10 ms·

The sub title of the article is "History ain't changed" and the article starts with "In the late summer of 1929 [...]" and I already knew that I shouldn't have

by bhaak 5y ago

The sub title of the article is "History ain't changed" and the article starts with "In the late summer of 1929 [...]" and I already knew that I shouldn't have read any further. Yes, there will be a crash, there always is, but it will play out differently than the ones before. History only rhymes, never repeats itself. There have been calls for a big crash for decades now but no crash in this millennium was the big one. "The S&P 500 fell 57% during the 2008 crisis, 49% in the dot-com bubble, and 34% during the COVID-19 crash. So if the most pessimistic predictions prove true, the next one would be the most dramatic crash since the Great Depression." We already had big crashes in the last decades but we always came round (more or less). We are no longer on the gold standard, governments have plenty of experiences with crashes. I'm not convinced that we'll be seeing a crippling crash again.

crooked-v 5y ago
> We are no longer on the gold standard This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.
- drsnow 5y ago
  Can you elaborate? I'd like to know why this is the case
  - chii 5y ago
    i suspect the OP is suggesting that you can print your way out of a depression.
    - grey-area 5y ago
      What could possibly go wrong! This strategy of financializing governments debt to deal with financial difficulties led to the south sea bubble. MMT is an old lie, oft repeated.
  - pharmakom 5y ago
    Print money, buy assets, raise price floor.
    - mrjin 5y ago
      If printing money can resolve all problems, Zimbabwe must have become the strongest nation in the world.
      - clavicat 5y ago
        They do have the best-performing stock market.
      - kqr 5y ago
        You can't print your way out of debt held in foreign currency. That's different.
        guiriduro 5y ago
        Begs the question why anyone would lend US corps and institutions US dollars. In fact, increasingly, they're not. Which can create its own problematic scenarios.
      - petters 5y ago
        It solves some problems, not all.
      - bserge 5y ago
        They should've printed US Dollars, d'uh. Actually not a bad idea for a small/poor country if they can get their hands on good equipment (at least until the CIA finds out lol). Some say North Korea is doing it.
      - kamaal 5y ago
        Printing money really isn't that big a problem if you know how to take it back from the public(aka taxes). In fact if you have a strong enough tax collection system, printing is actually good because it cleans up debt by inflating it, provides liquidity, and has other benefits. You just need to pull it back from the public intelligently.
  - dodobirdlord 5y ago
    The Great Depression was caused by the gold standard. The initial crash caused a panic, which caused a run on the banks. Banks did not have the cash on hand to return all deposits, and many failed. This was before the FDIC existed, so when banks failed anyone with outstanding deposits just lost their balance. The ripple effect of this disruption through the economy was dramatic, and caused a deflationary spiral. - Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations. - Many banks had failed, and were not available to make loans. - Banks that hadn't failed were much more cautious about extending loans. - Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans. - Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages. - Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks. - etc. With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII. --- So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt. And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.
- starfallg 5y ago
  There is the possibility of a debt bomb once we run out of safe assets for QE. That rubber band will snap if you stretch it long enough, and it will snap hard.
- madsbuch 5y ago
  Governments are quite good at managing the financial system with the tools currently in use. But there is a chance that we will see change to those tools. Like we previously abandoned the gold standard to get to the current system, there is a good chance, that we will need to abandon the current system to get to a post-current system to avoid a "depression-level crash". What could be the cause for the need to abandon the current system? Well, this is where we go into the realm of prediction. But there are quite some technological tooling to outperform current economic and governmental structures. Those are currently in their infancy, but we will probably be forced to make some serious changes when they reach maturity.
- anovikov 5y ago
  People are also not allowed to trade stocks at such a massive leverage as they did in 1929 (which was the actual reason for crash - massive volume of leveraged trades and thus, margin calls and forced sales). And investment banks are separated from banks holding people's deposits, so you can be sure your deposits aren't participating in stock trading - especially not leveraged trading. They massively did in 1929, however batshit crazy it may sound today.
- TimMurnaghan 5y ago
  Vaguely competent financial management is by no means assured. I suggest reading Tim Geithner's "Stress Test" to to see how hard he had to fight to get some basic things done.
- drumhead 5y ago
  So its different this time?
  - andi999 5y ago
    An inflated asset is only a bubble if it bursts.
- alfiedotwtf 5y ago
  > with a decent credit rating That's the thing... what happens next year when Biden in a lame-duck President and the GOP end up blocking the next debt ceiling raise? The US would then be unable to pay bond coupons which would trigger a default. This would cause America's credit rating to tank.
flyinglizard 5y ago
Market crashes, much like forest fires, used to return things to a baseline. Now that we know how to prevent crashes - and forest fires - we risk creating an unhealthy environment which keeps growing until the inevitable catastrophe, where the underlying forces are beyond our means to control. To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.
- Eduard 5y ago
  >... Now that we know how to prevent crashes - and forest fires ... So we shall read your comment as irony?
  - ehnto 5y ago
    The analogy here is that we knew enough about forest fires to stop them from happening in a way that later on causes much worse catastrophic wildfires. The recent Californian and Australian wildfires were both worsened by previously putting out any and all fires and not letting burn-off of risk (brush/fuel) happen at a manageable scale. I don't know anything about the stock market, mind. But I get their analogy.
buzzwords 5y ago
The only thing I would say is that goverments have only so many levers they could pull and some of those are already to pulled close to their max capacity.

