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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (5856)	7/15/2001 12:22:53 PM
From: Ilaine	Read Replies (1) \| Respond to of 74559

The difference between theory and reality is human action. I don't know if money has ever been allowed to be purely subject to market forces but for the time frame we are talking about, it certainly was not, most definitely not when it came to exchange rates. The events were not as complex as the free market, much simpler and far less efficient, and, I suspect, far less effective. At this point I am just trying to make a timeline. Actually, several timelines. Timelines for more than one country, timelines for different segments of the economy, timelines for prices, timelines for interest rates, timelines for money supplies, timelines for political events, timelines for weather events, and eventually, start superimposing them, looking for hitherto unexpected relationships. I don't know when the free market in money ended, but certainly it was ended in the US in 1913 when the Federal Reserve came into being, and certainly it was ended in Germany after the Reichsbank intervened to stop the hyperinflation in 1924. Because there was no longer a free market for money, it was imperative that those in charge of the money supply no longer pretend that there was a free market in money, no longer try to imagine what would happen if the laws of supply and demand controlled, because they couldn't. They were willing to intervene to try to pop what they perceived as a stock market bubble - Schacht, the head of the Reichsbank deliberately did that in 1927, the Federal Reserve deliberately did that in 1929. And they had no idea what they were doing. Business cycles happen, but no human being can decide that it's time for the next stage in a business cycle. The world economy was growing at an exponential rate, but the money supply was growing at an arithmatic rate. Deflation was so rapid and so severe that interest rate cuts didn't help - as in Japan, cutting the interest rate didn't help because, paradoxically, zero is more than the natural interest rate. Business has no incentive to borrow, because the return on the investment will not be profitable. I know you are aware of the actions of the Federal Reserve during the time frame 1926-1933. Not sure whethere you are aware that the US had recovered from the Great Depression by 1937 - when the Federal Reserve began to worry about inflation, and raised reserve requirements, removing about 1/4 of the high-powered money supply! Thus triggering the recession of 1938. Business needs cheap money. Central planners shouldn't worry about unprofitable investments - that really is self-correcting. Choking off bad business chokes off good business. Under the real gold standard, the business cycle wasn't really natural, either, because an increase in the gold supply meant an increase in the money supply - so the business cycle depended on how productive gold mines were. That has its disadvantages, too. Treating money as a medium of exchange rather than as a store of value is, I believe, more consistent with the workings of the free market. People use gold because governments are not trustworthy, not because gold acts as a good medium of exchange. You can't transmit gold easily, you can't use it for small transactions easily, you can't use it for large transactions easily. And when you buy or sell it, you pay a premium that makes it uneconomical. Bank notes backed by gold are useful, but then you always have the problem of reserve requirements - and you start substituting central planning for the free market.

To: Don Lloyd who wrote (5856)	7/15/2001 3:55:27 PM
From: yard_man	Read Replies (1) \| Respond to of 74559

My only point was that falling prices (i.e. a currency that appreciates in value) do not necessarily imply anything about future economic activity. Of course, as you point out -- if wages (or some other prices for that matter) are artificially constrained -- then contraction may result -- but falling prices wasn't the cause. There is a common misconception that the volume of money must grow with economic activity for growth to continue. Complete nonsense.