September 07, 2011

Another Depression Ahead?

Europe is in disarray, stock markets are plunging, the banking crisis is back in full swing, gold is at record levels, and both the UK and US are self-evidently slipping back towards recession – not since the autumn of 2008 have things looked quite so ominous.

We appear to be at another pivotal moment, with Western economies once more staring into the abyss. At a conference in Frankfurt this week, Josef Ackermann, chief executive of Deutsche Bank, compared events to the Lehman Brothers catastrophe of 2008 and warned that many banks in Europe are essentially bust. His opposite number at KfW went further still and said that the present cocktail of negatives was “much more dramatic than 2008”.

Back then, governments and central banks still had the financial firepower and the will to attack the problem with massive injections of fiscal and monetary stimulus.

Today, the fiscal armoury is exhausted, while it is not clear that further monetary easing through the printing presses of “quantitative easing” would have any effect beyond adding to inflation.

Indeed, the parallels look alarmingly closer to the banking collapses of 1931, which plunged the world into prolonged depression, than the storms around the Lehman collapse.