The health crisis caused by the coronavirus will turn into an economic crisis. It seems inevitable by now. It remains to be seen to what extent this crisis will take place.
In order to assess possible consequences a bit better, it often helps to take a look at the past. Most recently, we compared the current corona crisis to the 2008 financial crisis. In this article, let's look back a bit further: to the great depression of 1929. Can similarities be found between the crisis then and the crisis today? Can we learn from history and use this knowledge to mitigate the consequences of the corona crisis?
How it all started
Unlike the current crisis, which directly affected the real economy, the great depression of 1929 originated in the financial sector:
in the 1920s, an economic boom spread across the USA: the golden twenties. Large companies and corporations began speculating on the stock market during this period. Small and medium-sized businesses were also doing well financially, and in the hope of turning this 'good' into a 'very good', significantly more small investors invested in shares. Banks extended loans at low interest rates to all among them who needed some start-up help. In some cases very large loans.
The U.S. Dow jones stock index initially rose steadily. While it was still at 100 points in 1923, it reached a level of over 150 points the next year. By 1929, the index had even been pushed up to 331 points.
The numerous uncontrolled investments in shares resulted in a speculative bubble. As a result, the stock index grew only very slowly. Many investors panicked and sold their shares as quickly as possible. If necessary, as cheaply as necessary.
Share prices fell rapidly and precipitously. Finally, on 24. October 1929 to the crash of the new york stock exchange. A day that went down in history. Black thursday. This is also known in part as black friday, presumably because the news did not reach europe until a day later due to the time difference. That thursday, there was a total loss, of all companies listed on the stock exchange, of 11 billion US dollars. Although the index rebounded somewhat the next day, the dow jones fell from 298 to 260 points on monday, the next trading day.
On tuesday, the dow jones index lost nearly 13 percent, the second-highest loss in history so far. In the ensuing 3 years, the dow jones continued to plummet by as much as 89 percent from its peak.
Similarly, the current crisis did not leave the dow jones index unscathed. By march 2020, a total loss of 26 percent was on the horizon.
The financial crisis at that time quickly developed into an economic crisis: insolvencies, mass unemployment, social unrest and political crises were the order of the day. As the U.S. Took back the loans it had previously given to germany, the U.K. Or france, the crisis quickly became globalized. Companies that relied on these loans went bankrupt. Unemployment increased. Wages, purchasing power and production fell. The global economic crisis was in full swing.
To save or not to save
In response to the crisis, germany initially adopted a strict austerity policy. Chancellor bruning's deflationary policy was characterized by budget restructuring, cuts in wages and price reductions. Although this policy eventually resulted in the production of cheap goods, it nevertheless caused unemployment to continue to rise. Purchasing power and production fell in equal measure.
In the U.S., hoover was first faced with the big question of how to deal with the crisis. In the end, this president proved to be less than energetic. His successor roosevelt finally adopted two "new deal" programs. These focused – roughly summarized – on a reorganization of banking and finance, support for industry and agriculture, and measures against unemployment.
Even though the economy in the U.S. Was shaky until the start of the war, the period of the "new deals" is recorded in the history books as a hopeful era.
For germany, the great depression and its intensification by extreme austerity policies opened a dark chapter: the need for economic order and structure paved the way for the nazi party .
Make do instead of spill the beans
Most people have come to realize that restrictive monetary policy cannot be the right solution to the problem of an economic crisis. In retrospect, economists conclude that an increase in government spending and tax cuts would have offered a quicker and less painful way out.
The actions of central banks are also retrospectively recorded as erroneous. Fueled by general panic, 1929 saw extreme bank runs, with investors looking to convert their deposits into cash as quickly as possible. As a result, the fed pursued a restrictive monetary policy, i.E. It tightened the money supply. Instead of the inflation feared at the time, it was precisely by restricting the monetary base that z.B. Less lending to deflation. Prices fell and the movement of capital came to a standstill. With the current crisis, the fed is so far taking a different path. So far, the federal reserve wants to make $300 billion available to support credit flows. In addition, the key interest rate was lowered to zero.
Furthermore, looking back to 1929, it can be criticized that no cooperation was sought among countries. Tariff walls were built, exports of goods were boosted, and imports were kept small. To overcome an economic crisis, you can't go on a tight budget. On the contrary.
In 2020, however, the whole situation looks a bit more complicated. Whereas in 1929 there was "only" a negative demand shock, now the problem of a negative demand shock, in combination with a negative supply shock, must be solved. And all this in times of a pandemic with contact bans and curfews. It can and may just hardly be offered, nor is there great demand. It is impossible at present to stimulate consumption solely on the demand side.
Would you like to know how the current market situation will evolve?
Then subscribe to our free market commentary and receive weekly updates on market developments.