Hi! nice of you to drop by...you could do so more often. now to your comments:
There is a new economy. It has come about via the PC and Internet. MSFT and INTC are so far the core of this new economy and they are two of the world's largest corporations dwarfing all the other DOW components. Those two are far more important to me than anything the other DOW components do.
there are new INDUSTRIES...new industries have been created since the dawn of time. my issue with the 'new economy' claptrap is that it somehow keeps implying that the economic laws have changed. they haven't.
The '20s were also a new era completely unlike American society before WWI.
again, new industries had been created, and the economy became more complex, and more productive. in that sense we are in a 'new era' all the time (or rather, every time when a new innovation wave occurs). again, in the 20's the 'new era' proponents insisted that the economic laws had changed, and that no classic economic downturn was possible anymore. wrong.
It was Anna Schwartz and Milton Friedman. According to the newspapers of the time the FED which shared policy creation with the Treasury maintained relatively high interest rates in order to forestall the export of gold and thereby protect the monetary base and preclude a presumed collapse of trade. This was a policy pushed by Roosevelt and Treasury Secretary Morgenthau and later opposed by Marriner Eccles. This is much like the intent of the Democrats now to shrink the tax cut in order to preserve an ideal that they could never keep and which is now wrong and inappropriate just like the failure to create fiat money was in the early '30s. The FED shouldn't have raised rates in '28 and '29 to cool stock market speculation. They should have raised margin requirements, but they hadn't enough experience with such techniques. If they hadn't raised rates, the stock market surely would still have crashed, but it wasn't the crash that caused the depression. The crash caused authority to panic and push the wrong buttons. If FED and Congress hadn't gotten involved the US would have undergone a recession, but not the disaster authority precipitated. The killer was the raising of rates at the end of '31. Afterwards they did lower them, but the damage had been done.
i am aware that the monetarists have created this myth. it still is a myth. the Fed began to lower AGGRESSIVELY immediately after the crash, and by late '31 the discount rate had been slashed to 1,5% from 6% just prior to the '29 crash.
that's 450 basis points in a little less than two years...aggressive easing by any standard. true, they made a mistake raising the rate in late '31 to stop the outflow of gold, and that has probably aggravated the situation, but deflationary depressions are not amenable to intervention by central bankers anyway...meaning, i don't think it would have made much of a difference had they stood pat in late '31. just look at corporate bond rates, which soared in the early '30's, and are outside of the Fed's ambit. the market priced in the increasing default risk, and in the process made corporate borrowing prohibitively expensive.
i do agree that both Congress and the administration made a series of mistakes, the most glaring of which was the Smooth-Hawley act that killed off international trade. i also concur that the Fed (or someone, i.e. the brokers)should have raised margin requirements, but as far as i know it didn't have that power back then. that would have alleviated the severity of the public's losses, but it is debatable if it would have stopped the speculative blow-off or the subsequent denouement. note that the Fed AGAIN didn't raise margin requirements in the 90's boom, presumably out of fear that it might actually precipitate a crash and be blamed for it.
i don't think the '29 stock market crash was avoidable...the market simply went to the point of exhaustion, and with no more buyers left, collapsed. just as the Nasdaq did last year.
the most important point though is that it was not the mistakes made after the boom ended that were primarily responsible for the severity of the bust - it was the profligate monetary/credit policy DURING the boom that created the imbalances that led to the depression.
It is a mistake to make the assumption that demand management can be achieved by interest rate manipulation. Interest rates are not always inversely and rigidly related to money supply. For example, in Japan now it's immaterial whether they lower rates or not. It is material if they create currency. After the damage from the '31 tightening, lowering rates didn't have any effect. They wouldn't have needed to do any of that had they just left things alone and let the people create the solution. Instead, the public cheered Roosevelt when he offered them words, but the depression went on any way. It's amazing how history looks on what occurred and heralds mediocrity as greatness, but that isn't anything new for history, and it is the way text books want to worship the advent of big government.
i agree 100% with that. imo, Roosevelts socialistic meddling had more ill effects than anything else, because it delayed the clearing out of the malinvestments accumulated during the speculative boom. likewise, your comment on rates and demand management is quite correct...in a deflationary depression, interest rate policy becomes powerless.
You are saying that they only make errors depending on what time it is when in fact the biggest errors come after the boom. That's when they have the greatest conviction to do good and to save the world which leads irrevocably to the greatest evil. That's the testament of the '30s that Friedman emphasized. It was an active FED and Congress during the early days of the depression which created horrible policies like tariffs, taxes, restrictions and regulations, which put a muzzle on the possibility of easy recovery. None of that makes it to the text books.
i'm not quite saying that. i only put it this way to emphasize that it is the willy-nilly credit expansion of the boom that lays the groundwork for the bust. you are of course right that unfortunately once a bust is underway, the meddling of the authorities tends to lengthen and deepen it unnecessarily - essentially the bureaucrats do the wrong thing all the time...if they do the right thing it is usually by mistake. as mentioned before, the recession of '21/'22 was very deep and painful - but the government adopted a laissez faire attitude, and the economy left to its own devices recovered very quickly. in that sense, the 30's depression was of course host to a number of policy mistakes, mostly on the part of the administration. nothing they did do worked, similar to the interventionist policies of Japan's government over the past decade. that should have told them that the best solution would have been to do nothing.
Not quite. There was no such phenomenon as disinflation then. Prices were stable during the '20s following the war inflation and deflation/depression of '22. There was rising farm deflation which started in '26 and is more related to factors strictly agricultural. In contrast, during the '90s inflation rose every year. The difference is remarkable:
note: the link doesn't work. no, there was disinflation, bordering on deflation in fact. but the Fed made the mistake to fight it, by leaving monetary policy too loose for too long following the '21/'22 recession. it erroneously believed that 'stable prices' were more desirable than falling prices...a view Austrian economists disagree with strongly. it's as if it was 'bad' that the fruits of rising productivity reach the consumer in the form of lower prices. the Fed should have left well enough alone, and instead of repo-ing the nation toward its Utopia of stable prices should have allowed market forces to do their thing.
the '90's disinflation (disinflation is still inflation, only one that is characterized by a more or less constantly declining rate of change) was less pronounced, true, but that is due to the Greenspan Fed again fighting it, with the biggest money supply expansion in human history.
As for productivity boom if you consider increases to productivity due to machinery and equipment, then there was a similarity between then and Greenspan's WinXXX productivity enhancement. Any economist worth two cents knows these aren't true productivity improvements or if they are, they actually only run at a max of 2% per annum. What these machines do is provide the belief to humans that if they work hard with the machines, they will prosper and create wealth. The machines only induce the will to make greater effort. That's where the true productivity lies, not in the increase in output from the lever factor of the machine.
we have had endless debates on this thread about productivity, and the way it is measured. i do agree with what you're saying here, and i believe the productivity increases of the '90's boom to have been far less significant than the government makes out with its hedonic indexing formulas. BUT..there can be no doubt that both the '20's and the '90's DID experience an increase in productivity (in the sense that costs per unit produced fell). especially the profound inventions that were brought to account in the 20's, like e.g. mass production techniques, modern transportation, electricity, etc. raised productivity quite a bit.
in conclusion, we agree of course fully on the meat of it all - namely that interest rates (and consequently the money supply) should be left entirely to the market, not be subject to an arbitrary 'target' deemed appropriate by a central economic planning agency. as you say, the economic and social engineers, in their attempt to do 'good' usually find a way to do just the opposite. |
