Therefore, the collapse of the world economy is not like the Great Depression. It's more like the fall of South Vietnam. Or the fall of Rome, with barbarians figuring out how to pick the locks of the gates.
The stock market crash of 1929 tumbled into the Great Depression when central banks hoarded cash, and the Federal Reserve Board watched as the money supply evaporated like yesterday's rain puddles. Meanwhile, the protectionist Ross Perots of 1930 blamed scurrilous foreigners and then jacked up barriers to trade, led by the US Smoot-Hawley tariff. Politicians compounded the error by strangling American workers with higher tax rates, raising them more than four-fold for lower income earners and three-fold for high-income earners.
Today's government economic policy is not nearly so reckless and stupid. Central banks have slashed interest rates and, so far, only small protectionist hand grenades have been lobbed. So where does the Vietnam analogy come in? Early in my career, I wrote an academic paper called ‘Revolution, Reputation Effects and Time Horizons', arguing that when an invader conquers a country, the economy will collapse, tracking a catastrophic mathematical function. What drives the collapse? Not guns. Not nooses. The catastrophe comes when time horizons shrink. Why? Because merchants must believe that their counter-parties will be around next year, or next month. The Latin root for ‘credit' means trust. Would you lend to fly-by-night travelling salesmen? The current crisis has turned nearly every company into a fly-by-nighter, desperately grabbing on to the last chopper out of Saigon.
Today, only a starry-eyed gambler will lend to the Sands Casino company for more than an hour. On the Las Vegas strip you could always find talent who rented by the hour. Now its CFOs must borrow by the hour.
Even if the Fed Funds and UK base rates scrape along near 0%, commercial credit suffers. While I am concerned about people paying back current debts, I am just as worried about a refusal to loan to businesses for new endeavours. A world-class company like AT&T should not have to pay 9% to borrow when government debt earns just 3%.
I heard US House Ways & Means Chairman Charles Rangel joke that at his age (79), he doesn't buy green bananas. Rangel is fast becoming a symbol of the entire world economy, and not just because he doesn't understand his tax returns. - By Todd Buchholz. Extracted from ‘QFinance: The Ultimate Resource' (Bloomsbury, £150)
