Could a Great Depression Happen Again

He is Chairman of Soros Fund Management LCC, a private investment management firm that serves as chief advisor to the Breakthrough Grouping of Funds. He is the author of The Crisis of Global Commercialism.
When you, as an investor, as a trader, look out at the world, 6 months, nine months down the road, what kinds of things are you looking for?

The financial markets generally are unpredictable. Then that one has to have dissimilar scenarios ... The thought that you tin actually predict what'due south going to happen contradicts my style of looking at the market.

Actually, I see tremendous imbalance in the earth. A very uneven playing field, which has gotten tilted very badly. I consider information technology unstable. At the same fourth dimension, I don't exactly see what is going to opposite it. Certainly, a slowdown in our economy would leave the globe extremely vulnerable, considering the U.S. economy is, today, the single engine that is driving this very big plane. And so if that engine were to conk out, you'd have a very serious problem. It's a question [of]: Tin you repair the other engines before this one gives out? Because fifty-fifty though people say that we alive in a new world, and the by is not relevant ... cyclical fluctuations are non eliminated. That's my main concern.

... I just want to clarify ... that what yous have is a very uneven playing field. You accept excess liquidity at the middle and a great deficiency of majuscule at the periphery. The money is withal flowing from the periphery towards the center. And then we ought to observe a way to inject liquidity in the periphery. Instead of that, nosotros can only inject liquidity at the center. The Federal Reserve can lower interest rates, and has done then.

What you demand is a mechanism to provide uppercase to countries like Brazil, which is where money is fleeing. Interest rates are very loftier. The state is going into recession. And so this is what creates a tremendous imbalance, at the moment, which is not sustainable. It could lead to ... if this engine now gives out, then you have a problem.

I mean, in fact, in that location is a certain danger that considering of the injection of liquidity, our fiscal markets accept become overheated. You lot have signs of speculation, excessive speculation in areas similar Net stocks, and so on. You could conceivably have at some bespeak a crash that would then have negative furnishings on the real economic system ... In this state. And then, indirectly, on the residuum of the world ...

He is a Washington-based journalist who has worked in newspapers, magazines and television for over 35 years. His most recent book is One World, Ready or Non, The Manic Logic of Global Capitalism.
Many people think this crisis, that'southward been with usa for the terminal 19, 20 months, is over. What's your view?

My view is nobody knows notwithstanding whether this is over or not. Just I would remind people, we've had three or four fake dawns in the last 2 years where the newspapers began reporting that recovery was in sight. Nearly e'er those judgments were based, non on the real economies in the globe, what people were doing and producing and ownership, but on fiscal indicators.

This present moment is very much based on some currencies in Asia that got hammered a year ago, have recovered a bit and now seem stable. Stock markets are reviving in some countries. If you lot await at the existent economies, what's actually happening to industry and commerce in those countries, they're still very negative. So I will feel like we may exist coming out of this when I cease seeing unemployment rising in those countries, stop seeing so many bankruptcies increasing--indicators like that, the real health of the economy.

We have, what, xl% of the world in recession or depression even so?

Aye, and we have something like half the world in recession or depression. The German economy, which is 1 of the large [ones], has been contracting for two quarters now. People in Europe are very nervous about a European-wide recession. The U.S., it'due south true, keeps chugging along. On the other hand, nosotros accept a negative personal savings charge per unit. People are spending more than than they're earning, despite the fact that wages take been increasing. Nosotros take falling turn a profit rates ...

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

Yes ... I'm among those who felt it was an inflated price chimera for a long time, several years, and it keeps going up, defying all sorts of predictions. Nevertheless, one of two things has to happen. Either the stock market will go downwardly considerably. We promise not all at once, but dramatically ... or those people who take invested their money in the stock market are going to be disappointed by the return. Just simply past the arithmetics--if y'all paid an over valued price for a stock, you're going to get a smaller render than you anticipated. I don't call up nosotros can escape from 1 or ii of those consequences.

When people discover that that'south the case, that they're not really going to go that 12%, fifteen% appreciation in their money, peradventure they will accept that maturely and only have it. History tells u.s.a. that that's not what happens. What happens is people say, "I'grand getting my money out of here, because I'1000 not getting what I idea I was promised by the market place. So I'll put information technology somewhere else." If a lot of people do that at once, and then you've got a fiscal panic and crisis.

