Every armchair economist has ask the question, will a Great Depression happen again? It is certainly a worthy question. I will answer it not based on economics theory, as this would have to be a very large post. I am arguing that there will be no great Depression because history never repeats itself in exactly the same way. There will be something very different, but nothing like the next Great Depression.

Many people want to make a name for themselves by predicting this (with timelines and all). It is even fun to hear about a little doom and gloom, like a big snow storm coming once you are hunkered down safe at home in your chair watching the news. But another economic collapse like the Great Depression of the 1930s will not happen. why?

Does history teach us about the future?

Many people cite the follow:

Those who cannot remember the past are condemned to repeat it. – George Santayana

Nice quote but it is not about predicting anything, it is about learning from the past.

There is no way to predict the future, and certainly not based on the past.

Can you predict your life based on the past?

Think about you own personal life. How difficult is it to imagine where you will be. Could you ever have imagined you are living in the place you are and married to the person you are. I am a Bostonian but live in Krakow, Poland now. I was worked in investment accounting, now I write software, have my own company in Eastern Europe and a dual citizen and speaking a couple of languages. How could I have ever imagined that? This is the nature of life. It is dynamic ever changing and never as you expect. Life is an exogenous variable.

Economics and the next Great Depression

This current downturn is not like the last or any other. Each business cycle has a unique set of reasons why market equilibrium was distorted and not allowed to adjust. The Depression in 1929 was a credit bubble caused by money over expansion. This was because the government is in a very dangerous business of controlling the money supply through central banking, rather than letting market forces regulate the supply and demand of this very important commodity.

You might say that this is exactly the situation today. Monetary disequilibrium spread disequilibrium to the real sector and caused the Great Recession of today. Basic this whole experiences is further support for Hayek’s theory of business cycles.

However, there will not be the next Great Depression because of my argument at the start of this post. That is history never repeats itself exactly the same. I could go on and say too many things are different to bring unemployment close to 25% and long bread lines. The world is different as are economics. But there is not need to go into this. This post is more a philosophical idea about the relationship between the past and the future, than an economic prediction.

Using economic analysis you can explain the process, make suggestions to policy makers how to prevent or improve the economy (like reduce the burden of government, do not try Keynesian New Deal type programs that did not work in the real Great Depression), but rarely predict major events like a Great Depression II. Sure there will always be people trying to make such predictions, but remember, even a broken clock is right two times a day.

OK, all this being said, I can not resist. Here is my prediction. I think the US economy will be stuck in disequilibrium and lackluster growth until the next large political, innovation or entrepreneurial wave of change. Gyrations around 8% or 9% unemployment and 1.4 % growth will be the new norm for the foreseeable future. If you are waiting for the New Deal II to improve economic efficiency, do not hold your breath.