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Old 11-29-2007, 09:15 AM
Exsubmariner Exsubmariner is offline
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Default The differences between 1929 and Today

All the chicken-little-OMFG-The-Sky-Is-Falling-We're-Already-In-The-Next-Great-Depression talk has be bothered to the point that I did a little review about the Great Depression.

Namely, I had an eye toward debate about the causes. There are some important differences that I think warrent discussion.

First and foremost - Many on this board believe in the assertion that the Great Depression was caused by a contraction of the money supply. Regardless of the validity of this assertion, one must concede that there is no such contraction occuring today.

The Fed's Policy and Impact - In the early 1930's, the Fed as an entity did not have the experience nor the influence over the capital markets that it does today. It's best practices were not as refined. In short, successful organizations learn over time.

The Information Age - The world was not as connected then as it is today. It was harder to verify information and investors and money managers were not as savvy as today at detecting [censored] rumors.

Dollar as the world reserve currency - In the 1930's the Dollar WAS NOT the world reserve currency. Trillions of Dollars were not held overseas waiting for bargain shopping in America as soon as the stock market went down. Today, this serves as a feedback mechanism that will bring capital back into the capital markets.

Gold backed currencies - In the early 1930's, many world currencies were backed by gold, INCLUDING THE US DOLLAR. This put an artificial choke hold on the availability of cash that does not exist today. Today, the major players in the currency market are fiat or pegged in some way to the dollar. Regardless of the arguements in favor of gold backing, the world currency market is not restricted by gold today.

Trade - The world was not as interdependant in 1930 as it is today. Borders were far more important to business than they are today. Protectionism was a far more ready and feasible fall-back position in face of an economic crisis then. Today, we have no choice. The economy depends on trade. We must trade. Period. Not the case in 1930.

In closing - The world is a different place than in 1930. I submit that the fears concerning the collapse of the international monetary system are based on ideas concerning the causes of the Great Depression that have little or no significance to the modern reality. They are therefore irrational.

Discuss.
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  #2  
Old 11-29-2007, 09:35 AM
ConstantineX ConstantineX is offline
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Default Re: The differences between 1929 and Today

I was one of the more skeptical posters on the recent "Depression" rhetoric and the general paranoia of many Misean theories. I have generally believed that we use sound monetary policy.

But different readings lately have convinced me that the US is going to fall into a recession, possibly a very deep one in 2008. I am also not confident in Americans' standard of living because the Fed seems very likely to capitulate AGAIN on interest rates as futures are already pricing in a rate cut which I have been convinced will lead to stagflation. There seems to be a formula for sound central monetary policy but it seems that political considerations will trump holding firm yet again. There was alot, perhaps unprecedented, mal-investment in housing.

I think I"ll expound more later in the evening.
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Old 11-29-2007, 09:54 AM
BluffTHIS! BluffTHIS! is offline
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Default Re: The differences between 1929 and Today

The AC'ers (and others) do have a point about fiat currency and its effects. Even though most of us do favor fractional reserve banking, it still matters what number is picked as the fraction. Unrestrained lending to people/companies with bad prospects has consequences, and ones that can ripple through the economy. When lenders and debtors can expect *absolutely no bailouts* by the gov't in *any form*, then the market can can operate better, if not perfectly. It seems to me that lenders, especially credit card companies and mortgage lenders, aren't incentivized to operate with more realistic standards because history teaches they and their debtors can cry to mommy gov't and get relieved of suffering much of the consequences of their own actions.
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Old 11-29-2007, 10:44 AM
adios adios is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]
The AC'ers (and others) do have a point about fiat currency and its effects. Even though most of us do favor fractional reserve banking, it still matters what number is picked as the fraction. Unrestrained lending to people/companies with bad prospects has consequences, and ones that can ripple through the economy. When lenders and debtors can expect *absolutely no bailouts* by the gov't in *any form*, then the market can can operate better, if not perfectly. It seems to me that lenders, especially credit card companies and mortgage lenders, aren't incentivized to operate with more realisti c standards because history teaches they and their debtors can cry to mommy gov't and get relieved of suffering much of the consequences of their own actions.

[/ QUOTE ]

A lot of mortgage lenders have gone belly up. CFC is on the ropes but they seem to be trying to attract more deposit money in their banking arm. Citi and others have had a lot of losses reported. Not sure how the Fed is exactly bailing these folks out. You're making the moral hazard argument and the Fed has provided more short term liquidity because some normally credit worthy borrowers are having trouble finding funds to borrow short term. That's basically a credit crunch. I agree that ceeding government the power over the currency is ceeding government a lot of power. Not sure though that there's a "moral hazard" with the Fed cutting it's rates at this time. I do think the economic impact of this will be to reduce recession chances.