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

Somebody'south got to exist incorrect. I don't call back information technology's the companies. They tin see what's happening ... The collapse 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 lot've got all these foreign goods pouring in here. It makes it impossible for a company to raise its prices. Probably it has to cut prices. That squeezes profits. If y'all squeeze profits long enough, then the company'due south got to cut back on new investment. You meet you're in a concatenation of bad events. That'southward where we are. Maybe we'll glide out of it and bottom out and things will turn around, only I wouldn't bet my mortgage on that at this point.

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

The critical moment that faces the global organisation now is: Volition governments be wise enough to learn from these catastrophic events and reform the organisation? That is, impose some rules on, especially, global financial markets, simply some other aspects as well. Non to shut it down, but to keep it live and moderate its pace and help countries protect themselves confronting the ravages of fickle financiers running in and out of their economy.

I am gloomy at the moment considering I don't encounter much prospect of those reforms being done seriously in a timely fashion. If they're non, then it is very clear that we'll be back in crisis, whether that'southward 6 months or xviii months or two years from now, I don't know and nobody else could say. Merely the fundamentals are now clear and we're not interim on them ...

He is a well known armed forces strategist and consultant, and Senior Fellow at the Middle for Strategic and International Studies in Washington DC. He is the author of Turbo Capitalism: Winners and Losers in the Global Economic system.
Exercise you think the possibility of a global recession, if not depression, is a very real i correct now?

Every bit nosotros speak, the possibility of a global recession is a very real one. On the one mitt, you lot have the base of the world economy. Y'all have the impoverishment that comes from very low commodity prices stretching from Wisconsin to Chile, Wisconsin pork bellies, Republic of chile copper, everything in between, the oil in Venezuela, and so on. It affects entire countries ... Somebody should be out there pumping demand into the arrangement. Instead of pumping demand, we have the United states of america running a surplus because of the politics of it.

... Now, what was avoided would be the coherent, united, harmonious, and smart intervention by the regime. Given what happened last October when the crash took identify, there were some waves and panic, and people were all of a sudden afraid that they wouldn't have a alimony, their mutual funds would disappear. People asked themselves how much money they still had invested in the former-fashioned style, you know, just by putting it in bonds and banks.

At that moment, there was no harmonious response. It was all done by the American Federal Reserve. Alan Greenspan and the Federal Reserve acted. Everybody else talked or did zippo ... I don't retrieve [the Federal Reserve is] going to be sufficient to forbid the [next] crash, which volition come sooner or afterward ...

... It's like having a great ball there on the top of an incline of a slope and when accelerated down, the only thing supporting it is just the Federal Reserve, the American regulatory fiscal and command organization, because no global machinery has been set up; no coordination has really been set upwardly between the American and the Europe and the Japanese economical decision-making entities.

At most, at that place is a liaison between the central banks, simply they only control monetary policy, so we have a contradiction here. We take 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 under the Clinton administration and is now president of an international advisory firm. He is too an adjunct professor of international and public affairs at Columbia University.
You ... [have] compared global economics to plate tectonics ...

... When you await at the global economic system, one way to view it is using a plate tectonic model where there are mistake lines all the way around. When there's a shift of one of these fault lines, especially a large shift, information technology can exist felt all the way around the world and we saw that final summer.

There was a fault line underneath the Russian economy. It shifted. The bear on was on Brazil where there was some other error line which shifted and acquired a problem throughout Latin America. You saw that with the Asian financial crunch where in that location were fault lines under a number of these economies that we reset into disequilibrium as a effect of too much capital and too many strange-denominated loans coming in while currencies were valued wrong ... Well, that fault line moved and what happened? Demand fell off enormously, and that's how the energy was passed through this system of economic plate tectonics, if you volition, and it afflicted the countries of Latin America. Why? Because near of them consign bolt--xl% of Chile's exports is copper, and twoscore% of their exports goes to Asia. So at that time all of a sudden you've got a event in Chile.

Even to this twenty-four hours in that location are fault lines that could shift and could gear up off some other set of these things. Wall Street with an Internet bubble in the middle of it is a error line. Japan with a weak financial organisation and doubtfulness about whether the regime'due south latest round of reforms after round of reforms over the grade of the past decade, are going to piece of work is some other fault line. Communist 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 Middle Due east nigh the source of oil, these are fault lines that exist out there. We accept to recognize that in the global financial organisation correct now these aren't isolated, these aren't remote from us. They tin affect us and they tin touch other markets in a fairly immediate style.

