6 ms·

"According to two new papers, the crucial variable that separates relatively harmless frenzies from disastrous ones is debt." Also according to, like, Irving F

by derf_ 11y ago

"According to two new papers, the crucial variable that separates relatively harmless frenzies from disastrous ones is debt." Also according to, like, Irving Fisher in 1933: https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf "I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate rôle as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price-level disturbances."

danieltillett 11y ago
Very hard to have sustained deflation when you are using a fiat currency. The only example in history has been Japan and this only occurred because of a political decision. We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east.
- arthurcolle 11y ago
  Great deflation is your GD as opposed to Great depression? Since you are talking about Japan
  - danieltillett 11y ago
    I meant the Great Depression :) While it is worth looking to the past to gain understanding we need to be really careful about doing so since the past really is a foreign land. Edit. If a country wants me to cure their deflation problem just give me control of their printing press for a few months. I can guarantee that by the time I am finished Zimbabwe will be held up as a paragon of financial rectitude compared to my handy work.
    - arthurcolle 11y ago
      I completely agree. Even characterizations of our past financial crisis (late 2000s financial crisis) as being "the worst since the Great Depression" miss the major difference between it and previous financial crises. The superficial similarity is that it was tangentially related to an 'asset bubble' (which is the common shared element of most financial crises), but the deeper and more troubling component (troubling in the sense of it hopefully not being an omen for later crises to occur) was the fact that it got out of control because of the omnipresence in late '08 markets of financial instruments designed to allow accredited investors to gain exposure to specific market segments, which then became extremely popular among banking houses and other financial market actors. People commonly view this as the same thing but never before had a class of specific financial products (in this case, RMBSs - residential mortgage backed securities and their related derivative instruments) become so extremely popular that their universal acceptance acted as a prelude to their total deterioration in value. To preempt subsequent comments: Yes, LBOs became super popular in the 80s and are kinda sorta similar but these aren't really financial products at all. They are mechanisms to finance the takeover of companies based on debt and financial products are involved but never before had downturns been so driven by the creation of market-specific financial instruments. The increasing complexity of financial markets is super awesome and will allow the blossoming of a wide variety of financial opportunities for interested parties, but this obfuscation should not come at the cost of... submerging entire market economics lol
      - douche 11y ago
        I always feel like the more relevant example for our current financial bubbles would be the South Seas Bubble[1] [1]https://en.wikipedia.org/wiki/South_Sea_Company https://en.wikipedia.org/wiki/South_Sea_Company
- Tloewald 11y ago
  > We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east. I don't know anything about the Thirty Years war, but I doubt that there's any major recent act of stupidity that was caused by excessive cleaving to (or knowledge of) historical experience. I suspect we'll keep on looking back at the great depression until it ceases to seem salient. Oh, and the Crusades explain quite a bit about the state of the middle east.
  - douche 11y ago
    Maybe if every western country decided to shithouse ISIS for their brutalities with their younger sons. And all of Occupy Wall Street banded together behind some charismatic idiot and marched over there without warlike equipment to fight the Arab/Turk.
  - douche 11y ago
    If you really want to see an explanation of the Middle East, look at the way France and the UK divided up the region in the wake of WW1, and then abdicated their responsibilities after WW2.
    - Tloewald 11y ago
      Yeah we've all watched Lawrence of Arabia.
      - douche 11y ago
