The Great Depression. Another Great Depression?

[joel]

Here are some predictions of the Austrian business cycle theory, from Rothbard's book (the following is my summary, not Rothbard's actual words).

The depression is the time of recovery from the preceding period of malinvestment and bidding up of capital goods prices (such as the stock market).
Here are some characteristics of this recovery period that the Austrian theory predicts:

• Inefficient firms will be forced to liquidate, have their debts scaled down, or be turned over to their creditors.
• Prices of producer/capital goods must fall, particularly higher orders, including capital goods, lands, stock market, and wage rates
• They fall relative to prices in consumer good industries (and retail).
• These price values will fall more than the earnings from the assets.
• Rise of interest rates
• Temporary unemployment (as labor must shift to consumer good industries) (This can be reduced by speeding up the market adjustment, and allowing wages to fall.)

Other possible features:

• Contraction of bank credit (and therefore the apparent money supply) due to bank runs and fear of bank runs
• Increase in the demand for money (a 'scramble for liquidity')
• Which can cause generally falling prices
• unsold stocks of goods, excess plant capacity

Rothbard's book shows that these correspond with the data of the Great Depression.
We are seeing much of the same these days. For example, we've seen great drops in the stock market, dropping much greater than are the earnings of the companies. Other business cycle theories suggest that depressions are driven by a lack of consumer spending power. This does not fit the actual data, because this would lead us to expect retail and consumer goods industries to be hit first and hardest. But in actual depressions/recessions we always see producer-goods industries hit first and hardest.

The good news is that this recovery process can happen fairly quickly and without too much widespread pain. However, the recovery can be hampered. Rothbard gives some examples of ways the government could hamper the recovery process, making the depression deeper and more prolonged, if it really wanted to do so:

• Prevent or delay liquidation (of those businesses revealed to be unsound).
• Inflate the money supply further.
• Keep wage rates up.
• Keep prices up.
• Keep interest rates down.
• Stimulate consumption and discourage saving (e.g., increase government spending).
• Subsidize unemployment.

The Hoover administration did all of these things.
These days we are seeing things like huge bailouts and government propping up of unsound firms, the Fed wanting to inflate the money supply more and more rapidly, and continue to lower the federal funds rate. The government has been encouraging people to consume more and save less for some time now (e.g., those economic stimulus checks). Pelosi wants more government spending and employment benefits.

[Augustine2004]

Bob Higgs reviews the events of 1932 and draws some conclusions about what 2009 might be like. Quotes Hegel and Mark Twain.

http://www.lewrockwell.com/blog/lewr...es/023845.html

[joel]

Bob Higgs reviews the events of 1932 and draws some conclusions about what 2009 might be like. Quotes Hegel and Mark Twain.

http://www.lewrockwell.com/blog/lewr...es/023845.html

He says, "At the Fed, the central bankers are baffled, sensing their powerlessness to prevent further economic contraction." This is another reason the Austrian theory seems better than the Friedman theory. The Austrian theory explains what is happening, while others are baffled. A couple weeks ago even Greenspan, longtime follower of Friedman, "conceded the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a 'state of shocked disbelief.'' "Greenspan said. 'I still do not fully understand why it happened.'"
http://ap.google.com/article/ALeqM5i...k_nPQD940FK100

"Greenspan acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that 'a flaw in the model ... that defines how the world works.'"

Austrians had shown, even before the Great Depression, that this is true for fractional-reserve banks operating under a central banking system, thus they are not surprised or baffled. And they see that the blame lies not with free markets but with government distorting the markets.

[Augustine2004]

A sign of depression - shipping is down 30% or so.
http://www.bloomberg.com/apps/news?p...d=aoE181cv.tds

[Augustine2004]

Thomas DiLorenzo says all the ingredients for another Great Depression are being assembled in Washington now. Lessons from Jim Powell’s book, FDR’s Folly are totally ignored.
http://www.lewrockwell.com/dilorenzo/dilorenzo157.html

[joel]

I took a look at what the Fed is currently doing with the money supply.

Once a week, the fed is required to publish the "Consolidated Statement of Condition of All Federal Reserve Banks". This is their balance sheet.
http://www.federalreserve.gov/releases/h41/

Total liabilities (i.e., the monetary base) on Sept 11 was $884 billion, now it is close to $2.2 trillion. The Fed has multiplied the monetary base about 2 and a half times in the past 2 months! It was increased by 6.8% in the last week alone! AFAIK, this is an unprecedented inflation of the monetary base.

The increase came primarily in the form of deposits held at the Fed by member banks. These increased from $38 billion to $1.2 trillion over the past 2 months. That is, banks have more than 30 times as many dollars deposited at the Fed than 2 months ago. And 80 times the amount of 6 months ago!

This has not come from the Fed buying U.S. Treasuries. Its holdings of Treasury securities has decreased. Rather, it is primarily due to purchase of "commercial paper" and "other assets". This is part of the bailout program. It's being done not by direct taxation or borrowing, but by creating new dollars out of thin air.

I think this is also why, in spite of there being a "credit crisis", we have seen interest rates on our savings accounts drop. The Fed is creating money and it is ending up in the hands of banks. Even though banks have been in a "scramble for liquidity," they don't need our savings, because they get money from the Fed. This just at a time where what the economy needs is more real saving.

[joel]

The 'Austrian' economist Peter Schiff judged correctly the current economic situation back in 2006, when he was being laughed out of the room when he said that house and stock prices were going to crash, and said we were headed toward a crisis in the financial sector.
http://www.youtube.com/watch?v=2I0QN-FYkpw
(And he had been saying the same thing long before 2006.)

[Augustine2004]

Maybe not! http://www.lewrockwell.com/rockwell/...ws-is-bad.html Even Bush made a good speech!

[Augustine2004]

I think the author of this op-ed is correct, libertarians should not let down their guards just because Bush seemed libertarian.
http://www.lewrockwell.com/gregory/gregory172.html

[Augustine2004]

Lew Rockwell says this is good news: The New Frugality

http://www.lewrockwell.com/blog/lewr...es/024088.html

[Augustine2004]

Wow, is this to be our fate? http://www.drudgereport.com/flashrur.htm

[uberliber]

Wow, is this to be our fate? http://www.drudgereport.com/flashrur.htm

I pray that it happens.

[Augustine2004]

I wonder, does Obama have any inkling he might become the last POTUS?

[Augustine2004]

Rioting in Iceland! That shows the USA have to consider how our creditors feel about our adding huge debt amounts to an already colossal load of ??? in just two months. Iceland depositors were wiped out even though the government promised that their money was insured. The Iceland Kroner fell 2/3 against the dollar and the euro, which is quite a feat, considering the deadbeat nature of the latter 2 currencies. (This is a re-write of a S&A Digest item for this day, from Stansberry & Associates).

[Sheepdog]

we'll never have another Calvin Coolidge again. Even Reagan was a mere disciple of small government, supply side conservatism.