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

... Personally, I'm a fiddling worried considering I remember there is a bubble in the middle of the Wall Street economy. No one should accept any confidence in the Japanese power to fix their issues, considering they haven't been able to do it so far and they oasis't taken sufficiently dramatic steps, although they may. The Chinese could be spooked past a variety of other things and need exports to produce difficult currency ... We are still in an era or period in which confidence is not restored, and until information technology is restored, until in that location is a deep sense that we're back on the upward track, we stand vulnerable to upsets like the upsets we've seen in the past yr.

Is there a danger that the wrong lessons are being drawn from the crisis of the final year and a half, ii years?

... Not but is there a danger, at that place's a certainty that the wrong lessons are being drawn by some people. By almost of the people at the eye of the international financial system, are the wrong lessons existence fatigued? I don't know. I don't see the IMF being highly responsive to this. I don't encounter it having learned its lessons. I encounter that lending $5 billion more to Russia seems to me to be at all-time an bookkeeping transaction, at worst another waste matter of money. I see notwithstanding an absence to exist able to accost questions of social disinterestedness in an constructive way, and so these things will take a while to formulate, but the general trend within the markets is to be fairly thoughtful nearly this at the highest levels, and in that location is a general movement toward understanding things better ...

Role of the problem is that in emerging markets, but equally some of them are not highly liquid fiscal markets, they are not highly liquid information markets, and equally a result a petty bad information tin crusade quite an upset just as an arrival of too much money or an outflow of too much money tin crusade quite an upset of these markets.

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

Volatility is the toughest issue to deal with because the pipelines are getting bigger and bigger through which coin goes. It allows information technology to go in quickly. Information technology allows information technology to go out quickly. The amount of information people take allows them to make decisions very apace. The mentality of a lot of these investors is not a long-term mentality in terms of the portfolio investors, and volatility is a big risk for a lot of these places. That'south why you lot'll see 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 financial institutions.

It's just inevitable in a medium- and a pocket-sized-sized state that they want to protect themselves against that kind of disequilibrium. You will always run across greed and cocky-involvement drive markets to places that reason wouldn't.

He was a top portfolio manager for George Soros's Quantum Fund, a private investment fund, from 1992 to 1995. He left the money management business in 1996.
It'south similar we're talking about some chess game in the heaven. Most of us don't even accept any thought ... that this game is going on.

Yes, I recall that'southward partially truthful. The nature of the abstract thinking that's going on in the investment community is sometimes discernible through comments you see in the financial pages. But the way in which all of these prices that affect employment and how appurtenances are bought and sold and what countries experience boom and which countries are in stagnation, I don't retrieve that that connectedness between how the investor-trader globe is setting prices and and so the real consequences is well established.

Or well known to ordinary folks ...

... We're seeing Russian federation, much of Latin America, most of Asia, go through episodes in their economies, in their economical life, that are as deep and damaging and painful and profound as the Great Depression was in the United States. At the aforementioned time, the United states is an economic system which is characterized past its proportionately smaller exposure to international trade and international influences, and our stock market'south at an all-time high. We're at a time 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 yous, "No, the market won't support that."

The market is a tool. We should have a political and social consensus on what our objectives are equally a society and utilize markets to facilitate that. But at present the servant'south the master. Information technology's almost as if the marketplace is a religious icon. I meet that mirrored in the very, very loftier valuation of the United States stock market place and the tremendous conviction that citizens have throughout the country that the United States is proficient, is right. The free market is keen, and the stock market is where you put your money.

People used to put their bank balances into gilded or bank accounts or CDs, then-called rubber things. The stock market was considered risky. Now the stock market place is where everybody puts their money 'cause that'southward considered safety and lucrative. That's a bothersome notion to me. As I mentioned earlier, making money is about changes in perception. Our club has such conviction now that the stock marketplace is a good place. That perception is reflected in prices. The change in perception that'southward going to make stocks go up further is becoming even more than optimistic.

... The power for perception to change and alter valuation in the stock market seems to me approaching the time when the just news that will be meaningful is bad news. That will alter your perception. That will brand my dentist stop lecturing me almost how I have to be in the stock market with all of my wealth because, 4 out of five years, it'south ameliorate than bonds. We're at a dangerous point with regard to equities in the United States, and I mentioned information technology's a trivial fleck like fiddling while Rome burns 'cause the globe is struggling all around the states correct now. And if the United States runs into a downward screw, failing stock prices ...

