Publications: Notes at the Margin

Economic Recessions: Historical Parallels to 1946-48 and the Treaty of Versailles (June 6, 2022)

 

Many believe the United States’ economy will slump into recession within the next six months. JPMorgan Chase CEO Jamie Dimon, speaking at a conference on June 1, went so far as to warn of a major economic storm:

 

“That hurricane is right out there down the road coming our way. We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.”[1]

 

Meanwhile, Germany, the European Union’s dominant economy, may already be slumping. Bloomberg’s Jana Randow cautions that the country could again become “the sick man in Europe,” as it did in 2005. In its most recent forecast, the European Commission sees 2022 economic growth in Germany lagging all but one EU nation. German growth was projected at 1.6 percent. In contrast, the EC expects Ireland and Portugal to realize growth of more than five percent this year from 2021.[2]

 

China’s situation is no better than Germany’s. Official forecasts put growth at four percent in 2022. However, most observers believe China is hiding the dire consequences of its prolonged Covid-19 lockdown.

 

Economic storm clouds are gathering. We have good reason to be concerned, even though the pronouncement by JPMorgan’s “weatherman” may be premature. Major hurricanes that make landfall on the US Gulf Coast form a week or two earlier off Africa. Predictions made ten days or more before the storm arrives can be very wide of the mark.

 

Still, Dimon has a point. The global economy is exposed. He chose Hurricane Sandy, a storm that devastated the US East Coast in October 2012, to characterize the potential economic chaos.[3] Others will likely think of the Great Recession that began in 2008.

 

However, each economic cycle, like each hurricane, is unique. The Great Recession of 2008, precipitated by a sharp increase in oil prices and followed by the Lehman Brothers and Bear Sterns failures, probably offers a bad parallel for today.

 

The recessions of 1990 and 2001 also provide few lessons for now. Both were tied to financial disruptions. The recessions of 1980, 1981, and 1973 are more closely related to the current situation because each involved an oil supply disruption. However, the circumstances today include some aspects that differentiate our predicament.

 

The best comparable is probably the recession of 1946 to 1948 because the major causes are similar. Indeed, the prospect of a cycle like that one may offer comfort to observers, especially those in the energy industry, because it was brief and mild.

 

Here, though, Dimon’s weather forecast is relevant. Many storms have like attributes: they make landfall at the same location, have similar power (e.g., are Category 3 storms), and wreak equal damage initially. However, the jet streams and the location of high and low-pressure areas can significantly alter a storm’s behavior. One can move quickly over land and back out to sea, while a second can be trapped over land and bring severe flooding.

 

The coming recession looks to begin just like the 1946-48 recession. The longer-run impact, though, may be as severe as that of the Great Recession or even the Great Depression. The consequences for oil markets could be huge. Here, a timely online Wall Street Journal article titled “The End of Energy Free Trade” previews the potential economic chaos.[4]

 

The Journal article, along with a Bloomberg piece headlined “ESG is alive and well. Just call it protectionism”[5], warn of a 1920’s type collapse in energy trade.

 

The Journal article implies that steps taken to sanction Russia could affect energy markets in the same way as the 1919 Treaty of Versailles. The latter’s impacts sparked protectionist actions that pushed the world economy into a depression in the 1930s. The Bloomberg article warns of the isolationist effects of environmental, social, and governance (ESG) measures.

 

Given the outlooks these authors envision, the net zero-emission goals set at the 2016 Paris Accords may be achieved well before 2050 thanks to an economic depression. As Mark Twain said, history does not repeat, but it rhymes.

 

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