable method of preparation for what is yet to come.

A more realistic problem appearing on the horizon is the threat of a second Great Depression, one that has the potential to have a more thorough and wider impact than its predecessor. Economic trends are beginning to mirror the hardships that workers of the 1930s had to face and if government’s fail to get stimulus packages through the halls of parliament and into the industries that need it most, a recession may become the least of our worries.

What was the Great Depression?

In 1928, the Federal Reserve raised interest rates and continued to do so throughout a recession that started in August 1929. The recession saw a 22% crash in the stock markets which prompted speculative investors to turn to currency markets where they could sell the US dollar for gold. Looking back with the knowledge we have today, tightening monetary policy given the conditions seems absurd, however the excessive supply of US dollars was placing extreme downward pressure on its value and so the higher interest rates aimed to raise demand and preserve value for the greenback in foreign exchange markets.

Nevertheless, high interest rates prevented businesses from accessing the funds they needed to stay afloat. Bankruptcies and deflation initiated a bank run, but with little regulation or assistance from the Federal Reserve, consumer confidence collapsed and lead people to store cash under their mattresses.

With no demand for consumption or investment, America’s economy collapsed and caused the unemployment rate to reach 25% of the workforce in 1933. Unemployment was even higher in Australia, reaching 30% in 1932. (Australian Bureau of Statistics)

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Echoes of the Great Depression in 2020

The most striking similarity between these two events is the sheer amount of job losses that will follow. While the finance and agriculture industry completely collapsed in the 1920s and 30s, the travel, hospitality and entertainment industries are the main victims of this pandemic. A virus that thrives on human migration and social interaction means that up to “50 million jobs could be lost” according to the World Travel and Tourism Council. The travel industry could lose $113 billion in revenue this year (International Air Transport Association) and the Centre for Aviation predicts the virus will “bankrupt most airlines worldwide by the end of May” if there is no government support. Westpac chief economist, Bill Evans predicts “unemployment in Australia will rise to 7% by October 2020”, which is roughly 1.26 million individuals.

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Poverty plagued the laid off workers of the 1930s and we have seen our Centrelink system overwhelmed by the high demand for government support packages that aim to stop modern workers from suffering the same fate. Retirees Superannuation portfolios have plummeted in value. Rent and mortgage payments have not been waived for everybody. The price of meat and other consumers staples has sharply increased. The hoarding of groceries has meant that some families have little savings left and for those that do it is near impossible to earn a return on those savings higher than 2%. All financial instruments are extremely volatile. In the Great Depression soup kitchens fed 3000 people per day, the above factors foreshadow a potential repeat of such a scenario.

During the Great Depression, farmers were forced to migrate to the big cities in search of work and apply for work that had no compatibility with their skill sets. Similarly, Covid-19 will cause an even bigger skills mismatch in the labour force with pilots, air traffic controllers and air stewards becoming truck drivers, cleaners and call centre workers. Coles received over 36,000 applications with only 5,000 positions available.

Another resemblance of note between the Great Depression and the Covid-19 pandemic has been the trading movement patterns on global stock markets.

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These two graphs of the Dow Jones Industrial Average reveals that the crashes came only subsequent to the market reaching record high levels. The Dow Jones has dropped 35.87% from its high in February 2020, to make it one of the worst crashes since the “Black Monday” crash in 1987.

Recession far more likely than a depression

However, please don’t start to stock up on ammunition, tinned food and hazmat suits just yet. With past mistakes comes knowledge that leaves us far better equipped to handle the economic dilemma than our great grandparents.

Our crucial advantage is thanks to one man: John Meynard Keynes.

Keynes witnessed the impact of The Great Depression and believed its impact could have been cushioned if the government provided stimulus packages rather than depending on the business cycle. His landmark book, “The General Theory of Employment, Interest and Money” (1936) showed that governments can bear large amounts of debt if the debt is used to create aggregate demand in the economy.

The Australian government’s stimulus packages during the GFC allowed us to avoid a recession and maintain our 30 year streak of economic growth.

While the Hoover administration in the 1930’s did nothing to alleviate the economic hardship, Scott Morrison’s government have devoted $189 billion to those struggling, which to put in perspective is 9.7% of annual GDP. $750 and $550 lump sum payments are being distributed to those in low socio-economic conditions, furthermore because these people have high marginal propensities to consume this will help to maintain aggregate demand.

The Federal Reserve of the 1930s erroneously increased interest rates, alternatively central banks across the globe are loosening monetary policy in order to stimulate investment. The Reserve Bank of Australia has the cash rate at an all-time low of 0.25%.

Light at the end of the tunnel

The Coronavirus will no doubt be a historical landmark of the 21st Century. It will have economic consequences for all industries and undermine many individual’s standard of living.

Spanish Flu, SARS and Ebola have all shown that overcoming pandemics takes time. The pain in these industries is only temporary, made evident by the fact that China’s factories are beginning to reopen.

So keep watching Netflix in your isolation zone for now, but do so with the reassurance that once this pandemic is under control; stadiums, clubs and airports will no doubt boom, injecting life back into the economy and triggering a global wide party that will be worth the wait.