"and that we can learn things about how to handle our present problems by looking at the experience of 1930s"

From A Fistful Of Euros:

"Well, one good turn deserves another. So if, like Paul Krugman (and me, I think, though I hadn’t gotten as far as thinking through all the implications of what was happening when I posted the original piece) you take the view the Ukraine industrial output chart I put up yesterday is the smoking gun (or starter’s pistol, or line judge flag, or whichever metaphor works for you) that tells us that the second great depression has now begun, then here are some more of those tell-tale charts to put in you pipe and smoke - or if , like Huck Finn that is your preference, to chew on.

(Update: someone in comments has made the perfectly legitimate point that Paul Krugman may only be saying that a Great Depression has broken out in Ukraine, and obviously only he can say what he really thinks, but as far as I am concerned, since one of the hallmarks of the original Great Depression was a sudden sharp drop in output, sustained over a number of years, and in a large group of countries, accompanied in several cases by outright price deflation, then I do think that a depression rather than a recession( DON'T AGREE ) is what we now have on our hands, and what makes me more or less sure about that is looking not only at what is happening in Ukraine, but also at neighbouring Russia, and China, and so on and so on. Evidently, since history never exactly repeats itself, I am certainly not saying that this is going to last a decade, or end in a big war, or anything like that, but that it is already in the history books, and already in the class of large and unusual economic phenomena, and that we can learn things about how to handle our present problems by looking at the experience of 1930s, of all of this I am absolutely sure, and I have a pretty good idea that both Bernanke and Krugman are too, if you look at the constant references to those years in almost everything they say and do these days( THE 1930s ARE OF LIMITED USE. IT WAS A COMPLETELY DIFFERENT CONTEXT )

Now For Some Charts

Japan industrial output isn’t exactly falling at the same dramatic pace as Ukraine, but a 16.2% year on year fall isn’t to be sniffed at either, and this is what they informed us today happened in November. Worse still, according to Japan’s Economy Ministry output is expected to decrease by a further 8.0% between November and December, which, if accurate, will surely push the year on year decline in December over the 20% mark, not the great depression, but then again, not exactly enjoyable.

And exports, which drive the Japanese economy, were down by 26.7% in November. Even more to the point, deflation is baaack, or almost back, since “core” core prices hit zero (or 0.1% below current overnight BoJ interest rates) in November, and outright deflation surely isn’t far behind.

You can find more detail on all today’s Japan data over at the Japan Economy Watch Blog, and for those of you who want some more deflation background on Japan, well, Krugman has the goods here (extremely wonkish).

Moving nearer to home we have Germany. Here is the latest (flash) December manufacturing PMI for Germany, which is just about as point of the spear as you can get in terms of just in time data.

The slope of that line looks pretty telling doesn’t it, especially if you are into depression economics. Then we have the November new orders chart, another shocker, and indicator of much worse to come, I think.

Now going back to this point:

“There is a burgeoning economic crisis in the European periphery,” Krugman said on the ABC network Dec. 14. “The money has dried up. That’s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.”

I think this is largely true, if we mean by the periphery the UK, Ireland, Eastern and Southern Europe, but the periphery in a very literal sense always ends up biting the hand that feeds it, since German industry depends on exports to that periphery perhaps more than to anywhere else, so it is not surprising that once the periphery folds, the shock wave moves on in towards the centre. I don’t know if the blast which is about to hit Germany next year will count as a depression, but if it doesn’t, it is going to be a damn close call. And the hard part for Germany is when you get to ask yourself where exactly the new demand will come from to drive the exports( THE GOVERNMENT COULD SPEND, WHICH IS WHAT WILL HAPPEN )?

Moving off now towards the periphery, we have Spain to the south, where the money certainly has dried up, and with it internal demand for Spain’s manufactured products. The November PMI showed Spanish industry contracting at an all time series maximum for any country.

Central Europe

The whole of central European manufacturing is now contracting rapidly. First off, the Czech Republic

Then Poland

And finally (for this little illustration) Hungary

Then There Is Russia

Moving on now to Russia, industrial output was down by 8.9% year on year in November, so it hasn’t yet reached Ukraine levels, but at the rate of contraction they are experiencing I wouldn’t be too confident that that state of affairs will last too long.

And Finally China

Where the November PMI also showed quite a strong contraction:

So where does that leave us? Well basically I’m not sure. We still need to see more data. (Do I sound horribly like Jean Claude Trichet at this point?). If we look at the chart for US industrial output which Krugman presents, the first thing which is pretty obvious is that the 1928-1930 boom-bust was a pretty rapid affair.

After that output dropped very sharply, going in the space of twelve months from a 20% expansion to a near 30% contraction, and the contraction continued at those levels until mid 1932, when the position started to improve - although all this year on year % contraction data is a bit misleading for non specialists, since to have a 30% contraction in mid 1932, following near 30% contraction in mid 1930 and (what) a 15% contraction in mid 1931 (taking into account base effects) then the drop is really massive, and I doubt even Ukraine (barring very worst case scenarios where the country simply disintegrates) will get this. But where this current output slump (or call it what you will) in a number of key countries already does resemble the 1930s more than any other drop in activity since (remember, Japan’s November fall in output is greater than anything that has happened in the entire lost decade-and-a-half) is in the sharpness of the drop, and in the sequencing of events. By sequencing I mean the fact that we have had a pretty dramatic financial crisis, which has lead to a generalised loss of confidence in the banking sector( THIS IS TRUE. THE AVERSION AND FEAR OF RISK ), and this in turn has produced a credit crunch, which is now working its way right through the real system( TRUE, IT'S ALL THE FEAR AND AVERSION TO RISK ). And nothing, but nothing, at this point, seems to be barring its pass( IT WILL SUBSIDE NEXT YEAR ). That is the worrying bit, and that is why I don’t think we are going to see a generalised “turnaround” in activity in 2010, or even 2011, this show is going to run and run, at least in some of the worst affected countries. And we still don’t know just how many icebergs there are lying out there for our convoy to hit. Life, as we know, is always full of surprises, and we should ever be ready for them, for good or for ill."

I don't see things this way. For one thing, the steep decline tells you that it can't be fundamentals, which don't fall off a cliff like that. Rather, like a Bank Run, this is a generalized Fear and Aversion to Risk and the Accompanying Flight to Safety. Because it began in the US, it has rippled around the world. When the US turns around, that will ripple around the world as well. The movement of information is also a main cause of the speed of this tsunami of fear.

I'm saying that the resemblance of the charts, similar in both Spender and Saver Countries, should be a clue that this is not fundamentals driven. It is more like mass panic.