The depression of 1929 is the wrong model for the current economic crisis

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effenheimer_IHB

effenheimer_IHB

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Apologies if this has been posted already. I did do a search...

The Real Great Depression

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
 
Hmm... maybe. If this is to be believed, then part of the problem was a contraction of the money supply. It seems to me that the Fed and Treasury are trying to increase the money supply. That the banks are, apparently, holding it rather than lending it seems to be the problem at the moment.
 
If I understand what I'm reading correctly, the Fed has pumped somewhere around $600 billion of liquidity into the money supply, but M1+M2 only increased by $100 billion.

I have to plead ignorance as I have no idea how the mechanics of Fed modulating M work, so I may have got this completely wrong.
 
That's what struck me the most about the article... We have a fiat money this time around. And helicopters.

Although as Mish says, you can print all you want but you cannot force banks to lend it or force consumers to borrow and spend it. A high supply of money might not help matters if the velocity is low. Where's our IHB econ major when you need him?
 
From that Wiki article:

The outbreak of equine influenza in 1872 had a pervasive effect on the economy. Called the “ Great Epizoötic”, it had an effect on every aspect of American transportation. The whole street railway industry ground to a halt. Locomotives came to a halt as coal or wood could not be delivered to power them. Even the United States Army Cavalry was reduced to fighting the Western tribes on foot; their adversaries likewise found their mounts too sick to do battle. The outbreak forced men to pull wagons by hand, while trains and ships full of cargo sat unloaded, tram cars stood idle and deliveries of basic community essentials were no longer being made. The effect this disease had on the US economy should not be understated.

Oil supply disruption, anyone?
 
no_vaseline said:
If I understand what I'm reading correctly, the Fed has pumped somewhere around $600 billion of liquidity into the money supply, but M1+M2 only increased by $100 billion.

I have to plead ignorance as I have no idea how the mechanics of Fed modulating M work, so I may have got this completely wrong.
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M1 ? currency held outside banks + demand deposits + traveler’s checks + other checkable deposits.

M2 ? M1 + savings accounts + money market accounts + other near monies.

Or in other words, the cash that is floating around at a given point in time. Most of what the Fed has done is not print more money, but allowed for banks/IBs to borrow from the Fed. From my understanding, and I could be wrong or just seriously tired from a long week, the banks have to pledge collateral to borrow from the Fed. So the money is already there, in the technical sense. The banks/IBs don't have a cash problem, they have a problem that no one will lend to them. If the banks were not pledging any collateral, then the Fed would just be printing more money, adding to the M1 and the M2.
 
EvaLSeraphim said:
Hmm... maybe. If this is to be believed, then part of the problem was a contraction of the money supply. It seems to me that the Fed and Treasury are trying to increase the money supply. That the banks are, apparently, holding it rather than lending it seems to be the problem at the moment.
Click to expand...

The Treasury and the Fed are being very successful at increasing the money supply. The assets which are presently deflating are not included in any index referred to as money supply, therefore the money supply is not deflating. Deflation and inflation are monetary conditions, not price indicators. It is all the rage to accuse the banks of being the problem since they ARE trying to increase their reserves, and maybe that is part of the problem, but maybe it is not. It very well could be that increasing the money supply is like pushing on a string at this point and will not have the same effect as it has in the past. Or in other words, past conditions do not guarantee future results.

One more thing. Even if the banks loosen lending standards, it does not necessarily follow that folks or organizations will borrow.
 
I'm not disputing that we are in a long hole before the whole eoncomy gets better. However, just looking at the stock market, I noticed this.

In 6/1932, DowJones was about 40. In December 1932, it hit 80, then dropped to 50 in March/1933, but went up to 100 in July/1932. Within One year! DJ then was somewhat stale until April/1936 when it hit 160.

Eventually, it took almost 22 years to get back to high of 1929 after falling some 85%, but my point is that from the bottom, stock market did recover gradually.

I don't think 14000 will be achievable any time soon. It may take 10 or more years. (could be shorter since we are more "modern" and more advanced technically than 80 years ago) However, we will not see depression like 1930s in my opinion and there are some 10 Trillion dollars in checking/saving/treasury bill now. That money can't be there forever.

I'm not an expert in this matter at all but have been studying and following what's going on in the blog, news, and market in general. I agree with IR that Housing market won't be coming back until 2012, but contrary to some people's belief, I think economy needs to get better (more job, higher income, coupled with lower housing price) before the housing market comes back. On top of that, the stock market will foresee the recovery of economy prior to that.

