The global recession is not yet over, but it is not, at present, acquiring the momentum of the Great Depression. The economic historian should still feel some degree of anxiety about the risk that the global economy will have another big decline, as happened in the second half of 1930. The pattern of the Great Depression was one of recovery followed by decline. The low point did not occur until the middle of 1932, approximately two and a half years after the initial Wall Street panic in late October of 1929.
It is possible that some event, such as the bankruptcy of General Motors may still precipitate a further decline. It would, indeed, be unusual for there to be no significant aftershocks following what may now be called the 2008 recession. Yet the rise in the global stock markets in the first half of 2009 has been substantial and reassuring. Investors will need to be careful, but are likely to feel that the greatest danger has probably passed. If so, they will want to invest in the opportunities that have been created by the recession itself.
Oil and gold prices have been linked for most of the period of the recession. In recent weeks, both have been in a stage of recovery. The gold price has reached $982 an ounce, close to its peak when it touched $1,000 an ounce. Oil prices fell in the recession by about 70 per cent, and have now received about 50 per cent.
The recovery in the gold price reflects a number of factors. The Asian economies have accumulated excessive quantities of dollar securities, and the Asian central banks are reluctant to continue accumulating dollars, except on a purely speculative basis. The weakening of the dollar has had a reciprocal effect in the strengthening of the gold price. There is also a fear that the Keynesian policies which have helped to create the appearance of a global recovery will, at some point, lead to a revival of inflation.
Angela Merkel has criticised the world’s central bankers; she is afraid that their expansionist monetary policies could make the crisis worse. That lady is no Keynesian, but she is the Chancellor of Germany, which is Europe’s leading economy. The European Union is the world’s largest trading bloc. She has said that what these central banks have been doing “needs to be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe.” One does not have to agree with Chancellor Merkel to take notice of what she says. She is one of the world’s most powerful politicians.
Underlying the rise in the oil price has been the basic strength of oil as a commodity. The world has probably reached the point at which oil supply has peaked – if not, we are close to that point. The growth of the huge economies of China and India is limited by the long term constraints of the oil supply, more than by any other factor.
If the recovery does continue, the oil price will regain the level of $100 a barrel, and the gold price will rise well above $1,000 an ounce. My own expectation is that these figures will be exceeded substantially, perhaps to $150 or $200 a barrel and $1,500 or $2,000 an ounce. But that will limit the possible global recovery. The world has, indeed, been living beyond its means, in terms of the oil supply. Everything else depends on that, and will have to adjust to a higher oil price.
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