The cause of the Great Depression

[AceNZ]

In the years after WW I and before the stock market crash of 1929, the Fed was used to help bring England out of a depression. The approach taken was to transfer American wealth to England by establishing artificially low interest rates and inflating the money supply, weakening the dollar relative to the pound. That caused investors, businesses and individuals to move resources, including gold deposits, from the low-interest-paying US to the higher-interest-paying UK.

Artificially low interest rates encouraged stock market speculation. However, as a result of the movement of wealth out of the country, industry wasn't as strong as people thought, so it eventually collapsed, and the Great Depression began.

Notice any similarities to what's going on today? Artificially low interest rates? Yep. Inflating the money supply? Yep. Weakened dollar? Yep. Stock market speculation? Yep. The net effect is a transfer of wealth out of the US, only on a much larger scale than before.

 

[nunaem]

The question is whether the next depression will be a deflationary one like the past.

 

[Green Mountain Boy]

The question is whether the next depression will be a deflationary one like the past.

what goes up must come down

 

[nunaem]

what goes up must come down

I'm not sure how to take that. Are you talking about the price of gold? Because the USD has been coming down for the last 100 years. Is the reverse true? What comes down must go up?

 

[AceNZ]

The question is whether the next depression will be a deflationary one like the past.

I don't think it will be, for two reasons:

1. Bernanke studied the causes of the Great Depression in detail. He has written papers and made speeches on the subject, where he says that he feels the Fed back then didn't act swiftly or strongly enough. Even more intervention mechanisms are available today than back then, so there's no doubt the Fed will be inflating like mad. FWIW, I happen to believe that he's wrong, as do many Austrian economists -- which leads to the second reason...

2. Today, more so than in the 1920's, a huge number of dollars are held by international investors. With low interest rates and a declining dollar, the holders of those dollars will want to dump them -- one of the ways to do that is to buy US assets (real estate, businesses, etc). The dollars from those transactions will flow into the economy, adding more inflationary fuel to the fire.


My best guess is that we're headed for hyperinflation (inflation rates greater than 50% per year), perhaps followed by the introduction of a new currency, such as the Amero.

 

[Truth Warrior]

http://www.radix.net/~tarpley/29crash.htm

 

[Green Mountain Boy]

I'm not sure how to take that. Are you talking about the price of gold? Because the USD has been coming down for the last 100 years. Is the reverse true? What comes down must go up?

I'm talking about inflation in general. It's impossible to inflate forever, that is, there are limits to how much new debt consumers can request.

 

[Green Mountain Boy]

I don't think it will be, for two reasons:

1. Bernanke studied the causes of the Great Depression in detail. He has written papers and made speeches on the subject, where he says that he feels the Fed back then didn't act swiftly or strongly enough. Even more intervention mechanisms are available today than back then, so there's no doubt the Fed will be inflating like mad. FWIW, I happen to believe that he's wrong, as do many Austrian economists -- which leads to the second reason...

2. Today, more so than in the 1920's, a huge number of dollars are held by international investors. With low interest rates and a declining dollar, the holders of those dollars will want to dump them -- one of the ways to do that is to buy US assets (real estate, businesses, etc). The dollars from those transactions will flow into the economy, adding more inflationary fuel to the fire.


My best guess is that we're headed for hyperinflation (inflation rates greater than 50% per year), perhaps followed by the introduction of a new currency, such as the Amero.

1.The FED can't inflate if consumers can't afford to request more debt. Consumers are absolutely spent right now.

2. Added liquidity doesn't necessarily lead to greater inflation, and even if it does I think it would be a negligible amount. What happens when they have dumped all their dollars?

 

[Tom228]

Here's a site that's pretty much dedicated to inflation.

http://inflationdata.com/inflation/default.asp

AceNZ,

The thing is that Bernanke is is a Classical economist, in his own right, he's correct in his assumptions of the causes of the Great Depression. Of course Austrian Economics is a different economic though. So it's hard to find the "true" cause of the Depression.

 

[scooter]

The economy almost needs a big recession or a depression if the dollar is to ever be saved. In the Great Depression after years of rampant inflation and artificially low interest rates, the Fed finally started to decrease the money supply.

If the Fed finally gets smart and stops inflating, you better believe that there will be a big market tumble because the entire bubble that's been propped up for several decades is going to burst.

