What we learn from history: it doesn't always repeat itself

[CHIMO]

At a Washington dinner party in the early 1980s the atmosphere was full of gloom and doom. There was a severe recession in the US and much speculation that the Japanese economy was unbeatable. Suddenly the great British political journalist Henry Fairlie, who was by then resident in the US, said it was all nonsense: the US was a great country, and it would in due course bounce back. Which it did – and how!

One needs a sense of history at times like this, but also common sense about history. In a fascinating article in the current New York Review, the Nobel laureate Paul Krugman and his wife Robin Wells question some of the lessons that are at present being drawn. In reviewing This Time Is Different: Eight Centuries of Financial Folly by Carmen M Reinhart and Kenneth S Rogoff, as well as this year's two editions of the International Monetary Fund's World Economic Outlook, Krugman and Wells note, in a neat twist to Hobbes: "All three studies offer a grim prognosis: the aftermath of financial crises tends to be nasty, brutish and long. That is, financial crises are typically followed by deep recessions, and these recessions are followed by slow, disappointing recoveries."

But historians Barry Eichengreen of at the University of California, Berkeley and Kevin 0'Rourke of Trinity College, Dublin have found that, while the initial slump in world industrial production was just as steep in the recent "Great Recession" as it was in the Great Depression of 1929-32, the downward spiral has been arrested earlier and there have even been the beginnings of a recovery. For myself, having been very cautious about using the word "recovery", I note distinct signs at last, in both the US and UK, that a tentative revival may – repeat may – be taking shape.

Why the difference? Krugman and Wells conclude: "The obvious difference is policy." Policymakers have not slashed budgets to balance the books, or raised interest rates to adhere to the gold standard. Instead we have had "the stimulus" – the stimulus, incidentally, that, if David Cameron and George Osborne had been in power, would probably not have been administered in this country.

http://www.guardian.co.uk/business/2010/may/09/william-keegan-economic-history

[Art_from_Ark]

1. One thing that killed Japan in the 1980s

was the Plaza Accord, which jacked up the value of the yen from 260/dollar to 160/dollar, within a couple of months. Not to mention the "voluntary" limits on exports to the US. How many export-driven economies would have been able to adapt to that?