        I was thinking more about Leon Uris' Exodus. Most of the faults of colonialism seem to come from how poorly the handoff between the imperial powers and the local population went. It's an interesting dynamic, since almost all of the traditional colonial powers were a shell of themselves by 1945, while the two ascendant powers were the USA and USSR, who really hadn't been involved in the Victorian era colonial land-grabs, at least to the extent that the UK, France, Germany, Belgium, and even Italy were.
  - 11y ago
- skylan_q 11y ago
  The gov't decides the policy of the central bank, so it's always political. Right now, the scheme is to drive inflation which pours newly printed money into gov't coffers as that's how new money makes it into the economy: through gov't bonds. If the gov't created a policy of deflation (which would be against them growing their budget as much as possible) then there would be deflation. The central bank policy is always political.
- cliftonk 11y ago
  I completely disagree with your assertion that you can "cure" deflation with a printing press. And how is Japan not a relevant example? You can certainly raise prices of financial assets but when the long rates are low for so long (and are made lower by QE) there emerges a negative feedback loop of overproduction -> oversupply -> lower prices for goods, with a stronger concentration of this effect low on the value chain (CPI ex-housing). In fact, if you look at domestic and european CPI's ex-housing (European countries are ex-housing by default), you will see that the inflation rates has been nearly 0 since the financial crisis despite printing trillions of dollars. But stocks are expensive. Quote from Greenspan: "As the cost of capital approaches zero, so too will the return on capital." And to pose another question to you: from what transmission mechanism will your printing press create inflation when long rates are already low? Like another poster below, I suggest reading the material at http://www.economicprinciples.org/ http://www.economicprinciples.org/
  - skylan_q 11y ago
    I have to agree that monetary stimulus alone isn't enough. Some call this the "zero lower bound" and that fiscal policy needs to drive inflation. https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound Mind you I think 0% interest rates from a central bank and reckless gov't spending are idiotic policies.
    - danieltillett 11y ago
      You can have negative interest rates (Switzerland and Sweden currently have them) so the zero lower bound does not need to exist. Of course monetary stimulus only works if the banks decide to actual lend all this cheap money. If they don’t then the money just piles up on their balance sheet and has no effect on aggregate demand.
      - yxhuvud 11y ago
        Sweden has negative rates when loaning in money, not when loaning out money. That is, they are not violating the zero lower bound - they are simply a bit closer to it.
- Symmetry 11y ago
  I think the problem is more that most people only learn about the Great Depression in a strictly historical context and only the theories about its causes that were popularly discussed at the time make their way into high school history textbooks. I doubt there are many serious scholars of the Great Depression these days would talk about the stock market crash as causing the depression. However, all the policy makers at the time knew about the stockmarket crash because it was obvious. The monthly industrial production numbers took months to assemble and while they show a decline that started well before the crash that information wasn't available to politicians until well after information about the stock market was. And it never really made the newspapers or got into the public consciousness.
pdecker 11y ago
its debt cycles that one should really watch...check out Ray Dalio's "How The Economic Machine Works"...there's a video and a paper...the paper is much more informative.
skylan_q 11y ago
The Austrians have been saying this since about the same time or earlier. Read only if you're interested in the theory of economic bubbles. The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank or fractional reserve banks. https://en.wikipedia.org/wiki/Austrian_business_cycle_theory https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
dnautics 11y ago
Also according to Kindleberger ("manias, panics, crashes"), which is slightly more accessible than Fisher. I cannot recommend this book more to people interested in having insightful things to say about market bubbles. http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146 http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest... Even the economist has previously commented on this, but I guess the writer of this article forgot http://www.economist.com/node/1923462 http://www.economist.com/node/1923462