Just hope that we get more of a 1970s scenario where the high interest rates create a big recession, but save the dollar and help the economy rebound within a few years. If it's a big one like the 1930s, it's going to hurt badly.

Beware when people say to load up on gold, though. When Chairman Volcker took over the Fed in the 80s and started to save the dollar by the really high interest rates, gold sunk from almost $900 to $300. It's fine to own the gold while the Fed is still being inflationary, but if they have a sudden change of heart like Volcker did, the dollar will rebound hard.

Just stay diversified and don't put all of your eggs in one basket. That is investing suicide.

 

[tsetsefly]

In the years after WW I and before the stock market crash of 1929, the Fed was used to help bring England out of a depression. The approach taken was to transfer American wealth to England by establishing artificially low interest rates and inflating the money supply, weakening the dollar relative to the pound. That caused investors, businesses and individuals to move resources, including gold deposits, from the low-interest-paying US to the higher-interest-paying UK.

Artificially low interest rates encouraged stock market speculation. However, as a result of the movement of wealth out of the country, industry wasn't as strong as people thought, so it eventually collapsed, and the Great Depression began.

Notice any similarities to what's going on today? Artificially low interest rates? Yep. Inflating the money supply? Yep. Weakened dollar? Yep. Stock market speculation? Yep. The net effect is a transfer of wealth out of the US, only on a much larger scale than before.

that caused the crash not the depression...

The depression was caused by the fed contraction after the crash, tariff war and FDR's policies...

 

[Tom228]

Actually, it's unemployment that was rampant during the Depression. There was virtually no inflation, matter of fact it was deflation that was prominent during the Depression.

Here's a historical chart: http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=6

The Fed, from what I can recall reading, raised interest rates and caused a sharp decrease in Investment Spending, therefore pulling the economy into a Depression.

 

[scooter]

Actually, it's unemployment that was rampant during the Depression. There was virtually no inflation, matter of fact it was deflation that was prominent during the Depression.

Here's a historical chart: http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=6

The Fed, from what I can recall reading, raised interest rates and caused a sharp decrease in Investment Spending, therefore pulling the economy into a Depression.

So you're saying you actually believe the official inflation statistics? Inflation is much more than a few percent now because it's not only prices in the few areas that they study. It's a monetary phenomenon.

There were people in the 20's betting the farm to get some margin to buy stocks. A lot of money through debt was introduced that should not have been.

Yes, the deflation afterwards made things worse, but was not a cause. By what I'm reading in this thread, I'm seeing people who are basically advocating what the Fed is doing right now. "Don't deflate things any so this bubble can keep on going."

You can't kill the bubble until you deflate the money a little bit. If you let it go on forever that's when the dollar collapses. Remember, dollars got a lot more valuable after the Depression.

 

[tsetsefly]

So you're saying you actually believe the official inflation statistics? Inflation is much more than a few percent now because it's not only prices in the few areas that they study. It's a monetary phenomenon.

There were people in the 20's betting the farm to get some margin to buy stocks. A lot of money through debt was introduced that should not have been.

Yes, the deflation afterwards made things worse, but was not a cause. By what I'm reading in this thread, I'm seeing people who are basically advocating what the Fed is doing right now. "Don't deflate things any so this bubble can keep on going."

You can't kill the bubble until you deflate the money a little bit. If you let it go on forever that's when the dollar collapses. Remember, dollars got a lot more valuable after the Depression.

he is right what prolonged a sever recession or depression as FDR's disastrous policies... read http://www.amazon.com/FDRs-Folly-Roosevelt-Prolonged-Depression/dp/0761501657

 

[AceNZ]

1.The FED can't inflate if consumers can't afford to request more debt. Consumers are absolutely spent right now.

Sure they can. Inflation isn't driven by consumer debt. How do you think the war in Iraq is being funded? It's all inflated money.

2. Added liquidity doesn't necessarily lead to greater inflation, and even if it does I think it would be a negligible amount.

There are actually two kinds of inflation: money supply and price. I'm suggesting that price inflation will increase as foreign-held dollars are dumped into the US economy.

The thing is that Bernanke is is a Classical economist, in his own right, he's correct in his assumptions of the causes of the Great Depression.

Bernanke agrees that the Fed caused the Depression. There's a quote from him where he says "you're right, we did it, but it won't happen again" or something like that.

