Why Wont the Great Depression Happen Again

He is Chairman of Soros Fund Management LCC, a private investment management firm that serves as principal advisor to the Quantum Group of Funds. He is the author of The Crisis of Global Capitalism.
When you, as an investor, as a trader, look out at the world, half-dozen months, nine months down the road, what kinds of things are you looking for?

The fiscal markets by and large are unpredictable. Then that one has to have different scenarios ... The thought that you tin can actually predict what'due south going to happen contradicts my mode of looking at the market.

Really, I meet tremendous imbalance in the earth. A very uneven playing field, which has gotten tilted very badly. I consider it unstable. At the aforementioned time, I don't exactly run across what is going to reverse it. Certainly, a slowdown in our economy would get out the earth extremely vulnerable, because the U.S. economy is, today, the unmarried engine that is driving this very large plane. And so if that engine were to conk out, you'd have a very serious problem. It's a question [of]: Can you repair the other engines earlier this 1 gives out? Considering even though people say that we live in a new world, and the past is not relevant ... cyclical fluctuations are not eliminated. That's my master concern.

... I just want to analyze ... that what y'all have is a very uneven playing field. You lot have excess liquidity at the center and a groovy deficiency of majuscule at the periphery. The money is nonetheless flowing from the periphery towards the center. And so we ought to find a way to inject liquidity in the periphery. Instead of that, we can only inject liquidity at the center. The Federal Reserve can lower involvement rates, and has done so.

What you demand is a machinery to provide capital letter to countries like Brazil, which is where money is fleeing. Interest rates are very loftier. The country is going into recession. So this is what creates a tremendous imbalance, at the moment, which is not sustainable. Information technology could atomic number 82 to ... if this engine now gives out, then you take a problem.

I mean, in fact, there is a certain danger that considering of the injection of liquidity, our financial markets take go overheated. Y'all accept signs of speculation, excessive speculation in areas similar Internet stocks, so on. You could feasibly have at some bespeak a crash that would so accept negative effects on the real economy ... In this country. And and so, indirectly, on the residual of the globe ...

He is a Washington-based journalist who has worked in newspapers, magazines and television for over 35 years. His most recent volume is 1 World, Ready or Not, The Manic Logic of Global Commercialism.
Many people think this crisis, that's been with us for the last 19, 20 months, is over. What's your view?

My view is nobody knows yet whether this is over or non. But I would remind people, we've had 3 or four fake dawns in the final two years where the newspapers began reporting that recovery was in sight. Near e'er those judgments were based, not on the real economies in the earth, what people were doing and producing and buying, just on financial indicators.

This nowadays moment is very much based on some currencies in Asia that got hammered a twelvemonth ago, have recovered a chip and now seem stable. Stock markets are reviving in some countries. If yous await at the existent economies, what's really happening to manufacture and commerce in those countries, they're nonetheless very negative. Then I will experience like we may exist coming out of this when I stop seeing unemployment rising in those countries, cease seeing so many bankruptcies increasing--indicators like that, the existent health of the economy.

We have, what, 40% of the world in recession or depression still?

Yeah, and nosotros accept something like half the globe in recession or low. The German economy, which is one of the big [ones], has been contracting for two quarters now. People in Europe are very nervous nigh a European-wide recession. The U.Southward., information technology's truthful, keeps chugging along. On the other hand, we have a negative personal savings rate. People are spending more than they're earning, despite the fact that wages accept been increasing. Nosotros have falling profit rates ...

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

Yes ... I'm among those who felt it was an inflated toll bubble for a long time, several years, and it keeps going up, defying all sorts of predictions. Nevertheless, ane of 2 things has to happen. Either the stock market place will go down considerably. Nosotros hope non all at in one case, but dramatically ... or those people who take invested their money in the stock marketplace are going to be disappointed by the return. Just just by the arithmetic--if you paid an over valued price for a stock, yous're going to get a smaller render than y'all anticipated. I don't retrieve nosotros can escape from ane or 2 of those consequences.

When people discover that that'southward the example, that they're not really going to go that 12%, 15% appreciation in their coin, maybe they will take that maturely and merely accept information technology. History tells us that that's non what happens. What happens is people say, "I'yard getting my money out of hither, considering I'1000 not getting what I thought I was promised by the market place. So I'll put it somewhere else." If a lot of people practice that at once, then you've got a financial panic and crisis.

