Thursday, August 9, 2012

Our current Depreession and its paralell the Great Depression

In the thirties we had the Great Depression.  Today we're in the middle of another.

What went wrong this time?  Did we learn anything from the first one?

In 1920-1921 there was almost depression.  But you've never heard of it. It could have been its own great depression but rather than try to stimulate the economy or reducing the interest rates the government instead did the opposite.

"At the conclusion of World War I, U.S. officials found themselves in a bleak position. The federal debt had exploded because of wartime expenditures, and annual consumer price inflation rates had jumped well above 20 percent by the end of the war.

To restore fiscal and price sanity, the authorities implemented what today strikes us as incredibly “merciless” policies. From FY 1919 to 1920, federal spending was slashed from $18.5 billion to $6.4 billion—a 65 percent reduction in one year. The budget was pushed down the next two years as well, to $3.3 billion in FY 1922.

On the monetary side, the New York Fed raised its discount rate to a record high 7 percent by June 1920. Now the reader might think that this nominal rate was actually “looser” than the 1.5 percent discount rate charged in 1931 because of the changes in inflation rates. But on the contrary, the price deflation of the 1920–1921 depression was more severe. From its peak in June 1920 the Consumer Price Index fell 15.8 percent over the next 12 months. In contrast, year-over-year price deflation never even reached 11 percent at any point during the Great Depression. Whether we look at nominal interest rates or “real” (inflation-adjusted) interest rates, the Fed was very “tight” during the 1920–1921 depression and very “loose” during the onset of the Great Depression."  - from here.

Similarly, in 2001 we had some problems in the economy.  Do you remember that?  Did the government "stimulate" the economy or buy lots of old cars to stave off that potential recession?

In 1929 there was a stock market crash.  Then the government decide to fix the depression.  It spent and spent, regulated and regulated some more, etc...  And the government saved the day.  We had a great depression that lasted for many years.

In 2008 we had another potential depression on our hands.  So the government spent and spent, regulated and regulated some more, "stimulated" the economy, etc...  And once again the policies of more government saved the day.  We have another depression.

Let's summarize:

When we have a potential depression and the federal government reduces spending and raises interest rates, or does not much of anything, we have a recession, or depression, that no one remebers even a few years later.

When we have a potential depression and the government decides to "help," we get The Great Depression, or today's Depression.

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