I am a bit afraid to talk about depressions on the thread - the last time I did, the World Trade Towers were knocked down, causing a depression for a time. Makes me nervous.
Anyway, we already know the answers, don't we?
1. Booms, busts and recoveries happen. That's inevitable. It's part of capitalism.
a. Someone invents a better way of doing things.
b. Someone else (unfortunately) figures out a way to use 1a. to make money.
c. Lots of other people see that 1b. is making money and try to imitate.
d. Irrational exuberance as the rest of the world tries to get into the act, spending money they can ill afford to lose. People quit their jobs and become day-traders. Mortgage themselves to the hilt. Cash in their retirement money.
e. Also flim-flam. "Stuffing" inventory chains to look good on paper. Selling "salted" gold mines to the credulous. Trading "futures" in things that don't exist.
f. Eventually, bust. Panics, bankruptcies, suicides.
g. The canny comb over the wreckage and pick out the gems at a bargain, and thus make their fortunes. This is the "up" side - liquidations are bad for asset holders, good for asset buyers, and asset re-sellers.
h. The stubborn, who bought something of value, held on and never panicked, come out ok, too, eventually, which is one reason the rich get richer.
2. A "depression" also occurs when more than one sector of the economy hits a downturn at the same time.
This may be caused by losing a major source of income if the economy isn't sufficiently differentiated, for example, some regions of the United States suffered recessions/depressions when the Japanese auto industry began selling superior products at lower prices than the American auto industry, while other regions of the United States suffered recessions/depressions because the Chinese began selling good-enough products at lower prices, and the Indians began providing good-enough IT services at lower prices.
My home state of Louisiana went through many a boom and bust due to OPEC playing around with oil prices and supply - now OPEC keeps oil prices just low enough that nobody in Louisiana can make any real money in the oil business.
This is "creative destruction," which doesn't feel good for the destroyed. But isn't so bad for those who are able to switch career paths into something else.
3. A "depression" also occurs when multiple companies in multiple industries which have value but not enough cash can't borrow money at a sufficiently low rate to make a profit. This may or may not follow a panic.
a. The economy is deflating and the nominal interest rate is higher than the real interest rate (see Japan.)
b. Some well-meaning authorities decide to cool off the economy by "taking the punch bowl away," either by raising interest rates, deliberately cutting down the money supply, or both. (This caused a "Great Crash" in Germany in 1927, and in the United States in 1929.)
c. There is no money to borrow. If gold is the only money, then how can it both remain on deposit, and loaned out at interest? It doesn't really matter if you believe that money should be backed by gold, or agree with Adam Smith that money can be backed by the productive capacity of the country, lending only gold is by its very nature deflationary.
History does not tell us when the first intelligent person figured out that you could both hold gold and lend it if you used symbolic gold - hawala, hundi, certificates of deposit - the Assyrians appear to have traded clay certificates of deposit thousands of years ago. The Chinese got along just fine trading paper certificates of deposit for centuries, until the government got greedy and pumped out more paper than is prudent - 40% backing was probably as low as you could go to avoid panics.
Andrew Jackson, a "hard money" man, caused the Depression of 1837 by removing the federal government's gold from the Second Bank of the United States, forcing it to "call" loans and not renew them - most businesses in the United States borrow money over the short term as a matter of course - 90 day notes, and the like. If they are all forced to sell assets at once to meet payrolls and buy inventory - that's what happens in a panic. Many will be ruined.
Another thing Andrew Jackson did was decree that federal lands had to be paid for in gold or silver - the "specie circular." There wasn't enough gold or silver in circulation, so prices dropped. People couldn't sell for what they paid so were forced to hold or sell at a loss. Those who could afford to hang on came out ok, those who needed the money to pay their loans at the bank were ruined. Then banks lost assets and some were ruined.
It was a very bad depression. Anybody who thinks deflation is a good thing should study the Depression of 1837.
The United States experienced many panics, followed by depressions, throughout its history.
The closest thing we've seen to a panic in our lifetimes was the tech wreck of 1999, and the aftermath of 9/11.
In both cases, Greenspan kept the interest rates low, kept the money flowing. No depression. Lots of "creative destruction," but no depression.
CONCLUSION: these are just some thoughts off the top of my head. The money needs to keep flowing, without bottlenecks, without excessive pressure.
Human beings, too, need to be able to keep moving and making money.
Without money, no capitalism. Without capitalism, no incentive to produce more than you consume, and we're back to pre-feudalism.
Money is as necessary for our existence as air and water. When the money goes away, depressions are inevitable.
A long time ago, I started out asking the question "where did the money go?" I now know that the proper question is "why did the money go?" |
