Text / Sina Financial opinion leader column organization People’s Congress Chongyang

Author: Wang Jinbin (Executive Deputy Secretary of the Party committee of the school of economics of Renmin University of China and special researcher of the National Institute of development and strategy)

The “Great Depression” in 1929-33 affected most countries in the world and was the only economic cyclical fluctuation known as the “Great Depression” in 100 years. The IMF released the world economic outlook report on April 14 local time. It is expected that the global economic growth rate will be - 3.0% in 2020, the worst economic recession since the great depression. Does this mean that there will be a “Great Depression” in the global economy? Let’s take a look at some important scenes of the great depression in 1929-33.

According to Friedman and Schwartz’s American monetary history, Bernanke’s great depression and wind data, we first look at the replay of several important scenes of the “Great Depression”: 1. The collapse of the banking system. At the end of 1933, only a little more than half of the banks still operating in 1929, and about 50% of the banks failed; 2. The stock market collapsed. Since October 1929, although there has been a rebound in the middle, it has been falling for about three years, and the largest decline of the S & P 500 is about 85%. 3. Output and price levels continued to fall. Based on the constant price of US dollars in 1929, the output level in 1933 was about 30% lower than that in 1929, and the price level was about 25%. 4. Unemployment is high. The highest unemployment rate is about 25%; 5. International trade plummeted. The “beggar thy neighbor” trade policy of the United States contributed to the contraction of trade, resulting in the decline of international trade by more than 40% in 1932 compared with 1929.

Why is the great depression so tragic? Why did it last for about four years? We list several of the most famous explanations: 1. Keynes’s expenditure contraction theory. In his general theory, Keynes proved that the total demand is less than the total supply by relying on the three laws of marginal propensity to consume, marginal efficiency of capital and flow preference, which led to the economic crisis of overproduction and unemployment. 2. Friedman and Schwartz’s monetary theory. It is believed that monetary tightening is an important reason for the “Great Depression”. In the years before 1929, the Federal Reserve had been in the channel of raising interest rates. When the crisis broke out in October 1929, the response of the Federal Reserve was extremely slow. It was not until the promulgation of the banking act of 1932 in February 1932 that the Federal Reserve began to buy treasury bonds and implement QE. In November 1929, the Federal Reserve cut interest rates by 1.5 percentage points, and the interest rate will be 4.5%. However, at the end of 1931, due to the collapse of the banking system and distrust of the US dollar, the Federal Reserve raised interest rates at the end of 1931. According to the yield of American high-quality corporate bonds from 1929 to 1933 given by Homer and others in the history of interest rates, we can see that the average annual yield of American high-quality corporate bonds in 1933 was 4.19%, while that in 1929 was 4.49%. Monetary policy has little effect on reducing interest rates. 3. Bernanke’s comprehensive theory. In the great depression, Bernanke expanded Friedman’s research from a global perspective, believed that monetary tightening was the main driving force of the great depression, and stressed that the root of global monetary tightening was closely related to the monetary exchange rate system. Some economists, such as Sachs and Eichengreen, observed that the countries that abandoned the gold standard and adopted the free expansion monetary policy recovered faster.

Therefore, the “Great Depression” is, to some extent, the first time that mankind has encountered such a large-scale crisis. The strength and speed of anti crisis policy-making remain on the basis of having not seen such a great crisis. One of the most famous research results of the severe impact of the financial system on the real economy is Friedman and Schwartz’s view of the reverse impact of financial entities: a large number of bank failures and the collapse of the stock market have led to the sharp contraction of the wealth of banks and investors, and the sharp contraction of credit in the economy, which further led to the decline of money supply; Many economists, including Bernanke, further elaborated the further impact of the bankruptcy of debtors, banks and lenders on the economic recession. Most of these valuable experiences in dealing with the great crisis come from the “Great Depression”.

The great impact of the epidemic in 2020 brought about a deep decline in the global economy. The starting point of the story logic is completely different from the “Great Depression” in 1929-33 and the subprime mortgage crisis in 2008-09. This is an “unexpected” or “unexpected” big impact of the COVID-19. It is the sharp contraction of economic activities caused by “isolation” or “social distance”, which has affected the world.

The short-term severe impact caused by “isolation” or “social distance” is higher than that caused by other forms of economic or financial crises, because the global economic activities related to human activities have been severely impacted. The UK even experienced the worst short-term economic recession in 300 years, the United States also experienced the worst economic contraction since the great depression, and China’s GDP also experienced a deep decline of - 6.8% in the first quarter of 2020. Even so, the world economy is unlikely to repeat the tragedy of the great depression. There are mainly the following reasons:

1、 The epidemic situation has not deviated from the prediction curve of pandemic infectious diseases. This shows that as long as effective measures are taken, the epidemic situation as a whole is controllable. China has been at the forefront of resuming work and production; Recently, part of Spain resumed work; The United States is also discussing a gradual resumption of work in May; wait. At the same time, in addition to promoting effective epidemic prevention and control measures, countries have also accelerated the research process of vaccines.

2、 Policymakers are not afraid. With the experience of anti crisis in history, in response to the pandemic and financial turmoil, there has been the largest intervention by the government and the central bank in human history, and the laissez faire economic policy has not been basically adopted as in the “Great Depression” period. The macro policy of “big impact and big response” has largely hedged the extremely severe risks caused by the great economic and financial turmoil caused by “isolation” or “social distance”, and helped investors stabilize their expectations to a great extent. According to the data of IMF policy tracker as of April 10, the number of economies with global fiscal policy expenditure accounting for more than P5% of GDP accounted for