At a Crossroad?

It has seemed clear for at least the past couple of months that the global economy is at a point where it may be poised to recover or to slip much further into the abyss. Much has been made, for an against, of a replay of the great depression, and yet much of the debate has seemed like a tiresome repetition of talking points from both sides.

It is clear that the contraction of credit, rapid job loss and staggering market losses mirror the opening months of the depression. Yet it is equally clear that we have policy tools that were not then imaginable, let alone available in 1929-30. And there are what have been termed "green shoots", tantalizing hints of a recovery many believe might now be materializing.

Barry Eichengreen and Kevin O'Rourke yesterday published a brief paper noting that while from an American (or Canadian) perspective, this might look like a typical cyclical recession, from a global perspective, it is anything but. Industrial output, global trade and world stock markets are tracking downward much more quickly than in the opening months of the depression. At the same time, monetary and fiscal responses have been much quicker and much more robust than in the earlier episode.

The question that remains to be answered, for me and for these authors among many others, is whether the latter will offset or counteract the former. The fatuous optimism of Jim Flaherty notwithstanding, this remains to be seen.