The Great Depression (Causes & Your Thoughts)

[michael_selway]

Hi Guys

Just wondering if anyone has studied the great depression in any detaill like the causes, the cures etc?

Below soem links and it does sound surprisingly familar!

http://en.wikipedia.org/wiki/Great_Depression
http://en.wikipedia.org/wiki/Great_Depression_in_Australia
http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday. The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939.[1]

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing.[citation needed] By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the American economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

Debt is seen as one of the causes of the Great Depression[8], particularly in the United States[citation needed]. Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view[citation needed] of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher:[citation needed] in the 1920s, American consumers and businesses relied on cheap credit[citation needed], the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production[citation needed]. This fueled strong short-term growth but created consumer and commercial debt[citation needed]. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default[citation needed]. Many drastically cut current spending to keep up timely payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in US unemployment rates of over 25% by 1933. Banks which had financed this debt began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.[9] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.[9]
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[9] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.

The Great Depression of the 1930s was an economic catastrophe that severely affected most nations of the world, and Australia was not immune. In fact, Australia, with its extreme dependence on exports, particularly primary products such as wool and wheat, is thought to have been one of the hardest-hit countries in the Western world along with Canada and Germany. Unemployment reached a record high of almost 29% in 1932, one of the highest rates in the world. There were also incidents of civil unrest, particularly in Australia's largest city, Sydney...

thx

MS

 

[It's Snake Pliskin]

Michael,

I see big differences, but some similarities.

Our ability to resist it today is far better than at that time.
It wasn't the only depression that has happened but it gets the most recognition.

 

[rhen]

Guess who may be preparing for this point in time (if it does eventuate and some suggest it will)?:

What would a socialist approach to the financial crisis look like? Emergency measures would be taken to transform the great banks, hedge funds, insurance companies and financial houses into public utilities. They would be placed under the democratic control of the working class, with safeguards for the savings of small depositors. Their resources would be used for productive and socially useful purposes and to alleviate the suffering of the population.

Trillions of dollars would be allocated to rebuild the infrastructure, provide new and high-quality housing, improve education, provide universal health care and access to higher education, and clean up the environment. Everyone would be guaranteed a job and a decent wage. The workweek would be reduced, with no loss in pay, and wages would be fully indexed to account for inflation.

The tax burden would be shifted from the working class to the richest 10 percent of the population.

There would be a full and public investigation into the activities of the banks and financial firms and the books of all major corporations would be opened to public inspection.

The wealth of financial industry executives and large stockholders would be appropriated, and they, along with their servants among the political elite, would face criminal investigation for the plundering of the economy that has led to the current crisis.

In order to fight for this socialist perspective, working people must break with the two parties of big business and build an independent political party that has, as its primary aim, the reorganization of the economy to meet social needs, rather than the profit interests of the financial elite. In the November election, only the Socialist Equality Party and its presidential and vice presidential candidates, Jerry White and Bill Van Auken, are advancing this socialist alternative. We urge readers of the World Socialist Web Site to support our campaign, vote for Jerry White and Bill Van Auken, and join the SEP.
http://www.wsws.org/articles/2008/oct2008/soci-o15.shtml

The American tax payers are angry...
Don't look for this in our media. Use the internet and seek the unfiltered facts. The measures the Socialists describe would seem to many over there to be the answer. Don't expect it but just don't be too surprised...

 

[chops_a_must]

The American tax payers are angry...
Don't look for this in our media. Use the internet and seek the unfiltered facts. The measures the Socialists describe would seem to many over there to be the answer. Don't expect it but just don't be too surprised...

A rise in the extreme political agendas are without doubt an inevitable outcome.

 

[Ageo]

Personally i believe that as long as their is a monetary system there will always be greed/power as money incentifies people.

After doing a fair bit of research into the 1930's i believe alot of things are happening here. The only difference is we have many more emerging markets than before......

 

[michael_selway]

Michael,

I see big differences, but some similarities.

Our ability to resist it today is far better than at that time.
It wasn't the only depression that has happened but it gets the most recognition.

Hi Snake what do you mean by "better ability to resist"?