Kind of had a funny thought here. The bond rating agencies were apparently flat out wrong about rating the bonds derived from many CMOs. The bond rating agencies are unregulated as far as I know. Perhaps that should change.
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  #5  
Old 11-29-2007, 12:00 PM
Exsubmariner Exsubmariner is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]
the Fed has provided more short term liquidity because some normally credit worthy borrowers are having trouble finding funds to borrow short term. That's basically a credit crunch.

[/ QUOTE ]

Exactly. The Fed is helping with liquidity. Putting liquidity into a market does not equal a bailout.

[ QUOTE ]
Kind of had a funny thought here. The bond rating agencies were apparently flat out wrong about rating the bonds derived from many CMOs. The bond rating agencies are unregulated as far as I know. Perhaps that should change.

[/ QUOTE ]

Yes. Conceptually, I have always had a problem with the financial ratings system. Basically, the ratings system exists to encourage people to buy financial instruments. Naturally, they are only going to say things that will make those instruments look attractive. It's kind of an incentive to fudge things. Shades of Enron.
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  #6  
Old 11-29-2007, 12:12 PM
adios adios is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]
Yes. Conceptually, I have always had a problem with the financial ratings system. Basically, the ratings system exists to encourage people to buy financial instruments. Naturally, they are only going to say things that will make those instruments look attractive. It's kind of an incentive to fudge things. Shades of Enron.

[/ QUOTE ]
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  #7  
Old 11-29-2007, 12:05 PM
Exsubmariner Exsubmariner is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]
There was alot, perhaps unprecedented, mal-investment in housing.



[/ QUOTE ]

Yes. The effect the rest of the economy (which is about to awash with investment as dollars come back into the economy) is going to have on the relative magnitude of that impact is yet to be seen.

I kind of suspect that after everything settles out, people's wealth is going to be shifting back to the stock market as opposed to real estate. Back in the 90's everyone was making a killing in stocks. Then we shifted to our houses. I think everything is going to swing back to stocks.
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  #8  
Old 11-29-2007, 12:21 PM
tolbiny tolbiny is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]

First and foremost - Many on this board believe in the assertion that the Great Depression was caused by a contraction of the money supply. Regardless of the validity of this assertion, one must concede that there is no such contraction occuring today.


[/ QUOTE ]

If you are (and I think you are) talking about Austrian theory it is important to note a few points. The first is the distinction between the market crash of 1929 and the initial recession that followed. The depression that followed was caused by government intervention in the markets preventing corrections from taking place. Secondly the market crash and ensuing recession were not "caused by" a contraction in the money supply, they were caused by the expansion of the money supply. The contraction was a symptom of the weakness in the economy that existed in reality. When people started to run on the banks it was because they realized that there wasn't enough money going around like they thought, their realization didn't change the fact of the reality, it just acknowledged it. Likewise today we have an expansion of the money supply followed by the symptoms of a weakened economy, instead of a contraction we are experiencing the subprime issues, inflation and a weakening dollar because some of the other underlying issues are different, but they point to difficult times ahead.



[ QUOTE ]

The Fed's Policy and Impact - In the early 1930's, the Fed as an entity did not have the experience nor the influence over the capital markets that it does today. It's best practices were not as refined. In short, successful organizations learn over time.

[/ QUOTE ]

This discussion has gone on for a long time, but short and sweet what makes you think the fed is a successful organization? Since its founding there has been the great depression, the stagflation of the 70s, the market crash of 87, the tech bubble burst and now the issues that are causing the concern in the here and now. The second questionable assumption is that the fed has the tools to actually fix these problems.

[ QUOTE ]

Dollar as the world reserve currency - In the 1930's the Dollar WAS NOT the world reserve currency. Trillions of Dollars were not held overseas waiting for bargain shopping in America as soon as the stock market went down. Today, this serves as a feedback mechanism that will bring capital back into the capital markets.

[/ QUOTE ]

This won't provide any protection for the American consumer, this will be inflation in prices for them. This will also weaken the dollar further, people who used to save masses of dollars spending them will drive the value into the floor.

[ QUOTE ]

Gold backed currencies - In the early 1930's, many world currencies were backed by gold, INCLUDING THE US DOLLAR. This put an artificial choke hold on the availability of cash that does not exist today. Today, the major players in the currency market are fiat or pegged in some way to the dollar. Regardless of the arguements in favor of gold backing, the world currency market is not restricted by gold today.

[/ QUOTE ]

Its an easy trap to fall into, but overall markets are not driven by currencies, they are driven by production of goods and services.


Honestly the one main difference between your position and the Austrian one is the view of what causes what. For an Austrian the majority of the problems in major crashes like this can be traced back to expansionary monetary policies while you believe that those expansionary monetary policies are the solution to these problems.
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  #9  
Old 11-29-2007, 01:56 PM
Exsubmariner Exsubmariner is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]
contraction was a symptom of the weakness in the economy that existed in reality

[/ QUOTE ]

Correct me if I'm wrong, but I thought the position of the Austrians was that the contraction was a result of government intervention. I'll come back to this.

