An order of magnitude

Barry Eichengreen and Kevin O’Rourke have been doing a great job of tracking the development of the current recession versus the Great Depression. While one could conceivably quibble with a few of the minor details, such as the starting points, the comparisons are nevertheless highly informative. In their most recent update, on September 1st, a number of the indicators appeared to show that the present situation had improved dramatically vis-a-vis the historical one, as global industrial production and world stock markets in particular appear to be in recovery thanks to the massive global stimulus programs enacted by most of the governments of the industrialized nations. That’s a reasonable interpretation based on the conventional Neo-Keynesian macroeconomics that drove the decision to implement the programs.

However, when I look at the charts, especially those for global production and world stock markets, I see what looks suspiciously like a situation that is developing at a larger order of magnitude. This interpretation fits with my statistical observations of the banking system and credit markets, the Austrian school interpretation of the relative size of the past and present stimulus programs, and with Bob Prechter’s socionomic theories. Note that none of these three factors are conceptually related; the synchronicity is entirely driven by events.

While I’ve added the Elliott wave labels to Eichengreen and O’Rourke’s chart on relative world industrial production, one needn’t subscribe to Elliott wave theory to see the potential pattern that appears to be developing on a larger scale. If my interpretation of a larger scale event is correct and the apparent 1.45 relative magnitude applies to the next major phase as well, then we should expect to see global industrial production to plunge to 65 percent of peak, versus the 90 percent it is at now. This would indicate an ultimate bottom of around 45 percent, compared to 62 percent for the Great Depression.