Is it because of better technology, globalisation, more educated and faster to respond by governments?

thx

MS

 

[Temjin]

Here is an EXCELLENT ARTICLE to read about the differences between GOOD and BAD credit. It's very relevant to the great depression too.

http://mises.org/story/3151

Some brief quotes from the article

Bernanke is of the view that a major reason for the Great Depression of 1930s was the failure of the US central bank to act swiftly to revive the paralyzed credit market. By "swift action," Bernanke means massive monetary pumping.

The Fed chairman continuously reminds us that at least he has learned the lesson of the Great Depression and will make sure that the error that the Fed made then will not be repeated again.

Central-bank policy makers have said that the key for economic growth is a smooth flow of credit. For them (in particular, for Bernanke) it is credit that provides the foundation for economic growth and raises individuals' living standards. From this perspective, it makes a lot of sense for the central bank to make sure that credit flows again.

Following the teachings of Friedman and Keynes, it is an almost-unanimous view among experts that if lenders are unwilling to lend, then it is the duty of the government and the central bank to keep the flow of lending going.
For instance, if in the commercial-paper market lenders are not there, then the Fed should step in and replace these lenders. The important thing, it is held, is that various businesses that rely on the commercial-paper market to keep their daily operations going should be able to secure the necessary funding.

Will the increase in money pumping by central banks unfreeze credit markets? Experts believe that this will do the trick. If the current dosage of pumping won't work, then the central bank must continue to push more money until credit markets start moving again, so it is believed.

It is true that credit is the key for economic growth. However, one must make a distinction between good credit and bad credit. It is good credit that makes real economic growth possible and thus improves people's lives and well-being. False credit, however, is an agent of economic destruction and leads to economic impoverishment.

 

[Ageo]

Here is an EXCELLENT ARTICLE to read about the differences between GOOD and BAD credit. It's very relevant to the great depression too.

http://mises.org/story/3151

Some brief quotes from the article

Posted this link in the international markets thread earlier

https://www.aussiestockforums.com/forums/showthread.php?t=6395&page=182


Makes for very good reading indeed

 

[Temjin]

Posted this link in the international markets thread earlier

https://www.aussiestockforums.com/forums/showthread.php?t=6395&page=182


Makes for very good reading indeed

Oops, sorry. I didn't venture there first to check.

Agree, excellent read. The bread example for shoe was just perfect and easy to understand.

 

[It's Snake Pliskin]

Hi Snake what do you mean by "better ability to resist"?

Is it because of better technology, globalisation, more educated and faster to respond by governments?

thx

MS

Yes, pretty much the above due to the ability to trade with more people than at that time.

If someone has a credit card and the internet they can PURCHASE if available quicker than someone who has to walk 10 kilometres to buy what may not be available.

Read this thread and click and download the PDF book from the link in wayne's post.
https://www.aussiestockforums.com/forums/showthread.php?t=1240&highlight=depression

 

[michael_selway]

Yes, pretty much the above due to the ability to trade with more people than at that time.

If someone has a credit card and the internet they can PURCHASE if available quicker than someone who has to walk 10 kilometres to buy what may not be available.

Read this thread and click and download the PDF book from the link in wayne's post.
https://www.aussiestockforums.com/forums/showthread.php?t=1240&highlight=depression

Ok thnaks, very intersting article, but there appears to be some conflicting arguments

http://www.mackinac.org/archives/1998/sp1998-01.pdf

A M O D E R N F A I R y T A L E
According to this simplistic perspective, an important pillar of capitalism,
the stock market, crashed and dragged America into depression. President Herbert Hoover, an advocate of “hands-off,” or laissezfaire, economic policy, refused to use the power of government and conditions worsened as a result.
It was up to Hoover’s successor, Franklin Delano Roosevelt, to ride in on the white horse of government intervention and steer the nation toward recovery. The apparent lesson to be drawn is that capitalism cannot be trusted; government needs to take an active role in the economy to save us from inevitable decline.

The genesis of the Great Depression lay in the irresponsible monetary and fiscal policies of the U.S. government in the late 1920s and early 1930s. These policies included a litany of political missteps: central bank mismanagement, tradecrushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labor laws, to recount just a few. It was not the free market which produced 12 years of agony; rather, it was political
bungling on a grand scale.

thx

MS

 

[michael_selway]

Hey has anyone read thsi article?

It compares Australia to Iceland!

