Five YEARS of recession?

Post Reply New Topic

For further perspective on current events, we can turn to a classic 1933 paper on debt deflations by economist Irving Fisher. His model boils down to this: Some shock hits the economy, resulting in an increase in pessimism and asset sales. Asset sales drive down prices, leading to more pessimism and distress selling. That results in a shrinkage in the money supply and a decline in velocity (the speed at which money turns over, a function of how quickly people spend). Prices for goods and services fall, hitting profits and raising the real value of debts. Businesses go bust. Managers of surviving firms cut production and employment.

This deepens pessimism, leading those with cash to hoard it. Repeat in a vicious cycle. The point of Bernanke's printing press is to arrest and reverse this process.

Fisher, writing when the New Deal was only months old, noted that FDR's early policies of imposing a bank holiday (after 10,000 had failed) and going off the gold standard quickly reversed the deflation and marked the beginning of an economic recovery. After contracting by 27% between 1929 and 1933, the economy grew 43% from 1933 to 1937.

Sure, printing money sounds awful, but not as bad as watching the unemployment rate hit 25%, as it did in 1933.

http://www.latimes.com/news/opinion/la- ... 4221.story

Let's hope that this only lasts 5 years. The worst might not be behind us. If, as it now appears likely, that most of the post-2002 gains were fueled by inflation and did not really exist, then we have the world's 2nd biggest economic hangover in history. It will be very interesting to see who picks up the pieces of this mess.

I think we have a long way to go before things really change for the better!

The Depression was caused by a host of factors

1) Smoot-Hawley tarrif bill; slapped high tarrifs on foreign goods. This cut the legs off international trade.

2) World deflation (deliberate) - as each country found it couldn't trade with the world, they engaged in competitive money supply adjustments to make their currency 'cheaper' than the others. Sort of a monetary 'how low can you go', but for money instead of wages.

3) Inaction on the part of the 'free marketers'. There were practically none of the institutions FDR put in place; no insurance of bank deposits for the customers, the SEC in its infancy, etc. Hoover basically thought the whole thing would fix itself, which was obviously wrong. For his part, Roosevelt didn't do or say anything prior to the actual inauguration, which didn't help the markets as much.

4) Deflationary psychology- think about it; if you know that the price for something you want will be less and less the longer you wait, why buy now? No one buys, no one sells, no money coming in, people get laid off. And with fewer people employed, fewer people can afford to buy anything...

The Depression had 90% losses on the Dow (we're at about 50%), and the unemployment rate was north of 25% (we're at...what...8%?)

it's bad, but nowhere near as bad as it could be.