the social scientist.

Depressionary Tales

The problem with trying to analyze why a depression occurred is that we only had one with reasonable data to analyze. You can't therefore investigate it scientifically. Science is based on variables. You vary something and see what happens to a response variable. This can't be done in the case of a one time historical event.

Prior to the last depression there was no consumer price inflation. Technology was creating productivity gains where there was actually excess production capacity in the US holding down prices. There was asset price inflation but nothing like the current housing bubble. The Feds raised interest rates in 1929 to slow the asset price inflation. That worked well. Deflation in all prices became very apparent in 1930, and was at its worst in 1931 and 1932.

The economists today figure you provide liquidity to prevent this (helicopter Ben), to make people spend (better to spend than save when interest rates are low and there is inflation), and to relieve a credit crunch. But, how do they know that it would have worked then? They don't. How do they know that it will work this time, with a fundamentally different financial structure that provides credit to the economy? We don't know if it will work. So we try it, and see if it will work this time. The fact that interest rates are so low with the CPI at 5%, and that the Fed and Treasury are doing their utmost to relieve the credit crunch by providing it to more than just the banks, is an indicator that they truly fear a Depression. On the other hand, are they really doing what it takes to provide liquidity? The interest rate on the loans to AIG are really steep, and the government gets 80% of the equity in the company. And interest rates could be reduced to zero now. Inflation is not a worry. The danger is deflation.

The politicians on both sides can do little, except to keep the stimulus coming, but the government has to borrow that money they give to us and so place further demands on credit. In turn, if we spend it, which is what they want, a lot gets spent on imports benefitting other countries. No problem - they lend it back to us. Our government increases it debt; the common folk don't decrease there's. Nothing is solved. We just stay on the treadmill, the dollar drops and there is severe inflation or there is a depression, or both. In the both scenario, the inflation precedes the deflationary depression, or has that happened already?

I don't think there is a way out, until most of this debt is unwound, by way of bankruptcies or high inflation. So root for high inflation policies. Incidentally this is all began with the Reagan administration - cut taxes on the rich; so they have the capital to lend it back to the government, to lend it to the not so rich so they can consume all that unnecessary crap, and to build factories in other countries. They invested that money really well didn't they.