by derf_ 11y ago

danieltillett 11y ago

Very hard to have sustained deflation when you are using a fiat currency. The only example in history has been Japan and this only occurred because of a political decision. We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east.

arthurcolle 11y ago
Great deflation is your GD as opposed to Great depression? Since you are talking about Japan
- danieltillett 11y ago
  I meant the Great Depression :) While it is worth looking to the past to gain understanding we need to be really careful about doing so since the past really is a foreign land. Edit. If a country wants me to cure their deflation problem just give me control of their printing press for a few months. I can guarantee that by the time I am finished Zimbabwe will be held up as a paragon of financial rectitude compared to my handy work.
  - arthurcolle 11y ago
    I completely agree. Even characterizations of our past financial crisis (late 2000s financial crisis) as being "the worst since the Great Depression" miss the major difference between it and previous financial crises. The superficial similarity is that it was tangentially related to an 'asset bubble' (which is the common shared element of most financial crises), but the deeper and more troubling component (troubling in the sense of it hopefully not being an omen for later crises to occur) was the fact that it got out of control because of the omnipresence in late '08 markets of financial instruments designed to allow accredited investors to gain exposure to specific market segments, which then became extremely popular among banking houses and other financial market actors. People commonly view this as the same thing but never before had a class of specific financial products (in this case, RMBSs - residential mortgage backed securities and their related derivative instruments) become so extremely popular that their universal acceptance acted as a prelude to their total deterioration in value. To preempt subsequent comments: Yes, LBOs became super popular in the 80s and are kinda sorta similar but these aren't really financial products at all. They are mechanisms to finance the takeover of companies based on debt and financial products are involved but never before had downturns been so driven by the creation of market-specific financial instruments. The increasing complexity of financial markets is super awesome and will allow the blossoming of a wide variety of financial opportunities for interested parties, but this obfuscation should not come at the cost of... submerging entire market economics lol
    - douche 11y ago
      I always feel like the more relevant example for our current financial bubbles would be the South Seas Bubble[1] [1]https://en.wikipedia.org/wiki/South_Sea_Company https://en.wikipedia.org/wiki/South_Sea_Company
Tloewald 11y ago
> We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east. I don't know anything about the Thirty Years war, but I doubt that there's any major recent act of stupidity that was caused by excessive cleaving to (or knowledge of) historical experience. I suspect we'll keep on looking back at the great depression until it ceases to seem salient. Oh, and the Crusades explain quite a bit about the state of the middle east.
- douche 11y ago
  Maybe if every western country decided to shithouse ISIS for their brutalities with their younger sons. And all of Occupy Wall Street banded together behind some charismatic idiot and marched over there without warlike equipment to fight the Arab/Turk.
- douche 11y ago
  If you really want to see an explanation of the Middle East, look at the way France and the UK divided up the region in the wake of WW1, and then abdicated their responsibilities after WW2.
  - Tloewald 11y ago
    Yeah we've all watched Lawrence of Arabia.
    - douche 11y ago
      I was thinking more about Leon Uris' Exodus. Most of the faults of colonialism seem to come from how poorly the handoff between the imperial powers and the local population went. It's an interesting dynamic, since almost all of the traditional colonial powers were a shell of themselves by 1945, while the two ascendant powers were the USA and USSR, who really hadn't been involved in the Victorian era colonial land-grabs, at least to the extent that the UK, France, Germany, Belgium, and even Italy were.
- 11y ago
skylan_q 11y ago
The gov't decides the policy of the central bank, so it's always political. Right now, the scheme is to drive inflation which pours newly printed money into gov't coffers as that's how new money makes it into the economy: through gov't bonds. If the gov't created a policy of deflation (which would be against them growing their budget as much as possible) then there would be deflation. The central bank policy is always political.
cliftonk 11y ago
I completely disagree with your assertion that you can "cure" deflation with a printing press. And how is Japan not a relevant example? You can certainly raise prices of financial assets but when the long rates are low for so long (and are made lower by QE) there emerges a negative feedback loop of overproduction -> oversupply -> lower prices for goods, with a stronger concentration of this effect low on the value chain (CPI ex-housing). In fact, if you look at domestic and european CPI's ex-housing (European countries are ex-housing by default), you will see that the inflation rates has been nearly 0 since the financial crisis despite printing trillions of dollars. But stocks are expensive. Quote from Greenspan: "As the cost of capital approaches zero, so too will the return on capital." And to pose another question to you: from what transmission mechanism will your printing press create inflation when long rates are already low? Like another poster below, I suggest reading the material at http://www.economicprinciples.org/ http://www.economicprinciples.org/
- skylan_q 11y ago
  I have to agree that monetary stimulus alone isn't enough. Some call this the "zero lower bound" and that fiscal policy needs to drive inflation. https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound Mind you I think 0% interest rates from a central bank and reckless gov't spending are idiotic policies.
  - danieltillett 11y ago
    You can have negative interest rates (Switzerland and Sweden currently have them) so the zero lower bound does not need to exist. Of course monetary stimulus only works if the banks decide to actual lend all this cheap money. If they don’t then the money just piles up on their balance sheet and has no effect on aggregate demand.
    - yxhuvud 11y ago
      Sweden has negative rates when loaning in money, not when loaning out money. That is, they are not violating the zero lower bound - they are simply a bit closer to it.
Symmetry 11y ago
I think the problem is more that most people only learn about the Great Depression in a strictly historical context and only the theories about its causes that were popularly discussed at the time make their way into high school history textbooks. I doubt there are many serious scholars of the Great Depression these days would talk about the stock market crash as causing the depression. However, all the policy makers at the time knew about the stockmarket crash because it was obvious. The monthly industrial production numbers took months to assemble and while they show a decline that started well before the crash that information wasn't available to politicians until well after information about the stock market was. And it never really made the newspapers or got into the public consciousness.

pdecker 11y ago

its debt cycles that one should really watch...check out Ray Dalio's "How The Economic Machine Works"...there's a video and a paper...the paper is much more informative.

skylan_q 11y ago

The Austrians have been saying this since about the same time or earlier. Read only if you're interested in the theory of economic bubbles. The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank or fractional reserve banks. https://en.wikipedia.org/wiki/Austrian_business_cycle_theory https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

dnautics 11y ago

Also according to Kindleberger ("manias, panics, crashes"), which is slightly more accessible than Fisher. I cannot recommend this book more to people interested in having insightful things to say about market bubbles. http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146 http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest... Even the economist has previously commented on this, but I guess the writer of this article forgot http://www.economist.com/node/1923462 http://www.economist.com/node/1923462