1930s redux?

Monday, April 7

Overshadowed in historical recollection by the Great Depression and Second World War, the late 1930s saw a dramatic US recession that had the makings of another global depression. Yet the sharp US downturn, which itself was quickly reversed, did not badly affect the world economy. Parallels with today are striking:

• 'Decoupling'. The 1937 episode provides the only antecedent for the 'decoupling' hypothesis of today's emerging markets. The emerging markets of that era were net international creditors -- as they are today, and have not been at any time in between. Their huge stores of foreign reserves allowed them to sustain domestic demand even as export receipts temporarily tailed off.
• Currency pegs. That era's emerging markets were known as the sterling bloc, a group of net exporters whose currencies were faithfully pegged to sterling. In fact, today's East Asian exchange rate arrangements are far more similar to the sterling bloc's than Bretton Woods, to which they are frequently likened. In both cases, pegs were de-facto, consensual and unilateral, rather than internationally obliged, as under Bretton Woods.