The Great Depression. Another Great Depression?

**joel** · January 26th 2009, 11:51 PM

Originally posted by Augustine2004

A reason the money supply contracted in the Great Depression is that every time a bank fails, it ceases to be part of the fractional reserve system. It diminishes by that much. 6,000 banks failed in the depression.

Another thing was that people wanted to hold more cash. This took cash out of bank reserves, contracting the money supply (in the broad sense).

**Augustine2004** · January 29th 2009, 07:47 PM

A retired Professor of Finance makes and justifies a forecast of the monetary future. Lots of details on the current state of our monetary system.

http://www.lewrockwell.com/rozeff/rozeff264.html

**docjam** · February 16th 2009, 12:45 PM

Originally posted by 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.

austrian business cycle theory? who cares?

**Denonymous** · February 17th 2009, 03:49 AM

OK, I'm back for a few short responses!

Originally posted by joel

Oh, I thought you were making an argument as to why 'my scenario' would not work. So I was explaining how it would. Otherwise, you seem to be arguing why the current government intervention makes things worse. In which case I agree with you.

All joking aside, I have written to my congressmen. I have participated in demonstrations, etc. If you would like I can send you the response I got from Dianne Feinstein, who 'recognizes the importance of' centrally managing the economy.

Good for you! I wish more people would actually voice their concerns to their congressmen. Kudos.

And you are right that it most likely won't happen. We abolished two other U.S. central banks in the past (the Federal Reserve is our 3rd central bank), but the Fed has been around long enough that people are used to it and most people don't know what it does. And fractional reserve banking is so ingrained in society that it would be difficult to convince enough people, besides the fact that people are short-sighted and want to protect their special interests (e.g., because of holding shares in banks).

So, yes, you are right that it probably won't happen. Most likely the government will do (as it has always done for the past 100 years) everything the exact opposite of what is needed to help the economy. It will prevent and delay liquidation of firms and business projects that are a drain upon the economy. It will inflate the money supply. It will try to control prices (including wages). It will try to encourage consumption and indebtedness and discourage saving. It will increase government spending, increasing its burden upon the economy. It will subsidize unemployment. It will let banks off the hook, enabling them to suspend fulfillment of their obligations while still demanding their debtors to fulfill obligations. It will hold interest rates out of equilibrium.

This is the situation at hand. The government will almost certainly make us worse off than we would otherwise be. Wouldn't it be wrong to refrain from at least trying to make things right, as opposed to sitting by? If enough people become aware, then we can make these changes. It is only because people lack the understand and the will that we are stuck.

I absolutely agree.

And you say you were a supporter of free markets until just recently? Did you understand how free markets work before and you have recently found compelling arguments for these opposing claims you make? Because I have reason to believe the opposite of pretty much everything you said in this paragraph. Though I can't give a decent response to all your points in this post alone. I'll just give a synopsis.

If I said I no longer support free markets, that was not my intention. I just no longer support an [I]absolutely free market in our current circumstances.[I]

I have reason to believe government intervention caused the problems we have. (And will continue to exacerbate them.)
As for 'rampant greed', you'll have to define that. And explain why self interest is necessarily a bad thing. Plus, this is insufficient as an economic argument. You'd have to explain why markets ever work and specifically how 'greed' would (or did) cause them to fail in particular circumstances.

I see greed as something entirely different than logical (and preferably ethical) self-interest. In my opinion, greed would entail pursuing wealth and self-gain with little or no concern for the well-being of others, and a willingness to bend (or break) the rules or the law to obtain those goals, the only deterrent being the risk of punishment. Self-interest would be the desire and actions necessary to obtain wealth and self-gain, but carried out within the framework of the law and ethical business practices.

It sounds like you have a Marxist view of markets in at least some respects. For example, it sounds like you view employment as some kind of slavery and exploitation, and have a dim view of the private ownership of capital goods. And you may be conflating economic power with political power.

I don't understand where I came across as a Marxist, and I certainly don't see employment as "slavery". I also think private ownership of goods is a good thing! Lastly, economic power IS political power. It's always been that way and probably always will.

Besides, your "no market is free" argument seems to be a matter of semantics. You need to respond to what I actually mean by "free market", and not merely to the word "free". If what I mean by free market does not seem to you to be 'free', then fine, ignore the word, and focus on what we mean. (We might use a different term, such as "unhampered market" instead.)