... ultimately, the problem in the stock markets--you can fence over whose numbers you lot're using--but 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 downward and have been for a year and a half now.

Somebody's got to exist wrong. I don't think information technology'due south the companies. They can see what's happening ... The collapse in need in overseas markets and the falling crunch for goods ... that put a squeeze on American companies even if they aren't big overseas exporters, considering y'all've got all these strange goods pouring in hither. Information technology makes it impossible for a visitor to enhance its prices. Probably it has to cut prices. That squeezes profits. If yous squeeze profits long plenty, then the company's got to cut back on new investment. Yous see you're in a chain of bad events. That'due south where we are. Maybe nosotros'll glide out of information technology and bottom out and things will turn around, but I wouldn't bet my mortgage on that at this signal.

Looking at the global economy, yous call up we're at a critical moment and that we have been for the last year or half yr. What is your sense? What is it based on?

The disquisitional moment that faces the global organisation now is: Will governments be wise enough to larn from these catastrophic events and reform the system? That is, impose some rules on, particularly, global financial markets, but some other aspects likewise. Not to shut information technology down, but to go on it alive and moderate its pace and help countries protect themselves against the ravages of fickle financiers running in and out of their economy.

I am gloomy at the moment because I don't see much prospect of those reforms existence washed seriously in a timely way. If they're not, so it is very clear that we'll be back in crisis, whether that'southward half dozen months or 18 months or 2 years from now, I don't know and nobody else could say. But the fundamentals are at present articulate and we're not acting on them ...

He is a well known military strategist and consultant, and Senior Fellow at the Center for Strategic and International Studies in Washington DC. He is the writer of Turbo Capitalism: Winners and Losers in the Global Economic system.
Do y'all recollect the possibility of a global recession, if not depression, is a very real i correct now?

As we speak, the possibility of a global recession is a very existent one. On the one hand, you have the base of operations of the earth economic system. You have the impoverishment that comes from very low commodity prices stretching from Wisconsin to Chile, Wisconsin pork bellies, Chile copper, everything in between, the oil in Venezuela, and then on. It affects entire countries ... Somebody should be out there pumping demand into the system. Instead of pumping need, we have the United States running a surplus because of the politics of it.

... Now, what was avoided would be the coherent, united, harmonious, and smart intervention by the authorities. Given what happened last Oct when the crash took place, there were some waves and panic, and people were suddenly agape that they wouldn't accept a alimony, their mutual funds would disappear. People asked themselves how much money they still had invested in the quondam-fashioned way, you know, just by putting it in bonds and banks.

At that moment, there was no harmonious response. It was all done past the American Federal Reserve. Alan Greenspan and the Federal Reserve acted. Everybody else talked or did nothing ... I don't call up [the Federal Reserve is] going to exist sufficient to forestall the [next] crash, which will come sooner or later ...

... It's like having a great brawl there on the height of an incline of a gradient and when accelerated down, the only affair supporting it is just the Federal Reserve, the American regulatory fiscal and control system, because no global mechanism has been set; no coordination has really been ready between the American and the Europe and the Japanese economic decision-making entities.

At nigh, in that location is a liaison between the cardinal banks, but they only control monetary policy, and so we have a contradiction here. We accept 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 at present president of an international advisory firm. He is also an offshoot professor of international and public affairs at Columbia University.
You ... [have] compared global economics to plate tectonics ...

... When you wait at the global economy, one style to view it is using a plate tectonic model where at that place are mistake lines all the way effectually. When there's a shift of ane of these error lines, particularly a large shift, it tin exist felt all the way effectually the earth and we saw that terminal summer.

There was a error line underneath the Russian economy. Information technology shifted. The touch on was on Brazil where in that location was another fault line which shifted and caused a problem throughout Latin America. You saw that with the Asian financial crisis where at that place were fault lines under a number of these economies that we reset into disequilibrium as a effect of too much capital letter and as well many foreign-denominated loans coming in while currencies were valued wrong ... Well, that fault line moved and what happened? Need fell off enormously, and that's how the energy was passed through this system of economic plate tectonics, if you lot will, and it affected the countries of Latin America. Why? Because most of them export commodities--xl% of Republic of chile's exports is copper, and 40% of their exports goes to Asia. So at that fourth dimension all of a sudden you lot've got a effect in Chile.

