IS THE GREAT DEPRESSION II ON ITS WAY?

Canary Warf

According to the Daily Telegraph, “leading City experts” (Another lot of masters of the universe?) are raising the real prospect of "Great Depression II" amid worries that the European economic crisis could trigger financial chaos.

Markets across the world have fallen to new low levels as fears surrounding the fate of the Euro transmuted into worries about the wider global economic system.

Andrew Roberts, head of European rates strategy at RBS, said "Great Depression II" could now be approaching, adding: "It now has potential to speed toward its conclusion; a European $1trn package which does little and political panic tells you we are about to reach the end of the road. The world should be discussing deflation, not inflation." Of course there are people who might question what anyone at RBS knows about anything. I’d certainly be wary about their opinion on the weather never mind an economic crisis, given their record.

The FTSE 100 nearly reached the 5,000 point yesterday, eventually finishing the day 5073, while the French CAC 40 index was 2.3% lower and Germany's Dax dropped 2%. The USA’s S&P 500 and the Dow Jones both suffered their sharpest one-day falls in more than a year. The S&P fell 3.9% to 1072, while the Dow closed 3.6% lower at 10,068.

These falls precipitated increases in the price of state bonds in Germany, the US and across the world with investors looking for a safe place to put their money. German 10-year bund yields fell to a record low, while in England gilt yields dropped to their lowest levels for nearly 6 months.

Although this rush for safety can be attributed originally to the Euro's difficulties this week and German Chancellor Angela Merkel’s efforts to ban short-selling on its banks, worries that the deeper economic problems may be ahead have come to light because of fresh information from the European Commission showing consumer confidence falling suggesting that the Euro zone debt crisis is now affecting consumer confidence.

Unemployment continues to rise both in Europe and in the US. This is the norm after a recession, and it had surely been anticipated. There is always a lag between the downturn ending and the stabilisation of unemployment, given that employers have so little confidence in the continued improvement in the economic situation. The deterioration in the United States’ employment picture, however, coming after last week’s drop in inflation, has increased worries that we are facing the second dip in a possible global double-dip recession.

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