Most classical economists blame the depression on the declining money supply after the stock market crash, which is incorrect.

that caused the crash not the depression...

The depression was caused by the fed contraction after the crash, tariff war and FDR's policies...

I know that's one view. Sorry, but I don't agree -- although I do agree that FDR's policies made the Depression last a lot longer than it would have otherwise.

Actually, it's unemployment that was rampant during the Depression. There was virtually no inflation, matter of fact it was deflation that was prominent during the Depression.

In the years before the Depression, the money supply was increasing (inflation).

Here's a historical chart: http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=6

The Fed, from what I can recall reading, raised interest rates and caused a sharp decrease in Investment Spending, therefore pulling the economy into a Depression.

The chart shows CPI, not the money supply. Prices and money supply are two different things.

Interest rates were allowed to come back to their free market levels, which meant they came up from their artificially low levels. That by itself wouldn't have caused any problems if so much wealth hadn't been transferred out of the country first.

 

[Green Mountain Boy]

Sure they can. Inflation isn't driven by consumer debt. How do you think the war in Iraq is being funded? It's all inflated money.

Yes, inflation is driven by consumers requesting debt. The U.S. housing market is the driving force of debt inflation around the world. Total credit market debt in the U.S. is around $46 trillion. The public gov't debt is only a fraction of that amount.
Currently, U.S. consumers are requesting $11 billion in new debt per day.

 

[scooter]

Yes, inflation is driven by consumers requesting debt. The U.S. housing market is the driving force of debt inflation around the world. Total credit market debt in the U.S. is around $46 trillion. The public gov't debt is only a fraction of that amount.

This is the correct statement. And this rampant credit spread by American consumers was caused by the Fed keeping interest rates too low for too long. And now that it has come back to bite them, somehow they've decided to fight their bubble with more inflation.

I do disagree that the government portion of the debt is only a small fraction. When you add in the long-term obligations to things like Medicare and Social Security, from which the government has syphoned profits to fuel it's spending, the federal government debt is really close to that 46 trillion number.

Also, tack on the increased debt burden that has been passed to the states because of the runaway spending at the federal level on wars and other areas that are of no benefit to the states.

 

[AceNZ]

Yes, inflation is driven by consumers requesting debt. The U.S. housing market is the driving force of debt inflation around the world. Total credit market debt in the U.S. is around $46 trillion. The public gov't debt is only a fraction of that amount. Currently, U.S. consumers are requesting $11 billion in new debt per day.

When you first said consumers requesting debt, I was thinking "consumer debt", or credit cards, which is the usual meaning of that term. I do agree that debt in general fuels monetary inflation, and that housing debt is an important part of that.

 

[tsetsefly]

There are actually two kinds of inflation: money supply and price. I'm suggesting that price inflation will increase as foreign-held dollars are dumped into the US economy.


Bernanke agrees that the Fed caused the Depression. There's a quote from him where he says "you're right, we did it, but it won't happen again" or something like that.

Most classical economists blame the depression on the declining money supply after the stock market crash, which is incorrect.


I know that's one view. Sorry, but I don't agree -- although I do agree that FDR's policies made the Depression last a lot longer than it would have otherwise.

The size of the contraction was the problematic part, but you are partly right, I do think governments policy afterwards had more influnce on the depression than the fed.

As for inflation, I disagree, I agree with mises:

What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. (Mises, Planning for Freedom, 79)

http://www.mises.org/story/2781

rises in prices nto do to inflation is due to supply and demand...

btw, what other candidates board(if they actually had REAL not msm generated support) would have these kind of discussions? lol...

 

[AceNZ]

As for inflation, I disagree, I agree with mises:

http://www.mises.org/story/2781

rises in prices not due to inflation is due to supply and demand...

I agree with Mises, too. Unfortunately, the terminology in this area sometimes confuses things.

The aspect of the current situation that the markets and the Fed are neglecting, as far as I can tell, is the demand side of the equation. It's true that in a market with constant demand for dollars, that the rise in prices not due to inflation is due to supply and demand. However, if the demand declines, as in the current market, more existing money can enter the market and cause price increases that are independent of supply and demand or inflation. The money already existed, but had been withheld from the market for some reason, perhaps by being kept in an overseas account.