Even to this mean solar day in that location are fault lines that could shift and could gear up off some other prepare of these things. Wall Street with an Internet bubble in the middle of it is a fault line. Japan with a weak financial system and dubiety nearly whether the government's latest round of reforms after round of reforms over the course of the past decade, are going to work is another fault line. China, with the value of the yuan and whether they're going to devalue, is another fault line. A spreading war in Kosovo, a conflict in the Middle Eastward near the source of oil, these are fault lines that exist out there. Nosotros have to recognize that in the global financial organisation right now these aren't isolated, these aren't remote from us. They tin can affect us and they can affect other markets in a adequately firsthand fashion.

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

... Personally, I'm a little worried considering I think there is a bubble in the heart of the Wall Street economic system. No 1 should have any confidence in the Japanese ability to fix their problems, because they haven't been able to practice it so far and they oasis't taken sufficiently dramatic steps, although they may. The Chinese could exist spooked by a diversity of other things and need exports to produce hard currency ... We are all the same in an era or period in which conviction is not restored, and until it 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 nosotros've seen in the by year.

Is there a danger that the wrong lessons are being drawn from the crisis of the last yr and a half, two years?

... Not only is there a danger, in that location's a certainty that the wrong lessons are being fatigued by some people. By about of the people at the heart of the international financial organisation, are the wrong lessons beingness fatigued? I don't know. I don't see the IMF being highly responsive to this. I don't see it having learned its lessons. I see that lending $5 billion more to Russia seems to me to exist at best an accounting transaction, at worst another waste of money. I see nonetheless an absence to be able to address questions of social disinterestedness in an constructive manner, and so these things volition take a while to formulate, but the general tendency within the markets is to be fairly thoughtful about this at the highest levels, and at that place is a general movement toward understanding things amend ...

Part of the problem is that in emerging markets, just as some of them are non highly liquid financial markets, they are not highly liquid information markets, and as a result a little bad information tin can cause quite an upset just as an inflow of too much money or an outflow of too much coin tin crusade quite an upset of these markets.

So they're still volatile? They're nevertheless erratic?

Volatility is the toughest issue to deal with because the pipelines are getting bigger and bigger through which money goes. It allows information technology to get in rapidly. It allows it to go out speedily. The amount of information people have allows them to make decisions very quickly. 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's why you'll see some kind of modified capital controls in a lot of these countries growing even though that has not been for a long fourth dimension the policy of international financial institutions.

It's just inevitable in a medium- and a minor-sized country that they desire to protect themselves against that kind of disequilibrium. You volition ever see greed and self-interest drive markets to places that reason wouldn't.

He was a top portfolio managing director for George Soros's Quantum Fund, a private investment fund, from 1992 to 1995. He left the money management business concern in 1996.
Information technology's like we're talking about some chess game in the heaven. Most of us don't even have any idea ... that this game is going on.

Yep, I think that's partially truthful. The nature of the abstruse thinking that'south going on in the investment community is sometimes discernible through comments you lot see in the fiscal pages. But the way in which all of these prices that bear upon employment and how goods are bought and sold and what countries feel boom and which countries are in stagnation, I don't recollect that that connection between how the investor-trader earth is setting prices then the existent consequences is well established.

Or well known to ordinary folks ...

... We're seeing Russia, much of Latin America, most of Asia, go through episodes in their economies, in their economic life, that are as deep and damaging and painful and profound as the Great Depression was in the United States. At the same time, the U.s. is an economy which is characterized by 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 well-nigh religious in their worship of markets. The market is at present our master. If you espouse a social goal in America today, someone will say to yous, "No, the market place won't back up that."

The market is a tool. Nosotros should have a political and social consensus on what our objectives are as a club and use markets to facilitate that. But now the servant's the master. Information technology's most equally if the market is a religious icon. I run into that mirrored in the very, very high valuation of the U.s. stock market and the tremendous conviction that citizens accept throughout the country that the U.s. is expert, is right. The free marketplace is great, and the stock marketplace is where you put your money.

People used to put their banking concern balances into gold or banking company accounts or CDs, then-called condom things. The stock market was considered risky. Now the stock market is where everybody puts their money 'cause that's considered rubber and lucrative. That's a bothersome notion to me. Equally I mentioned earlier, making money is about changes in perception. Our lodge has such confidence now that the stock market is a adept place. That perception is reflected in prices. The alter in perception that's going to brand stocks get up further is becoming even more optimistic.