October 2008: two weeks ago Redeker repeated his claim that abundant foreign money had been available to Australia and too much of it had been spent on real estate, creating a speculative bubble: "The easy money went straight into real estate - Australia will now have to generate 4 per cent of GDP to meet payments to foreign holders of its assets. This is twice as high as the burden faced by the US."

After the Australian Reserve Bank slashed key interest rates by 1 per cent, Redeker also told London's Telegraph that he was concerned about what the Australian Government may do: "Yes, Australia has a fiscal surplus, but that does not offer as much protection as people think. If the Government boosts spending further, the current account deficit will spiral out of control."

http://www.brisbanetimes.com.au/articles/2008/10/19/1224351113115.html

 

[DJZ]

Debt Based Fractional Reserve Central Banking IS the problem, they Caused the problem now they come riding in as the Saviour's.

They are the cause, they allow money to be recklessly spent, missallocating capital in unproductive areas of the economy and then the credit is retracted for one reason or another (This time its sub-prime that cause a loss in confidence in the system) and the whole system crumbles in on its self.

I wrote this in another thread here

https://www.aussiestockforums.com/forums/showthread.php?t=12793&page=2

"Firstly, Every Fiat money system in the history of the world has collapsed!

The Creation of Money out of thin Air is the Problem! Power corrupts and Absolute power corrupts absolutely, the Central Bank has Absolute power over the issuance of Our money. They have a monopoly over the production of something that every single person needs.

The bare minimum we can strive for if we are to put up with a Fiat system, is to introduce competing currencies, so that the issuers of credit, have some sort of competition to put pressure on them to maintain the value of the currency they are selling, which would prevent an over abundance of credit.

If one currency is overinflated then people will move to another currency. Of course this causes runs on banks and can lead to people losing their money, but that is exactly what is needed, people need to understand risk instead of thinking they can go and spend as much as they want without a worry.

It would make people risk adverse and they would actually think about the true value of things as opposed to the numerical value, and would prevent wild speculation as the price of everything will not "Always Go Up".

Fractional Reserve banking is the other evil of our system. Why should someone be allowed to create something from nothing and then charge interest on it? Its perfectly fine to charge interest or get something in return for lending of your hard earned cash, but when you have neither worked hard nor own anything to begin with, why should you be given the power to charge on something you don't have?

When is comes down to it, Money is a Tool of Trade, a Store of value, for it to work fairly that value must remain true, otherwise people are being defrauded of their hard earned efforts, because it is their labour and energy that they trade for this Unit of Value. When a entity has the power to devalue that Unit(by way of printing more money), they are stealing from every single person who has worked hard to save and get ahead. Inflation is a Tax upon people, with whoever receives the pre-inflated dollars first benefiting, and the people who receive this money first? The Financial institutions, The Central bank is a banking cartel, they defraud everyone for the benefit of there own.

A centralised debt based fiat money system is a system open to severe corruption, and that is exactly what has occurred, indeed It was designed to be this way so why would we think anything else would happen."

 

[numbercruncher]

Its really great to see all you ASFers getting to the core of this gigantic issue ! Ive been a hardcore bear for a while but I could never word things as well as you guys, good work , makes my rantings un-needed around here lol

 

[ducati916]

Originally from my blog;

………………………………………………………………………….% Decline………..Cumulative
September 3 1929 to November 13 1929………………….-48%………………-48%
1’st Rally November 13 1929 to April 1’st 1930…………..+48%………………-23%

This part of the “Crash” was the stockmarket component. In essence driven by excessive leverage and speculation within the stockmarket itself.

*Leveraged Holding Companies
*Investment Trusts [highly leveraged]
*Low Margin requirements [highly leveraged speculators]

……………………………………………………………………………..% Decline………..Cumulative
First Banking Crisis April 17 1930 to September 16 1930….-36%…………………-59%
2′nd Rally December 16 1930 to February 24 1931………..+23%…………………-49%

The high number of Bank failures through the 1920’s was largely the result of hard times through the farming sector. The 1907 Banking crisis had led directly to the formation of the Federal Reserve, to mitigate such problems.