Soros has said if things don't change, there is the real danger and possibility that we are headed for a worldwide recession, if not low.

Yes.

Do you share that fear?

I call up that George is accurate. There's an sometime saying by a now deceased announcer, American, named Christopher Lash, and he said, "Meritocracies are only stable if a large number of people are winners. Otherwise they modify the rules."

In the economic consequence, if the United States is successful and the rest of the world goes through the kind of transitions and violence that they accept in recent years, and that persists, and for instance, if the U.South. slows down, we've talked almost it, and it amplifies the pain in other areas, they will not view themselves as bad performers in this organisation. They will try to alter the arrangement.

The nature of the trading arrangement in the world 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 about 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 change in the way the world is organized.

He is the Ford International Professor of International Economic science at MIT. He specializes in international merchandise and finance and his virtually recent volume is The Return of Low Economic science.
What is the biggest question in your listen today?

Oh, the biggest question is what nearly the large advanced countries? This is an enormous human being tragedy. Only so far, it's merely affected people who didn't take that much coin to brainstorm with. So in dollars and cents terms, information technology doesn't really affair that much. The question is: Can this thing spread to us? By us, I mean, basically, all the avant-garde countries, all of the rich, stable, autonomous countries of the first world.

So far, more often than not information technology hasn't, but there are some scary things out in that location. The Japanese are fairly shut to entering into a deflationary spiral. The United states of america had i heck of a scare in the autumn when the bail market froze. I remember a Fed official in a private coming together, when people asked him what are we going to practise about this, [he] said, "Pray," which was not very encouraging. We got out of that. Nosotros don't quite know how. And so the scary question, the big question is: How immune are the big advanced economies? I'd give you ten to one odds that it'due south non the 1930s again for those economies, but those are not the kinds of odds I'd similar to be hearing.

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

Yes. Clearly some groups are hurt, because they are dependent on those markets, or one style or another are directly in the path of this storm. On the whole, the The states' economy remains astonishingly prosperous in the face of what's going on there. There'southward no necessary reason why that tin can't keep. But then, there was no necessary reason for whatever of this to happen. So you've got to exist concerned. The keen revelation here is that nosotros don't know what we're doing also equally nosotros thought we did. Problems we thought were solved are not solved. Economical analysts like me, economical managers like the people at Treasury, hopefully know something, but don't know as much as we thought we did. That ways that problems that we thought were impossible may turn out to be quite real in the modernistic earth.

In your Strange Diplomacy article, yous talked almost whether or non governments would have enough steps to stimulate demand at this moment ...

If yous wait at two of the three great centers in the advanced world, Japan, first and foremost, and so also Europe, y'all starting time to wonder, what are they thinking? Look at Nihon right now. It'southward an economy that'southward 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 get that economy moving once again." The answer is, they aren't. They're spending a lot of money on public works, only they're not printing a lot of money. When the yen surged in value for complicated market reasons, which is a terrible thing for an economy that's on the verge of a deflationary spiral, the Japanese actually seem to be proud of it.

And then that's scary. That's making me wonder, is it really possible that here in the modern 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 look at Europe, where they talk almost toll stability and are sitting there again on the edge of deflation, you lot wonder, are they prepared to do what's necessary?

Pregnant, spend coin?

Well, in particular, print money. You print money, and you spend coin. Impress coin is the easier alternative and the preferred one, if you can do information technology. Once more, the Europeans start to talk about the virtues of the strong Euro, which is the last matter they need right at present. What worries me about Japan 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 aggrandizement of the 1970s and early 1980s. They retrieve the excesses of speculation in their markets during the bubbly economy in Japan during the 1980s. Here, they are in a earth which is that earth turned upside downwardly, where the articulate and present danger is deflation, not aggrandizement; where the problem is crashing asset prices, not overvalued ones. They don't seem to exist prepared to make the mental shift. And when they do, it might be too late.

Add into that mix the U.S. economic system running a [budget] surplus. Isn't that a problem at this moment in fourth dimension?

... Well, and then far that'due south non a trouble, because U.South. consumers are making up for it. What happened is the U.S. government has gone from heavy dissaving to substantial saving. Only U.South. consumers decided to stop saving altogether at the aforementioned fourth dimension, then it hasn't created a problem.

