Thursday, April 2, 2009

McKinsey on why this might not be the next Great Depression.

Nice article from McKinsey on getting history right. Compares the current political system to the Great Depression era and makes a compelling argument on why comparisions to that period are overblown and not relevant today. Excerpts follow:

"The key differences between the current crisis and the past are less economic than political. The Great Depression was the offspring of the killing fields of Europe: the First World War had destroyed trading patterns, undermined currencies, and produced massive public debts. Who would foot the bill for this catastrophe? The Americans had financed the British and French victories, and expected to be paid back in full. The British and French demanded that Germany carry the cost by paying reparations. Germany —which been victorious on their Eastern front and had prevented Allied forces from entering their territory—had agreed to end the war in part because of Woodrow Wilson’s promise not to impose a victor’s peace. When this promise was broken and massive reparations were imposed, a bitter decade-long battle over who would pay what ensued. From this toxic environment of distrust and enmity emerged a series of unsustainable deals, whereby America financed Germany’s reparations to Britain and France, which were recycled back to the United States in the form of war debt payments. If American financing dried up – which it did during the late 1920s—the whole scheme would collapse, taking the international monetary system with it. "

"Looking back, we tend to forget that growth in the developed world after World War II was the less the product of globalization than the recovery of war-devastated economies, the one-time productivity increases from the so-called green(agricultural) revolution, and preferential trade regimes like the European Economic Community (today’s European Union). "

"We live in an era when the threat of a great power war in the developed world is remote. The major players may have their political differences, but nothing approaching the bitterness and distrust that marked international relations in the last century. In addition, the greater interconnectedness of the world that has grown up over the past 20 years will act as a counterweight to the tendency to pursue purely self-interested policies. This backdrop will make continued cooperation much easier, and should make another Great Depression far less likely. "


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