by bhaak 5y ago

crooked-v 5y ago

> We are no longer on the gold standard This is a key thing. A Great Depression-level crash is basically impossible in any modern country with a decent credit rating and even vaguely competent financial management.

drsnow 5y ago
Can you elaborate? I'd like to know why this is the case
- chii 5y ago
  i suspect the OP is suggesting that you can print your way out of a depression.
  - grey-area 5y ago
    What could possibly go wrong! This strategy of financializing governments debt to deal with financial difficulties led to the south sea bubble. MMT is an old lie, oft repeated.
- pharmakom 5y ago
  Print money, buy assets, raise price floor.
  - mrjin 5y ago
    If printing money can resolve all problems, Zimbabwe must have become the strongest nation in the world.
    - clavicat 5y ago
      They do have the best-performing stock market.
    - kqr 5y ago
      You can't print your way out of debt held in foreign currency. That's different.
      - guiriduro 5y ago
        Begs the question why anyone would lend US corps and institutions US dollars. In fact, increasingly, they're not. Which can create its own problematic scenarios.
    - petters 5y ago
      It solves some problems, not all.
    - bserge 5y ago
      They should've printed US Dollars, d'uh. Actually not a bad idea for a small/poor country if they can get their hands on good equipment (at least until the CIA finds out lol). Some say North Korea is doing it.
    - kamaal 5y ago
      Printing money really isn't that big a problem if you know how to take it back from the public(aka taxes). In fact if you have a strong enough tax collection system, printing is actually good because it cleans up debt by inflating it, provides liquidity, and has other benefits. You just need to pull it back from the public intelligently.
- dodobirdlord 5y ago
  The Great Depression was caused by the gold standard. The initial crash caused a panic, which caused a run on the banks. Banks did not have the cash on hand to return all deposits, and many failed. This was before the FDIC existed, so when banks failed anyone with outstanding deposits just lost their balance. The ripple effect of this disruption through the economy was dramatic, and caused a deflationary spiral. - Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations. - Many banks had failed, and were not available to make loans. - Banks that hadn't failed were much more cautious about extending loans. - Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans. - Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages. - Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks. - etc. With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII. --- So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt. And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.
starfallg 5y ago
There is the possibility of a debt bomb once we run out of safe assets for QE. That rubber band will snap if you stretch it long enough, and it will snap hard.
madsbuch 5y ago
Governments are quite good at managing the financial system with the tools currently in use. But there is a chance that we will see change to those tools. Like we previously abandoned the gold standard to get to the current system, there is a good chance, that we will need to abandon the current system to get to a post-current system to avoid a "depression-level crash". What could be the cause for the need to abandon the current system? Well, this is where we go into the realm of prediction. But there are quite some technological tooling to outperform current economic and governmental structures. Those are currently in their infancy, but we will probably be forced to make some serious changes when they reach maturity.
anovikov 5y ago
People are also not allowed to trade stocks at such a massive leverage as they did in 1929 (which was the actual reason for crash - massive volume of leveraged trades and thus, margin calls and forced sales). And investment banks are separated from banks holding people's deposits, so you can be sure your deposits aren't participating in stock trading - especially not leveraged trading. They massively did in 1929, however batshit crazy it may sound today.
TimMurnaghan 5y ago
Vaguely competent financial management is by no means assured. I suggest reading Tim Geithner's "Stress Test" to to see how hard he had to fight to get some basic things done.
drumhead 5y ago
So its different this time?
- andi999 5y ago
  An inflated asset is only a bubble if it bursts.
alfiedotwtf 5y ago
> with a decent credit rating That's the thing... what happens next year when Biden in a lame-duck President and the GOP end up blocking the next debt ceiling raise? The US would then be unable to pay bond coupons which would trigger a default. This would cause America's credit rating to tank.

flyinglizard 5y ago

Market crashes, much like forest fires, used to return things to a baseline. Now that we know how to prevent crashes - and forest fires - we risk creating an unhealthy environment which keeps growing until the inevitable catastrophe, where the underlying forces are beyond our means to control. To the psychology of "the market always go up" we've now collectively added - through our interconnected hivemind - "buying the dip", and on the opposite end we have inflation coming after those who are more conservative, pushing them into taking uncomfortable risks.

Eduard 5y ago
>... Now that we know how to prevent crashes - and forest fires ... So we shall read your comment as irony?
- ehnto 5y ago
  The analogy here is that we knew enough about forest fires to stop them from happening in a way that later on causes much worse catastrophic wildfires. The recent Californian and Australian wildfires were both worsened by previously putting out any and all fires and not letting burn-off of risk (brush/fuel) happen at a manageable scale. I don't know anything about the stock market, mind. But I get their analogy.

buzzwords 5y ago

The only thing I would say is that goverments have only so many levers they could pull and some of those are already to pulled close to their max capacity.