... The ability for perception to change and change valuation in the stock market seems to me approaching the time when the simply news that will be meaningful is bad news. That will alter your perception. That will brand my dentist stop lecturing me about how I take to exist in the stock market with all of my wealth because, four out of v years, it's better than bonds. We're at a unsafe bespeak with regard to equities in the United States, and I mentioned it'south a little fleck like picayune while Rome burns 'cause the world is struggling all effectually united states correct now. And if the United states runs into a down screw, declining stock prices ...

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

Aye.

Do you lot share that fright?

I think that George is authentic. There's an one-time saying past a now deceased journalist, American, named Christopher Lash, and he said, "Meritocracies are just stable if a large number of people are winners. Otherwise they change the rules."

In the economic outcome, if the Usa is successful and the remainder of the world goes through the kind of transitions and violence that they have in contempo years, and that persists, and for instance, if the U.S. slows down, we've talked about information technology, and information technology amplifies the pain in other areas, they will not view themselves as bad performers in this system. They will endeavour to change the system.

The nature of the trading arrangement in the world and commerce is at gamble in the electric current fourth dimension, because large 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 fashion the world is organized.

He is the Ford International Professor of International Economic science at MIT. He specializes in international trade and finance and his most recent book is The Render of Low Economics.
What is the biggest question in your listen today?

Oh, the biggest question is what about the big advanced countries? This is an enormous human tragedy. Just and so far, information technology'south only affected people who didn't take that much money to begin with. So in dollars and cents terms, it doesn't really thing that much. The question is: Can this thing spread to u.s.a.? By the states, I mean, basically, all the avant-garde countries, all of the rich, stable, democratic countries of the first world.

And so far, mostly it hasn't, but at that place are some scary things out in that location. The Japanese are fairly close to entering into a deflationary spiral. The United states had one heck of a scare in the fall when the bond market froze. I remember a Fed official in a individual coming together, when people asked him what are we going to practise near this, [he] said, "Pray," which was non very encouraging. We got out of that. We don't quite know how. So the scary question, the large question is: How immune are the big avant-garde economies? I'd give you ten to one odds that it's not the 1930s over again for those economies, but those are not the kinds of odds I'd like to be hearing.

Aren't we already seeing [people] in the oil industry, steel industry, in this country get-go to feel the furnishings?

Yeah. Clearly some groups are hurt, because they are dependent on those markets, or one way or another are directly in the path of this storm. On the whole, the United States' economy remains astonishingly prosperous in the face of what'south going on there. There'southward no necessary reason why that can't keep. But then, there was no necessary reason for any of this to happen. And so yous've got to be concerned. The dandy revelation here is that we don't know what nosotros're doing too as we idea we did. Bug we thought were solved are not solved. Economic analysts like me, economic managers like the people at Treasury, hopefully know something, but don't know as much as we thought we did. That means that problems that we thought were impossible may turn out to be quite real in the modern world.

In your Strange Affairs article, y'all talked near whether or not governments would take enough steps to stimulate demand at this moment ...

If you lot expect at two of the iii great centers in the avant-garde world, Japan, first and foremost, and and so also Europe, yous start to wonder, what are they thinking? Look at Japan correct now. Information technology's an economic system that's been shrinking for the past two years. Prices are falling. Wages are falling, which never happens. You say, "Well, they must be moving heaven and earth to go that economy moving over again." The answer is, they aren't. They're spending a lot of coin on public works, but they're non printing a lot of money. When the yen surged in value for complicated market reasons, which is a terrible affair for an economic system that'southward on the verge of a deflationary spiral, the Japanese really seem to be proud of it.

So that's scary. That'due south making me wonder, is it actually possible that here in the modern world, there are people who don't understand even that much and are prepared to take those kinds of risks with a large economy? If you look at Europe, where they talk about price stability and are sitting there once more on the edge of deflation, you wonder, are they prepared to do what'due south necessary?

Meaning, spend money?

Well, in particular, print money. You print money, and you spend money. Print money is the easier alternative and the preferred one, if you lot can practice information technology. Again, 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 nearly Japan and Europe is the people in charge seem to be similar the old line well-nigh French generals, prepared to fight the last war. They remember very well the aggrandizement of the 1970s and early 1980s. They recall the excesses of speculation in their markets during the bubbly economy in Japan during the 1980s. Here, they are in a world which is that earth turned upside downwardly, where the clear and present danger is deflation, not inflation; where the problem is crashing asset prices, not overvalued ones. They don't seem to be prepared to make the mental shift. And when they do, it might be likewise tardily.