[ QUOTE ]
symptoms of a weakened economy,

[/ QUOTE ]

Overall numbers on the economy are actually quite good, in spite of the problems you mention. link

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but they point to difficult times ahead.

[/ QUOTE ]

Conjecture.

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short and sweet what makes you think the fed is a successful organization?

[/ QUOTE ]

His name is Alan Greenspan.

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This won't provide any protection for the American consumer, this will be inflation in prices for them. This will also weaken the dollar further, people who used to save masses of dollars spending them will drive the value into the floor.


[/ QUOTE ]

The protection for the American consumer lies in continued employment, the availability of goods and continued economic activity in general. Wages will adjust.

Also, the holders or dollars do not have an incentive to deplete their own wealth. Does this statement make sense? "OMFG - The dollar is falling and we are having inflation....I know lets dump dollars and make our problems worse." No - The incentive is to create economic activity; i.e. INVEST dollars, not dump them.

[ QUOTE ]
Its an easy trap to fall into, but overall markets are not driven by currencies, they are driven by production of goods and services.


Honestly the one main difference between your position and the Austrian one is the view of what causes what. For an Austrian the majority of the problems in major crashes like this can be traced back to expansionary monetary policies while you believe that those expansionary monetary policies are the solution to these problems.

[/ QUOTE ]

We have a winner. You and I find ourselves in total agreement here. Economics is activity. Without the activity, the economy goes nowhere.

I think that intervention in the market by an organization like the fed is a means of encouraging and sustaining that activity. The non-interventionalists think that intervention undermines that activity. I submit that the interests of government and capital intersect in having a robust economy. I also assert a policy resulting in something that undermines that interest is highly unlikely, as self destruction is not the nature of government or business.

Government and business in the US complement each other, not work against each other. This is partly due to the aftermath of the depression and the effect of the Fed.
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  #10  
Old 11-29-2007, 02:47 PM
tolbiny tolbiny is offline
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Default Re: The differences between 1929 and Today

[ QUOTE ]

Correct me if I'm wrong, but I thought the position of the Austrians was that the contraction was a result of government intervention. I'll come back to this.

[/ QUOTE ]

The issue at hand here is what caused the depression and how are those factors working today. It was government intervention (from the Austrian perspective) trying to prevent the market correction that was the problem, not the specific mechanism they chose. If your driving 100 miles an hour and hit a patch of ice you screwed regardless of whether you hit the brakes or not, turn into the skid or not, the problem was driving far to fast.

[ QUOTE ]

Overall numbers on the economy are actually quite good, in spite of the problems you mention. link


[/ QUOTE ]

Again there is a fundamental disagreement on what value these numbers hold. If you use the method of CPI calculation from 1980 to figure inflation then those numbers look far worse. From the Austrian perspective, the actions that produce short term "gains" like this in the third quarter will lead to long term losses. The fed rate cuts which appear to have boosted the economy have only done so by encouraging, enabling, or causing (depending on your view) higher inflation over the next X number of years.

[ QUOTE ]


His name is Alan Greenspan.

[/ QUOTE ]

The funny thing about Alan Greenspan is the way his opinion on matters changes depending on his job title. Prior to his position at the fed he was in favor of the gold standard, with the fed he held rates at historic lows for long stretches, recently he's been talking about the likelihood of a recession, diversifying out of the dollar and risks of inflation. AG's position on the American economy going forward cannot be described as bullish for sure.

[ QUOTE ]
Also, the holders or dollars do not have an incentive to deplete their own wealth. Does this statement make sense? "OMFG - The dollar is falling and we are having inflation....I know lets dump dollars and make our problems worse." No - The incentive is to create economic activity; i.e. INVEST dollars, not dump them.

[/ QUOTE ]

The Chinese, Saudis and other currency holders are not able to "create economic activity" simply with dollars, they can only look for good investment opportunities they cannot create them. If the fundamental problems exist in the economy pumping dollars into it won't help. China can't stop Bernake from printing more money by investing in the US, but they can limit their exposure to the fall by moving away from dollars. As long as you have more dollar sellers than dollar buyers you have a depreciating currency, for a country that imports far more than they export this bodes extremely badly for the US economy.



[ QUOTE ]

I think that intervention in the market by an organization like the fed is a means of encouraging and sustaining that activity. The non-interventionalists think that intervention undermines that activity. I submit that the interests of government and capital intersect in having a robust economy. I also assert a policy resulting in something that undermines that interest is highly unlikely, as self destruction is not the nature of government or business.

[/ QUOTE ]

Businesses fail all the time, its not in the owners' interests to fail, but it happens. The market stays healthy through competition, government has no competition and government limits competition in the marketplace. Having a self interest is not enough, there needs to be a mechanism that correctly identifies good decisions and rewards them, and punishes bad decisions.
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