KEY POINTS:
Many people have compared the economic crisis faced by Barack Obama at his inauguration this week with the one that faced Franklin Delano Roosevelt when he was inaugurated on March 4, 1933. Many are wondering if New Zealand faces the fallout from a repeat of history and a
return to depression.
There are many parallels. Both presidents inherited nations desperate for change and cloaked in a climate of fear. Both spoke in stark terms about the economic and security threats to America and the world.
Confidence in the American model of capitalism was fundamentally shaken, if not broken, when both presidents took office. Faith in the financial systems of both eras had evaporated. Markets were in turmoil. Both were planning massive government spending to rescue the economy.
But a closer look shows that Roosevelt had a much tougher job than Obama.
America was already three years into the worst depression of the century when Roosevelt was sworn in. Unemployment was 25 per cent and many people were short of food and basic medical care. Most of the banks were closed to prevent panicked depositors from trying to withdraw their money. Many were hoarding gold.
Roosevelt also faced the growing threat of Nazism. Hitler had just been voted into power and was rapidly destroying the remaining vestiges of democracy in Germany, which had the capacity to build an army to threaten the rest of Europe. Many wondered if Roosevelt would be the last US president before a socialist revolution destroyed the nation's proud democratic tradition.
Obama, however, has inherited an unemployment rate of 7.2 per cent. The US economy has been in a bad recession for a year, but is a long way from a depression. Industrial output fell 47 per cent from 1929 to 1933 and real GDP fell 30 per cent. Even the most pessimistic forecasters are expecting US real GDP to fall just 5 per cent over a two-year recession ending in 2010.
Americans are also a long way from starving. If anything, the US has too much to eat rather than too little. Medical care is excellent for many and available for most. Banks are still operating. Payrolls still work, ATM machines still dispense cash and few depositors are worried about losing their money in savings accounts because they are insured by the Government.
The new President does still have some massive challenges that New Zealanders will hope he can surmount. American consumers and businesses have gone into their shell. That is dangerous for both the US economy and the global economy. It is particularly relevant for New Zealand, which is a very open economy that depends either directly or indirectly on US consumers for its income.
Our biggest trading partner, Australia, exports the coal and metals that power the factories in China, Japan and Korea that export the cars, electronics and knick-knacks that Americans have been buying hand over fist in recent years. Our top six trading partners (Australia, US, China, Japan, Korea, Britain) depend to a large extent on the US consumer.
Obama is preparing a massive fiscal stimulus and more financial bailouts to encourage consumers and businesses to start spending and investing again. He will not have it all his own way. The first financial bailout supported by Obama appeared to disappear into a black hole filled with bankers reluctant to lend.
A Democrat-controlled Congress may actually be more troublesome than a Republican one. We all hope it can avoid the mistakes of the Democratic Congresses in the 1930s, which embarked on a wave of trade protectionism that deepened the Depression.
* Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.