In 1930 Bank suspensions, or failures, were $287 million. In the first Banking crisis of 1930, this figure rose to $550 million very quickly, involving some 608 Banks. One of the failed Banks was “The Bank of the United States, a member Bank of the Federal Reserve. When 400,000 depositors lost their money, this materially changed perceptions

Economic change

Date…………………GDP…………Unemployment………..CPI…………….Retail Sales
Jun 1929……………100…………….100…………………100………………..100
Dec 1929…………..100.6…………..92.3………………..99.7……………….98.3
Jun 1930……………98.2……………83.8………………..99.1……………….90.6

As can be seen, after the first Banking crisis, and stockmarket plunge, the economy had constricted by 12%. The effects largely due to the Banking sector, rather than the stockmarket, as in December 1929 there had been an expansion. Certainly economic data lags somewhat, however, stockmarket plunges were a common experience in that era.

Stockmarket Plunges
January 1907 to November 1907…………………………………-44%
November 1916 to December 1917………………………………-39%
November 1919 to August 1921………………………………….-47%
September 1929 to November 1929……………………………..-48%

Thus we can see that the market plunge, while brutal, was not extraordinary in the light of previous experience.

………………………………………………………………………………..% Decline………..Cumulative
2′nd Banking Crisis February 24 1931 to October 5 1931…….-56%………………-77%
Potential stability October 5 1931 to March 8 1931…………..+1%……………….-76%

Economic Effects……..GDP…………Unemployment………..CPI…………….Retail Sales
June 1931……………..89.5………………70………………….94.8………………92.4
Dec 1931………………83.1………………62.2……………….92.1………………84.3

The Banking crisis drove GDP to an almost 30% contraction, and unemployment lept upwards with a concurrent falling in Retail Sales.

The Final Crisis………………………………………………….Market decline………Cumulative
The Gold Drain March 8 1932 to July 8 1932……………….-54%…………………….-76%

The economic crisis had become so bad in the rest of the world, and with the United States holding some 45% of the worlds gold, that several countries including France and Great Britain, were forced into revaluations and devaluations. With interest rates spiking upwards in Europe, Gold started to drain out of the US. Fearing a US devaluation, prices in the market once again plunged.

The economic consequences of a feared gold drain and devaluation, dealt a heavy blow to an already struggling economy.

Economic Effects……..GDP…………Unemployment………..CPI…………….Retail Sales
June 1932………………77.8……………48.6…………………88.2……………..74.9
Dec 1932……………….70.1……………57.2…………………84.8……………..69.3

As the second Banking crisis erupted worldwide with banking failures in Austria and Hungary, at the time still very important even though WWI had broken the empire, US funds held in the European banks became frozen.

It is here that the Federal Reserve made possibly it’s largest mistake, and the one that they are continuously criticised for, they in essence sat on their hands and did nothing. Rather than furnish liquidity via an elastic currency to the system, especially after one banking crisis the previous year, they did nothing.

It was this failure to provide liquidity that drove Corporations and individuals alike to scramble to cash and withdraw deposits from the system. The Gold crisis, then threatened the actual worth of the currency, and drove further redemptions from the deposit base by National Governments.

The 2008 crisis is at it’s heart a two pronged problem. First we had a Real Estate bubble form on the back of excessively cheap credit courtesy of Alan Greenspan, in an effort to cushion the effects of the 2000 stockmarket crash from the bubble in internet based common stocks. It was at it’s heart no different from other bubbles in new technologies, Railways, Automobiles, Electricity, Telephones.

This Real Estate bubble, as is Wall St’s want, was leveraged to very high levels via amongst others, derivatives. As these derivatives potentially unwind, the sheer leverage now threatens the viability of any bank with exposure to the CDS, as the figures dwarf their available capital.

As the Central Banks around the world gradually have evolved plans to deal with the problems, so will the problems in the banking system resolve. The problem though remains the damage that potentially can be wrought to the economy in the process.

That the Federal Reserve acted quickly under Bernanke, the ultimate damage, once contained, should resolve with a recession of indeterminate depth, rather than a repeat of the depression experience of the 1930’s. Certainly, with co-ordinated Central Bank action, the chances improve, rather than decrease.


http://leduc998.wordpress.com/2008/10/13/the-1929-crash-contrasted-with-the-2008-crash/#respond

jog on
duc

 

[michael_selway]

Its really great to see all you ASFers getting to the core of this gigantic issue ! Ive been a hardcore bear for a while but I could never word things as well as you guys, good work , makes my rantings un-needed around here lol

hehe yeah...and some maybe be "oblivious" to what is happening today and in the past

thx

MS

 

[Kimosabi]

Debt Based Fractional Reserve Central Banking IS the problem, they Caused the problem now they come riding in as the Saviour's.