I'thousand less worried near the U.S. I don't recall that we are a contractionary strength in the world now, or are likely to be. And in Greenspan I trust--not really, but the fact is, that the U.South., whatever criticisms you can make nigh its policies and for the residual of the world, our domestic policies are more flexible, more open minded, than that of anyplace else. That is ane of our great strengths ...

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

Oh, we accept to move fast. The world is not all that integrated. Information technology is possible to have prosperity in the U.S. while the remainder of the world is in trouble. It'south possible in principle, but we'll take to move fast. If in that location is a slump that spreads to the get-go world oustside the U.Due south., and so nosotros take got to cut interest rates, start spending that upkeep surplus ... The Swell Depression would have been like shooting fish in a barrel to stop in 1930. It was very difficult to go out of by 1935. The point is, that the time to act would be rapidly. I think Washington understands that. Famous final words?

He is the Galen L. Stone Professor of International Merchandise at Harvard University and the Manager of the Eye for International Development. He has served equally an economic advisor to governments in Latin American, Eastern Europe, Russia, Asia and Africa.
A growing number of observers accept pointed out similarities in certain trends in the 1990s that were also trends in the 1930s. You've written some well-nigh that yourself ...

There'south a question whether 1999 is 1929. We had a booming stock marketplace in 1929 and then went into the world's greatest low. We have a booming stock marketplace in 1999. Will the bubble somehow burst, and and so nosotros enter depression? Well, some things are non different. The volatility of international capital played a big role in the onset of the Great Depression. The volatility of international majuscule is plain destabilizing markets today.

There is, in my view, one fundamental difference, though. I recollect it really is so primal that the analogy doesn't agree in the finish. In 1929, the earth 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 price of the currency set up to aureate, you lot couldn't really do very much in terms of expanding the coin supply in a depression, and then on. Nosotros but got out of the Great Depression every bit countries got off the gold standard, which was a long, backbreaking, tumultuous and, eventually, tragic process.

The skillful news for 1999 is, we are non on a gilt standard. Nosotros accept contained national currencies or regional currencies, in the case of the euro. If nosotros did become into a recession, something that's always possible for the U.S. or Europe, we could lower interest rates and expand the money supply without worrying virtually the price of gold.

If the whole world went into recession, all the major central banks could cut interest rates and expand the money supply. Indeed, last summer in 1998, when at that place was an intense moment of fright later on the Russian default of a worldwide credit crisis, the Federal Reserve Lath cut interest rates several times and successfully overcame that fright. I recall that was of import to a good monetary policy. So this is the big difference in my view. Could information technology happen once again? It would accept absolutely horrendous policy mistakes. The system itself is a lot safer right now, because nosotros are not leap by the straight jacket of the gilded standard.

Practise you call back that the stock marketplace bubble, only more, the sense of American prosperity, is ever going to exist affected past what is happening in the rest of the earth?

The U.South. is in a bit of a euphoric mood. Euphorias come to an end. We hope they don't come to an cease with a recession, much less a crash. There's a lot of force in the U.S., only there'southward a lot of froth too. The froth will blow off. We're going to have to face up to some realities that we're not fully facing upwardly to right now.

Ten years ago, there was a lot of euphoria near Japan ... [and] fearfulness in the U.S., that we're about to be taken over or fully endemic by Nihon. Well, this was a lot of hysterical market misunderstanding. Opinions in markets but bounciness off of each other. We see it happening over again.

The U.S. has a sound economy. Information technology likewise has a cyclical economy. It likewise has stock market values right now that are difficult to explain on historical norms. While information technology's always possible that everything can be based on the new economy, information technology'south as well quite possible that we're doing a picayune chip of exaggeration in just how wonderful things are.

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

I remember within a express range of issues, they're thinking, "What about commutation rate recommendations? What virtually short term capital flows?" In that location is some discussion of some real problems. The broader issue of the existent role of the U.Southward., the foreign assistance aspect of that, who'south going to pay for the security of a global economic system? No, nosotros are non doing whatever broad rethinking right at present. This is the end of an administration. That'due south unremarkably a pretty terrible time for whatsoever existent ambitious thinking.

Does that worry yous?

I've been worried all through this decade. I'm more worried at the end of the decade than I am at the beginning of the decade, because yous have so many of the poor countries of the world in utter crunch right now. I don't meet that crisis getting improve. I don't see much real and serious attention. By serious, I mean something that might cost united states of america something.

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

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