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

... Well, so far that'south not a problem, because U.S. consumers are making up for it. What happened is the U.Due south. government has gone from heavy dissaving to substantial saving. But U.S. consumers decided to finish saving altogether at the same time, so it hasn't created a problem.

I'm less worried virtually the U.S. I don't think that we are a contractionary strength in the world now, or are likely to be. And in Greenspan I trust--not really, only the fact is, that the U.S., whatever criticisms you tin can brand virtually its policies and for the rest of the globe, our domestic policies are more flexible, more than open minded, than that of anyplace else. That is one of our great strengths ...

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

Oh, we accept to move fast. The world is non all that integrated. Information technology is possible to have prosperity in the U.Southward. while the remainder of the globe is in trouble. It's possible in principle, only we'll have to move fast. If in that location is a slump that spreads to the showtime world oustside the U.S., so we have got to cutting interest rates, start spending that budget surplus ... The Swell Depression would have been easy to stop in 1930. It was very hard to get out of past 1935. The betoken is, that the time to act would be quickly. I think Washington understands that. Famous last words?

He is the Galen L. Stone Professor of International Trade at Harvard University and the Director of the Center 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 take pointed out similarities in certain trends in the 1990s that were also trends in the 1930s. Yous've written some about that yourself ...

There's a question whether 1999 is 1929. We had a booming stock marketplace in 1929 and 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 low? Well, some things are non dissimilar. The volatility of international capital played a big role in the onset of the Great Depression. The volatility of international capital is obviously destabilizing markets today.

At that place is, in my view, ane fundamental difference, though. I retrieve information technology really is so fundamental that the analogy doesn't concur in the end. In 1929, the world 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 toll of the currency set to gold, you lot couldn't actually do very much in terms of expanding the coin supply in a depression, then on. We only got out of the Keen Low every bit countries got off the golden standard, which was a long, backbreaking, tumultuous and, eventually, tragic process.

The good news for 1999 is, we are non on a aureate standard. Nosotros have contained national currencies or regional currencies, in the example of the euro. If we did get into a recession, something that's ever possible for the U.South. or Europe, nosotros could lower interest rates and aggrandize the money supply without worrying about the toll 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 there was an intense moment of fearfulness subsequently the Russian default of a worldwide credit crunch, the Federal Reserve Lath cut involvement rates several times and successfully overcame that fear. I think that was important to a good budgetary policy. So this is the big difference in my view. Could it happen over again? It would take admittedly horrendous policy mistakes. The arrangement itself is a lot safer right at present, because nosotros are not bound by the straight jacket of the gilded standard.

Do y'all think that the stock market bubble, but more, the sense of American prosperity, is ever going to exist affected by what is happening in the rest of the world?

The U.Due south. is in a bit of a euphoric mood. Euphorias come to an end. We promise they don't come to an end with a recession, much less a crash. There's a lot of strength in the U.Due south., but there's a lot of froth also. The froth volition blow off. We're going to have to face up to some realities that we're not fully facing up to correct at present.

Ten years ago, there was a lot of euphoria about Japan ... [and] fear in the U.Due south., that we're well-nigh to exist taken over or fully owned past Japan. Well, this was a lot of hysterical marketplace misunderstanding. Opinions in markets only bounce off of each other. We run across it happening once more.

The U.S. has a sound economy. It also has a cyclical economy. It likewise has stock market place values right now that are hard to explain on historical norms. While it's always possible that everything tin exist based on the new economy, it's also quite possible that we're doing a little bit of exaggeration in just how wonderful things are.

Practice you lot have any sense that Washington policy makers are reconsidering some of the policies? ...

I think within a limited range of issues, they're thinking, "What about commutation rate recommendations? What well-nigh short term capital flows?" There is some discussion of some real problems. The broader event of the existent role of the U.S., the foreign assistance aspect of that, who's going to pay for the security of a global economy? No, we are not doing whatever broad rethinking right now. This is the end of an assistants. That's ordinarily a pretty terrible time for any existent ambitious thinking.

Does that worry yous?

I've been worried all through this decade. I'one thousand more than worried at the end of the decade than I am at the first of the decade, because you have and so many of the poor countries of the world in utter crisis right now. I don't see that crunch getting ameliorate. I don't see much real and serious attending. By serious, I hateful something that might cost us something.

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