And I believe your understanding of consolidation/monopoly/cartels to be misguided. History has been the opposite process. Monopolies and cartels are very difficult and usually impossible to obtain or maintain in an unhampered market. The early 1900's for example are usually thought to be a time of growing monopolies and cartels and the government saved the day with anti-trust and regulation of big business. The opposite is more nearly true. Industry leaders found they could not maintain cartelization on the unhampered market and lobbied politicians to pass regulations that protected their cartels by force and hurt their competition. Most monopolies and cartels are created by the government by force. Government intervention has had the general effect of increasing rather than reducing consolidation of economic power. Much regulation of an industry is lobbied for by the industry leaders themselves.

I have come across numerous examples, including in my own experience. I grew up on a family farm where we had raised pigs. The large hog producers lobby for ever-increasing regulation of hog production which eventually pushed my family (along with most small farms) out of the business, leaving only the big corporations. They would not have acheived this elimination of their competition without the cooperation of government force.

This is true also in the case of banking. People often think that the Federal Reserve places restraint upon the banking industry. On the contrary, banks were unsuccessful in their cartelization attempts on their own in the market and so private bankers lobbied for the creation of the Fed which would use force to help them achieve what they could not achieve in the market alone.

This paragraph illustrates my point that our market isn't free and that economic power is political power.

And minimum wage? This comment makes me think that you either never actually were a supporter of free market or you never understood how markets work. In a beginning economics course one learns that price controls (such as minimum wage) are counterproductive--i.e., have the effect opposite that of the one for which they are proposed. For example, a price floor is usually proposed for the purpose of making the good more accessible, but its actual effect is to make the good less accessible. Minimum wage is proposed for the purpose of helping low-skilled workers and reducing inequality. Its actual effect is to perpetuate inequality and hurt (at least some of) these low-skilled workers. In fact, sometimes politicians have recognized this fact and used minimum wage purposefully as a tool for discrimination.

Easy now! I understand how markets works, though I didn't have the luxury of taking a "beginning economics course". I was a National Merit Scholar and skipped directly to Honors Econ......

For example, I heard that in South Africa, where people with white skin were wealthy and people with dark skin were generally poorer and had less education, training, and experience, the white politicians passed minimum wage laws, not to help low-skilled workers but specifically for the purpose of barring them from the market--to 'protect' white jobs from competition. It was used as a tool for racial discrimination.

Minimum wage (and other labor laws) increases unemployment and allows employers to make hiring decisions based on their prejudices instead of based on what is economical. Both of these effects perpetuate inequality.

I enjoy the discussion too. I hope we can continue. In your last post you did not respond to our main topic of discussion, which was the creation of money caused by fractional reserve banks, and the effects of that. Are we agreed now that it increases the effective money supply?

Sounds like we're at least close to the same page now. Fractional-reserve banking has the [I]effect [I] of spreading more funds through the market.

**joel** · February 17th 2009, 04:53 PM

Originally posted by docjam

austrian business cycle theory? who cares?

The proper question is not "who cares?" The proper question is whether it is correct. If it is correct, then everyone should care.

**joel** · February 17th 2009, 05:37 PM

Originally posted by Denonymous

I see greed as something entirely different than logical (and preferably ethical) self-interest. In my opinion, greed would entail pursuing wealth and self-gain with little or no concern for the well-being of others, and a willingness to bend (or break) the rules or the law to obtain those goals, the only deterrent being the risk of punishment.

Insofar, that we are talking about acts that are unjust--that infringe the rights of others--then I will stand with you in opposing them.

I certainly don't see employment as "slavery". I also think private ownership of goods is a good thing!

Pardon me if I misunderstood, but you said, "No market is free; the wealthy command the majority of resources and influence." It seems to follow logically from this that you think this command of the wealthy makes the other people (e.g., people who are employees rather than owners of the means of production) unfree.

This paragraph illustrates my point that our market isn't free and that economic power is political power.

