Bear market comparisons to 1930s hold true

Just consider these two graphs for a moment. The news agencies this month are talking about the financial crisis of a year ago as though it is ancient history.

But trade and business revenues have fallen off a cliff this year in the worst economic contraction since the 1930s. Exceptional government intervention has slowed this fall but it has not been reversed. Crucially the loss in income remains while debt levels have soared.

It does not need a macroeconomic genius to see that a situation where debt is up and income is down is not a recipe for a sustained recovery, or indeed any recovery at all. This is therefore a false recovery and once financial markets realize this the plunge will resume, just as in the 1930s:

At the same time it should be noted that unemployment is also actually tracking the 1930s to an astonishing degree. Again how can we expect a reversal in job losses to occur when business activity is declining, and arguably many companies have not yet faced up to what is effectively a permanent downsizing of their markets.

This is a cycle of debt deflation with debt now being repaid or serviced from shrinking real incomes. More financial stimulus packages and even bigger spending programs will follow from the Fed and eventually that will result in inflation. But how long will this take and how much damage will be done to employment in the meantime? That could take us back to the 1930s: