Why I think this will be worse than the Great Depression

J

jueco2005

Milton Friedman demonstrated the main factor that contributed to the Great Depression was the destruction of money in circulation by the Fed. In other words the fed decreased the money supply by 1/3, this means nominal demand decreased by 1/3 while (approximately) real demand decreased by 1/4.

From 1929 to 2009 (90 yrs) the % of money aggregates comparison changed tremendously. M1 (real money, physical currency) used to be more than 70% of the money supply in 1929, today it is less than 10%.

So……….what we think as money has changed a lot.

I thought at the beginning of the crisis that it wasn’t going to be as bad as the Great Depression but lately I have been forced to rethink this view.

I think we are going to see Great Depression II because banks are decreasing the amount of credit in circulation (90% of money aggregates). The system of money creation today, is jeopardy which is to say………….”decrease in the money supply.

http://en.wikipedia.org/wiki/Money_supply
 
The Fed is easily capable, willing, and has already begun to address aggregate demand for money (money supply * money velocity).

They brought short term Fed rates to near 0%.

They are in the process of bringing long term debt to under 2%.

If needed, they will increase direct purchases of other long term debt such as mortgages, including sub-prime and junk bonds, as needed, to reduce interest rates closer to 0%.

If that still isn't working, they will electronically print more money and buy S&P futures and stocks.

If that still isn't working, they will work with the federal government to distribute the money more directly through tax rebates, as well as construction and other public works projects (this is already happening).

If that doesn't work they can give every citizen $20,000.00 USD, electronically printed by the Fed.

If that doesn't work, they can give $1 million. Then $1 billion per citizen. Then $1 trillion. They electronically printed $1 Trillion in under 6 hours at one point already (AIG etc). At one point, that is vastly under $100,000/citizen imo (probably closer to $20,000 at the maximum), inflation in housing prices and other asset values will take hold again and money velocity will decrease at a lower rate than money supply increases.

While I totally agree, money has different forms today than it used to, that can easily be correct by the Fed simply adding 1 digit to the amount it normally prints. This is an oversimplification and is of course done over months, hopefully it makes my point :)

Not that I am recommending this in the slightest, just the power they have is unlimited in terms of creating inflation, and with Bernenke the will is there. They would rather cause 20% annual inflation than risk default for example, and this probably is a smart move.

The real solution involves making inflation-adjusted cuts to government spending and moving closer towards a budget surplus instead of away from it. The big problem now is we have been living way past our means.. and the government's solution to bad debt has been to replace one form with another, instead of face the politically challenging true solutions. If we want to spend so much money, we need to increase taxes for it. If we are past the Laffer curve, then spending has to be cut. 10% deficits are unsustainable, and may put us at risk of shocks even greater than those recently experienced. Thailand, Argentina, and Iceland have some experience in this. We are a larger economy and the world's reserve currency, which is a huge help in reducing default risk, but this advantage does not confer unlimited resources to us. We must pay the piper, and we will, the only question is when and it what form and with what pain. The longer the delay, much like a rubber band snapping, the bigger the pain of adjustment when it comes due.
 
Quote from ptunic:

The Fed is easily capable, willing, and has already begun to address aggregate demand for money (money supply * money velocity).

They brought short term Fed rates to near 0%.

They are in the process of bringing long term debt to under 2%.

If needed, they will increase direct purchases of other long term debt such as mortgages, including sub-prime and junk bonds, as needed, to reduce interest rates closer to 0%.

If that still isn't working, they will electronically print more money and buy S&P futures and stocks.

If that still isn't working, they will work with the federal government to distribute the money more directly through tax rebates, as well as construction and other public works projects (this is already happening).

If that doesn't work they can give every citizen $20,000.00 USD, electronically printed by the Fed.

If that doesn't work, they can give $1 million. Then $1 billion per citizen. Then $1 trillion. They electronically printed $1 Trillion in under 6 hours at one point already (AIG etc). At one point, that is vastly under $100,000/citizen imo (probably closer to $20,000 at the maximum), inflation in housing prices and other asset values will take hold again and money velocity will decrease at a lower rate than money supply increases.

While I totally agree, money has different forms today than it used to, that can easily be correct by the Fed simply adding 1 digit to the amount it normally prints. This is an oversimplification and is of course done over months, hopefully it makes my point :)

Not that I am recommending this in the slightest, just the power they have is unlimited in terms of creating inflation, and with Bernenke the will is there. They would rather cause 20% annual inflation than risk default for example, and this probably is a smart move.

The real solution involves making inflation-adjusted cuts to government spending and moving closer towards a budget surplus instead of away from it. The big problem now is we have been living way past our means.. and the government's solution to bad debt has been to replace one form with another, instead of face the politically challenging true solutions. If we want to spend so much money, we need to increase taxes for it. If we are past the Laffer curve, then spending has to be cut. 10% deficits are unsustainable, and may put us at risk of shocks even greater than those recently experienced. Thailand, Argentina, and Iceland have some experience in this. We are a larger economy and the world's reserve currency, which is a huge help in reducing default risk, but this advantage does not confer unlimited resources to us. We must pay the piper, and we will, the only question is when and it what form and with what pain. The longer the delay, much like a rubber band snapping, the bigger the pain of adjustment when it comes due.
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good post, thanks
 
A major factor in the 30's Depression was the bursting of a credit bubble. But most people then had virtually no credit balance.

Unlike now..... where a significant percentage of the population is buried in debt.

And this credit bubble, as a percentage of GDP, is MUCH greater than the depression.

Logical to consider the ramifications could be very long and very hard.

BS Bernanke may try to save us from the great deflation.... with hyper-inflation.... which would ultimately be worse for nearly everybody.
 
Why not start by asking the unaskable first.

'What is the gov. trying to do and why are they trying so hard to make it work'

regards
f9
 
Maybe so............but printing real money (M1) wont come in time until the economy is completely crashed, it will help for a moment until we face hyperinflation.

Either way I am very pessimistic about the outcomes.

Quote from ptunic:

The Fed is easily capable, willing, and has already begun to address aggregate demand for money (money supply * money velocity).

They brought short term Fed rates to near 0%.

They are in the process of bringing long term debt to under 2%.

If needed, they will increase direct purchases of other long term debt such as mortgages, including sub-prime and junk bonds, as needed, to reduce interest rates closer to 0%.

If that still isn't working, they will electronically print more money and buy S&P futures and stocks.

If that still isn't working, they will work with the federal government to distribute the money more directly through tax rebates, as well as construction and other public works projects (this is already happening).

If that doesn't work they can give every citizen $20,000.00 USD, electronically printed by the Fed.

If that doesn't work, they can give $1 million. Then $1 billion per citizen. Then $1 trillion. They electronically printed $1 Trillion in under 6 hours at one point already (AIG etc). At one point, that is vastly under $100,000/citizen imo (probably closer to $20,000 at the maximum), inflation in housing prices and other asset values will take hold again and money velocity will decrease at a lower rate than money supply increases.

While I totally agree, money has different forms today than it used to, that can easily be correct by the Fed simply adding 1 digit to the amount it normally prints. This is an oversimplification and is of course done over months, hopefully it makes my point :)
More...
 
Quote from jueco2005:

Maybe so............but printing real money (M1) wont come in time until the economy is completely crashed, it will help for a moment until we face hyperinflation.

Either way I am very pessimistic about the outcomes.
More...

To be clear I agree with you and think it's a terrible situation. Printing money is not a solution, it is only marginally better than switching chairs on the Titanic.

True standard of living growth, as always, can only come from the following 3 variables:

a) less debt, higher savings and investment rate
b) productivity growth
c) greater natural resource discoveries (eg Norway's oil)

c) is pretty rare in terms of anything substantial and can't be counted on in any case.

That leaves a) : get your bills in order, just like a private citizen who saves more than they earns and invests it will over the long run do better than one who borrows (depending on the use of funds of course).

b) Productivity growth is key, and current Fed and central government policies are reducing, not increasing, productivity growth by distorting financial markets and spending massive public funds on unproductive assets and consumption.

The idea that reckless spending is good for an economy comes from outdated Keynesian theories that are unfortunately still held as gospel by the Fed and government leads. imo of course (can't easily even attempt to prove that in under 500 pages) :)
 
Exactly. That's why i think it will be worse.

Quote from gnome:

A major factor in the 30's Depression was the bursting of a credit bubble. But most people then had virtually no credit balance.

Unlike now..... where a significant percentage of the population is buried in debt.

And this credit bubble, as a percentage of GDP, is MUCH greater than the depression.

Logical to consider the ramifications could be very long and very hard.

BS Bernanke may try to save us from the great deflation.... with hyper-inflation.... which would ultimately be worse for nearly everybody.
More...
 
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