Have past crises taught us anything?

A global race to the bottom

Ferguson says he recently appeared on a CNN show hosted by anti-immigration demagogue Lou Dobbs and found the scorching critique of free trade, bankers and immigration to be eerily similar to screeds that ultimately led Congress to pass the Smoot-Hawley Tariff Act in 1930. That law backfired by smashing world trade and catalyzing a decade-long depression.

Think history can't repeat?

• President-elect Barack Obama pledged during his campaign to withdraw from the North American Free Trade Agreement until he has a chance to overhaul it.

• Leaders of the top 20 world economies met in Washington, D.C., last weekend and emerged with no firm plan to coordinate on interest-rate cuts or currency balances.

• French President Nicolas Sarkozy has proposed a socialist path for his country that irritates his European Union partners.

• Russia has sworn to prevent its banks from making good on obligations to the United States and the EU.

• And Ecuador's president has said he would ignore "illegitimate" Wall Street claims for bond repayments.

Ferguson says that if history is any guide, the next steps taken by countries in an attempt to revive domestic economies will be to weaken their currencies. This makes exports cheaper, boosting sales, but it cannot be done by every country at the same time, or chaos ensues -- and sometimes land grabbing.

"We will have a race to the bottom as every country tries to avoid depression," Ferguson says.

Policymakers throughout history have found few good choices once the unwinding of debt, known as deleveraging, replaces debt creation as the central theme of global trade. Debt buildup is a raucous party that makes borrowers happy and rich on paper; debt unwinding is a wake that leaves ex-borrowers bummed and truly poorer. Because the Fed has probably not figured out how to outlaw the credit cycle, we might think of the last 25 years as rock 'n' roll and the next decade as Mahler.

Japan has been able to withstand the past 18 years of extremely slow growth or contraction without social unrest because it was already a homogenous, orderly welfare state in which people were avid savers and accustomed to living in small apartments. Ferguson expects the transition to a credit famine in the United States to be a lot harder.

Although there won't be Hoovervilles, a dust bowl or ex-executives selling pencils, he says, there could well be a lot of angry nationalism and disorderliness as Americans shake their fists at Wall Street and Washington, battle each other, bristle at the world and learn unhappily to save instead of borrow.

Ferguson concludes that "unless we're careful, it'll be the late 1930s re-enacted," by which he means a path to world war. Yet he's optimistic that policymakers will avoid that mess by learning from history that they must cooperate instead of isolate.

"We have to stare at this possibility and say, 'Oh, my God, we cannot go there,'" he says. Let's hope the market gods are listening.

Fine print

To learn more about Ferguson's views, visit his Web site. He's a prolific and good writer; check out his journalism. Learn more about Japan's post-1990 depression here and here and here.

At the time of publication, Jon Markman did not own or control shares of any company mentioned in this column.

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