Since We're Thinking About the 1930s . . . .

I thought it might be interesting to check whether my return on capital indicator measure managed to hack it as a cyclical indicator during the Depression.  I suspect the business cycle is not about to enter a recession provided returns to capital are rising.  To proxy directional changes in return on capital, as previously explained (here), I look at GDP as a flow stemming from a stock of fixed capital.  A falling ROC indicator might, just might, be a necessary condition for recession.  More likely, it’s just quite tough to fall into recession if ROCs are rising. (Please note, I’m certainly not claiming the converse–economies clearly can keep growing for years whilst enduring a falling ROC directional indicator. Look at China, for example.)

So here’s how it panned out for Britain during the 1920s and 1930s:

• There was a very short but sharp recession in 1926, which was preceded by a sustained fall in the ROC directional indicator.
• And there was the lengthy recession of 1930 to 1932, which was preceded by a sustained fall in the ROC directional indicator.
• After the ROC directional indicator hit bottom in 1931, Britain experienced no further recessions before the Second World War.  A modestly rising ROC directional indicator appeared to inoculate Britain against the worst of the Depression.

Nothing’s  proved, of course. But if we’re worried that we’re tipping into the 1930s again (with ‘preserving the Euro’ standing in as a ‘returning to the Gold Standard’ doomsday machine), we might perhaps take a little comfort from the fact that the US directional indicator is rising, and will most likely continue to rise.