This Time it's Different

comments 0






rajat saggar's picture

This Time it's Different

There have been several economic and financial downturns which has happened in the last few decades such as the Oil Shock in the 1970s, the Dotcom bubble burst in the early 2000s, the Asian Economic crisis in the late 1990s, but the economies have been have to overcome these downturns and recovered relatively quickly. Even after the brain storming by the intellectuals around the world the process of economic recovery seems to be stalled or at least it is extremely slow for our liking. Even though the US and the European economics at times have shown that they are bouncing back but those are perhaps the short term effects of the extreme monetary and fiscal measures such as Quantitative Easing etcetera taken by these economies. Now the real question is that why the Global Economic Recovery is stalled and is the situation this time really different than other economic crisis which happened across the world and if so then how?

If we look at the current economic crisis the situation is extremely different and the quantum of damage or should I say carnage around the world is also enormous. It all started with the housing bubble burst in the US in 2007-08 and then the Eurozone debt crisis whose gravity was discovered around 2009-10 and these combined together has crippled the world economy. If we look at this whole crisis we see that –

  • This crisis is not limited to any sector or industry or any particular Geography;
  • The remedies taken by these economies aren’t wholesome;
  • The extent to which certain economies are affected is far more than others;
  • Also the spill-over effect can be seen in this situation.

Taking a look at how the situation was, in particular in the US in the Great Economic Depression, and what the situation is now at present we must understand that there were a number of differences. The most relevant of the differences between the two eras is leveraging in the economy and private sector debt in particular which can also be seen in Figure 1. 


Figure 1: Historical Data about the US and Federal Reserve System, and the Flow of Funds

The debt to GDP ratio in the US was considerably lower in the late 1920s, when the Great Economic Depression struck, than the same till 2007 but there was a sudden pick in 2008. During 2000 and 2007 the private sector took 70% of the total debt and this was accompanied by the huge leverage which was primarily based up on the housing bubble which was waiting to burst as shown in Figure 2. This is the reason why the impact on the real economy was so huge that pushed the economy into recession in 2007-08, but this was not the case in the Great Economic Depression or in any other recessionary phase.


Figure 2: US home price index

Also the saving rate in the US was extremely low during the current recessionary phase which maxed out at 4.5%. This meant that the US had to enter the crisis with extremely low savings showing a mirror image of their high indebtedness. This was also seen in European nations as well where the consumption was quite high and saving was not adequate.


Figure 3: Net Personal savings as % of GDP

On the Monetary Front the Fed was quite active from the onset of the Great Economic Depression but a series of mistakes in the same of omission and commission from 1928 till 1933 resulted in restrictive monetary policy. Though at times under pressure from the congress the Fed did easy the monetary policy but it was momentary as they would quickly reverse the same as well. Also during that time we can also say that the Gold Standard System was the prime reason behind the fall in the money supply, rise in Deflation and Interest rates.


Figure 4: Employment levels in the US

In the Great Economic Depression it was seen that the governments all over the world went on a hiring spree which led to job creation and let money flow into the hand of the common people, thus increasing demand. But it was not the same time and the government was far more focused on the Supply side this time around. In the USA, the Federal Reserve started this program of Quantitative Easing in November, 2008 and it is expected to run until at least mid-2015. Till now there have been 3 rounds of Quantitative Easing (QE) in the US and these are (Lim, 2012)

 QE1 (November, 2008 till June, 2010) –

Before recession the Fed Reserve (Fed) has approximately $800 billion of Treasury Notes in its balance sheet but with QE1, in November, 2008 it started to buy the Mortgage-Backed Securities (MBS) with an estimated worth of $600 billion. By June, 2010, the Federal Reserve has $2.1 trillion in Bank Debt, Treasury Bills and MBS (Lim, 2012).

 QE2 (August, 2010 till August, 2012) –

With a goal to maintain securities at $2.054 trillion and with debt maturing, in August Fed again started to buy $30 billion a month in 2 to 10 year Treasury notes. By the end of the second quarter in 2011it bought securities worth $600 billion (Lim, 2012).

QE3 (September, 2012 until at least mid-2015) –

Very recently, 13th September, 2012, Fed announced QE3 where in a vote of 11 to 1 it decided to launch QE3 with an open-ended bond purchase program for $40 billion a month (Lim, 2012).

In the Eurozone as well as in the UK Quantitative Easing was seen with a total of GBP375 billion in forms of UK Government Securities and small quantities of high-quality private sector assets (Gompertz, 2012). The ECB also bought covered bonds worth Euro 60 billion in May, 2009. Even in Japan, the Bank of Japan (BoJ) also expanded their asset purchase program which is estimated to be at $66 billion by October, 2011 (Ogasawara, 2011).

As a result of the Quantitative Easing measures taken by the Federal Reserve, the money supply (M2) increased considerably in the US with it being at $10,058 billion in August 2012 (, 2012). It shows that it has worked in the US when it comes to raising money supply which in November, 2008 was around $8,000 billion (, 2012).

In the Euro Zone, the money supply (M3) increased from approximately Euro 9,250 billion in July, 2010 to Euro 9,718 billion in August 2012 (, 2012). 


Figure 5: Eurozone Money Supply

But in the case of UK, the Money Supply (M3) increased from approximately GBP 1,970,000 million in September, 2008 to nearly GBP 2,420,000 million in March, 2011, but since then it has fallen and by August 2012 it was at GBP 2,281,845 million (, 2012). 


Figure 6: United Kingdom Money Supply

Even the IMF has quoted that the measures taken by several developed nations in the form of Quantitative Easing have contributed immensely in reducing the systemic risks following the Lehman Brothers collapse. This has also helped in bottoming out the recession and improving market confidence in the G-7 nation by the end of 2009. This has also helped in the rally in the stock market in the second half of 2010, especially due to QE2 that led to a rise in consumption and delivering a strong performance by the US in the later part of 2010. But it has been argued by several economists that Quantitative Easing has failed to stimulate the recovery in the economy of UK and caused a prolonged the recession in their economy for the period between 2009 and 2012 with it being the cause of collapse of velocity of circulation, i.e. the rate at which the money was circulating in the economy (Nevin, 2012).

I would like to suggest that the Fed should have been pre-emptive in should have reduced the interest rates aggressively than it did so that the price fall could be stopped. In case of the Eurozone the debt is prime reason of the crisis and in the US that of fall in prices. Both of them combined have resulted in a fall in the nominal as well as the real GDP this time around where the household incomes were falling but the expenses were either constant or rising. This time around the whole process has stalled because of perhaps the inactivity on the fiscal policy part rather than the monetary part which has played it role. For the governments around it is imperative that they cut down in their own expenses where the debt is high like in several Eurozone nation but in parts like the US they must push demand upwards and create purchasing power amongst the population and as they have not been able to do the same on time, the recovery process has been extremely slow and at times stalled as well.

  1. Gompertz, S. (2012, February 9). Bank of England injects another £50bn into UK economy. Retrieved October 28, 2012, from
  2. Lim, P. J. (2012, September 12). In Round 3 for the Fed, a Challenge for Investors. Retrieved October 28, 2012, from
  3. Nevin, M. (2012). The Golden Guinea. The International Financial Crisis, 2007–2014: Causes, Consequences and Cures. Southdown Books.
  4. Ogasawara, S. (2011, October 27). Bank of Japan increases stimulus and keeps rates low. Retrieved October 28, 2012, from
  5. (2012, September 30). Euro Area Money Supply M3. Retrieved October 28, 2012, from
  6. (2012, September 30). United Kingdom Money Supply M3. Retrieved October 28, 2012, from
  7. (2012, September 30). United States Money Supply M0. Retrieved October 28, 2012, from



Articles you may like