Only in the sense that those with wealth are able to manipulate political power. They are not essentially the same. This connection exists today only because of ideology. In much of the 1800's, for example, the prevalent ideology was classical liberalism. Wealthy people did not have as much power to manipulate political power, because they knew the government would reject their proposals, because the ideology of the people opposed using government to further special interests. Economic power and political power are not essentially the same or essentially connected. What we need is an ideological shift back to those principles of liberty and justice.

Sounds like we're at least close to the same page now. Fractional-reserve banking has the [i]effect [i] of spreading more funds through the market.

At the very least we can say that it creates the same effects as an increase in the monetary base would have. For example, price inflation, and a pushing down of the interest rate because the 'new money' appears first on the loan market before prices rise in general.

**Augustine2004** · February 17th 2009, 10:45 PM

wow, is that so, a monetary Stalingrad? The end of the euro within the year? http://www.telegraph.co.uk/finance/c...-meltdown.html

**uberliber** · February 18th 2009, 02:38 AM

Originally posted by docjam

austrian business cycle theory? who cares?

Ha, okay Krugman.

The truth is that no one really cares. But that's irrelevant to the fact that it still hasn't been refuted. The theory that everyone DOES care about, is Keynesian economics, which is easily shown to be wrong.

So I wouldn't use the scale of how much people care, as the proper scale for the best theory. Popularity and correctness are two very different things.

What are not so different, are popularity and convenience for government.

**Augustine2004** · February 27th 2009, 09:44 PM

Signs of the Second Great Depression: http://www.nytimes.com/2009/03/01/re...k.html?_r=3&hp Who would walk away from 6-figure deposits?

http://planetmoron.typepad.com/plane...-of-words.html
The article may not seem relevant, but it does show what morons we are. We deserve a depression.

http://www.lewrockwell.com/blog/lewr...es/025573.html

I think we have to realize that Obama will do everything he can to keep a recovery from occurring, because he and his minions know that an America that has double-digit unemployment is an America in which people will understand their dependency upon the state and come to welcome it.

It will be an America where there will be no more messy worries that perhaps someone, somewhere is doing something without the supervision of the state. Just as FDR and his people blocked the economic recovery during the 1930s -- and used it for political gain -- so will Obama use this crisis to bring power to himself and his party.

By the way, soon enough we are going to hear that the Bush administration was a "free-market" administration that really failed to intervene enough because of ideology, and that it did "too little, too late." Oh, pardon me. Krugman already has been saying that.

http://www.bloomberg.com/apps/news?p...refer=currency

http://moneynews.newsmax.com/headlin...27/186362.html 50% surge in mortgage deliquencies.

Remember the pic of the Halo to the Chief float in Germany? [whoops I think that was in another thread ] That was a Rose-Monday carnival parade float. Satire, not praise.

**Augustine2004** · March 4th 2009, 08:14 PM

Worst year since 1938 for dividends
http://www.thedailycrux.com/content/1096/Stocks

**seanD** · March 10th 2009, 05:03 PM

A lot of prognosticators and dooms day prophets -- some smart, some tittering on the loony fringes -- are predicting a major world economic meltdown looming within a year or two, where the dollar will be completely devalued.

Though conspiracy theorists get some major flak and bad press, they argue that the central bankers -- "the elite" -- actually control everything and run the world events. Now of course if you're a non-Christian, this is utter nonsense, but if you're Christian, then this is highly probable (unless you don't believe the bible, or the book of Daniel where it illustrates how demons run the world empires), because we know that flesh and blood is not running the world or the world events. The Prince of this world is running the world events, using humans as puppets to achieve a specific end. What is that end? A centralized world economy -- "no one can buy or sell unless they have the mark of the beast."

What better way to achieve this than to cause an economic collapse on a grand worldwide scale, and bankrupt OPEC in order to implement a worldwide economic system of control? So it would appear that the conspiracy theorists and the dooms day prophets are right and actually align with scripture -- ironically, most of these individuals are non-Christian -- in that we've only seen the tip of the iceberg as to what's to come.

Lyndsey Williams is just one of these economic dooms day prophets, and there's an interesting vid on YT about this, just one among many of these vids: http://www.youtube.com/watch?v=7a698...e=channel_page

IMO, there's going to be some trying times for the Christian in the years to come, which I believe will mark the difinitive point where the modern Christian will be forced to make tough and painful decisions based on their loyalty and faith.

**Augustine2004** · March 11th 2009, 12:55 AM