In short, things could happend like this. Stock market rally (no not double or triple from the bottom, may be 35 to 55%) from possible 7000 level bottom to 10000 or 11000 whin a year or two. Economy turn around within 4 to 5 years. Housing market rebound either simultaneously with economy (if price really goes down a lot from peak) or little later like 2013 or 2014. What do you think? No need to drop F bombs on me. Just my opinion...
 
I'm no economist and pretty much get my info where you do. Your theory seems as good as anything else I've seen and seems within the realm of probability.
 
OCMan said:
I'm not disputing that we are in a long hole before the whole eoncomy gets better. However, just looking at the stock market, I noticed this.

Stock market rally (no not double or triple from the bottom, may be 35 to 55%) from possible 7000 level bottom to 1000 or 1100 whin a year or two. ...
Click to expand...

Is there a 0 missing? Do you mean 10000 or 11000?
 
WestpartRenter and EvaL, b

Thanks. I corrected the numbers. You knew what I meant. Who know what would happen? I started buying some stock about 6 months ago thinking we were bottoming out and was actually up 3% until early Sept, then the all hell broke loose. Just like many others, I was wondering if I should cut the loss and get out but I resisted the temptation so far. Then I sort of had to look at the historical peformance of the stock market and see any proof that I should weather this out. Fortunately, I don't need that money right away, but I'm still regretting that I should've waited. Hind sight always 20/20.

Just looking at the historical fact/record, stock market rallied from crash almost everytime. According to Jubak at MSN.COM, if you held your stock for five years during any period including depression, at the worst, you would've lost 1 or 2 % annually (with inflation, it's more but still that's a lot better than getting out at the bottom in my opinion).

1) Another thing I noticed is that in 10/1973, DJ was all time high at like 987, then within a year it dropped 40% to 587 (very similar to what's happening now). Had double dip to 577 by Jan/19975, but recoved 88% to 875 by July/1995, and hit all time high again in March/1976 at 1003.

2) During 1977 through 1981, it was a painful stagnation, but still took 4 years to recover and during that time, there were several peaks and valleys but eventually hit 1200 in April/1983.

3) After black Monday in 1987, it only took 2 years to fully recover and bull market came back.

4) From the double dip bottom of late 2002 and early 2003, it was a bull market hitting all time high last year.

No, I'm not predicting the future. Yes, I'm concerned and fearful of the near future and my kids' life. I don't like what's happening in this country but hopeful that we will turn around. I just had to see my self with hard facts and numbers to know whether 3 to 5 year recovery has been done and would be possible.

I did my MBA mostly on operation and management so I only have limited knowledge of stock market and investment in general. But the stock market is highly emotional, speculative, and foreward looking. A lot of times, it's not the herd of small guys like me but a few big institutions and rich people drive the market condition. I'm pretty sure those rich guys want to double, triple their money instead of parking it in 0% yield treasury bill. However, I think most of the rich people are not really all crooks and con artists.

Therefore, my conclusion to myself it that unless I loose my job and deplete my other saving to survive, I stay the course and possibly buy little more stock if I could (though painful and highly tempting to give up and sob). I remember some bad times in 80s and 90s personally but stock market did more than 10X from sub 1000 to better than 10000 from 1980 ~ 2000...
 
What about the demographic effect as made famous in "The Pig and the Python"? The gist of the book was that by 2011-2015 there would be far more people needing to take their money out of the market to finance their retirements, than people putting money into the market to save for retirement. The effect would put a severe downward selling pressure on the market, just the opposite of baby boomers putting money into the market that gave us the tremendous asset appreciation in the 90's and early 00's. I think a demographic model of investors makes sense. Look at the demographics and there will be a shortage of investors in the near future. A large aging demographic will be needing their money, not investing their money.
 
Failedagent said:
What about the demographic effect as made famous in "The Pig and the Python"?...Look at the demographics and there will be a shortage of investors in the near future. A large aging demographic will be needing their money, not investing their money.
Click to expand...

I remember hearing about that. I was wondering if the boomers pulling money out will be offset by investing becoming more common. It is pretty common for a 25-year-old to be putting money into a 401k. I don't think it was so common for current 55-year-olds to have done so when they were 25. Would that help balance things out?
 
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