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

To: Mike M2 who wrote (6033)	7/19/2001 10:52:06 AM
From: TobagoJack	Respond to of 74559

Hi Mike, Thanks much, Kurt Richebacher is always a fun read, especially when waiting for either somethingtohappen or the all-clear signal. Chugs, Jay

To: Mike M2 who wrote (6033)	7/19/2001 12:41:48 PM
From: Ilaine	Read Replies (3) \| Respond to of 74559

Richebacher's explanation for the beginning of the Great Depression in the US isn't all that different from Friedman and Schwartz's. I won't argue with his theories, I don't argue with anyone's theories, but I will argue with his statement of facts. In the US, monthly industrial production peaked in July, 1929. Then it fell 3 percent over three months. That is a fact. It is also a fact that the Federal Reserve began contractionary open market sales in January, 1928. Many here have posted that the Federal Reserve had a policy of easy money prior to 1929. Richebacher essentially concedes the point that the Federal Reserve was NOT following an easy money policy when he says that "the money supply grew only modestly. Between 1925-1929, broad money grew by no more than 10%, from $50 billion to $55.5 billion. Demand deposits at banks in late 1929, at $22 billion were no higher than in late 1925." So much for the "easy money" theory. Richebacher claims that there was a great expansion of credit, but he can't prove it. "However, no statistics are available," he says. I wonder how none of the great expansion of credit shows up in the money supply, which, he says, "increased during the four years between end-1925 and end-1929 by 10% [note: this was NOT 10% annually, but 10% in aggregate] while narrow money (Ml) stagnated." But, not being an Austrian economist, I shall be forced to continue to wonder why he didn't trouble to look up the statistics for bank credit himself. Banks are audited by government agencies, state or federal depending on the type of bank, and the results are public records. It is also a fact that the stock market boom caused an increased demand for money and broker's loans, and the interest rate rose accordingly. The nominal interest rate rose from 4% in the fourth quarter of 1927 to 4.4% in the fourth quarter of 1928. The producer price index was declining, so the real interest rate in fourth quarter 1927 was 5.6% and 9.5% in the fourth quarter of 1928. Building permits for new construction in the US peaked in 1928 and declined 21% from 1928 to 1929. New automobile registrations peaked in July, 1929. One may infer from these facts that tight money policies and high interest rates are what started the Great Depression - but that's just a hypothetical. I'd get off my rear and go to the Library of Congress and the archives of the Federal Reserve and actually look at statistics books before I made a claim like that. At any rate, Richebacher gives a monetary explanation, it's just a little different than Friedman and Schwartz's. Where he seems to differ significantly is that they hypothesized that the Fed could have prevented the Great Depression from becoming "Great" by expanding the money supply. This is one of those hypos that is the subject of a lot of debate - and my impression is that modern economists think that the real problem was the gold standard, or, more precisely, the gold exchange standard, which isn't exactly the same as the gold standard. It didn't work, for a number of reasons, including (and this isn't just the US) lack of adherence to the standard when it wasn't convenient politically. I am intrigued by Richebacher's claim that "It is estimated that the stock market crash involved a wealth destruction of about $85 billion in total. Capital losses in the first wave of the crash in late October and early November 1929 amounted to about $25 billion." We have been talking about whether there was real wealth that was destroyed when the market crash, and concluded that there was not. The buyer pays the seller, so the money goes from the buyer to the seller, it's not destroyed. Even if the seller sells at a loss, he paid the one he bought from, so that money wasn't destroyed, either.