They are the cause, they allow money to be recklessly spent, missallocating capital in unproductive areas of the economy and then the credit is retracted for one reason or another (This time its sub-prime that cause a loss in confidence in the system) and the whole system crumbles in on its self.

I wrote this in another thread here

https://www.aussiestockforums.com/forums/showthread.php?t=12793&page=2

"Firstly, Every Fiat money system in the history of the world has collapsed!

The Creation of Money out of thin Air is the Problem! Power corrupts and Absolute power corrupts absolutely, the Central Bank has Absolute power over the issuance of Our money. They have a monopoly over the production of something that every single person needs.

The bare minimum we can strive for if we are to put up with a Fiat system, is to introduce competing currencies, so that the issuers of credit, have some sort of competition to put pressure on them to maintain the value of the currency they are selling, which would prevent an over abundance of credit.

If one currency is overinflated then people will move to another currency. Of course this causes runs on banks and can lead to people losing their money, but that is exactly what is needed, people need to understand risk instead of thinking they can go and spend as much as they want without a worry.

It would make people risk adverse and they would actually think about the true value of things as opposed to the numerical value, and would prevent wild speculation as the price of everything will not "Always Go Up".

Fractional Reserve banking is the other evil of our system. Why should someone be allowed to create something from nothing and then charge interest on it? Its perfectly fine to charge interest or get something in return for lending of your hard earned cash, but when you have neither worked hard nor own anything to begin with, why should you be given the power to charge on something you don't have?

When is comes down to it, Money is a Tool of Trade, a Store of value, for it to work fairly that value must remain true, otherwise people are being defrauded of their hard earned efforts, because it is their labour and energy that they trade for this Unit of Value. When a entity has the power to devalue that Unit(by way of printing more money), they are stealing from every single person who has worked hard to save and get ahead. Inflation is a Tax upon people, with whoever receives the pre-inflated dollars first benefiting, and the people who receive this money first? The Financial institutions, The Central bank is a banking cartel, they defraud everyone for the benefit of there own.

A centralised debt based fiat money system is a system open to severe corruption, and that is exactly what has occurred, indeed It was designed to be this way so why would we think anything else would happen."

I don't have time to get into this in depth, but a Fractional Reserve Banking System needs a unnecessarily harsh Tax System as a mechanism to remove the excess cash from the system.

The other, more important point is that these "International Bankers" buy up "REAL" Asset's with money they have created out of nothing. This is theft of the highest magnitute.

Another point. If you purchase anything, ie Property, Shares etc using money that has been "LEANT" into existance, you never really own it. The reason for this is that you can't truly own something that has been purchased with a Debt Instrument.

This is the sort of information the Government really doesn't want us having access too, which is the real reason why they really want to start censoring the Internet.

 

[ozambersand]

ducati your post is really interesting as you can see that a real timeline was involved. The time frame between the different steps was months, not days.

It wasn't one huge market crash and then an instant Depression as many people think of it today. It happened in very distinct stages. Whether each was inevitable given what had happened prior is probably very important. Could measures have been introduced at different stages to prevent the seemingly inevitable next stage? Or was it really a snowball effect and once a bubble is burst and a stock market crashes to reality, the rest of the train wreck is inevitable (to mix metaphors! )
If we relate it to what we where we are at today, it seems we are just at the very beginning. That stock market crash took two months.
If things happen at the same rate as they did back then, we may not see the next step, the bank closures for another six months!
The Great Depression didn't really take hold till 1933, three years later!
Part of the problem, as I see it, is that the general Joe Blow in the street still has a job, has some money in the bank and can't see what the panic is all about.

 

[ducati916]

ducati your post is really interesting as you can see that a real timeline was involved. The time frame between the different steps was months, not days.

It wasn't one huge market crash and then an instant Depression as many people think of it today. It happened in very distinct stages. Whether each was inevitable given what had happened prior is probably very important. Could measures have been introduced at different stages to prevent the seemingly inevitable next stage? Or was it really a snowball effect and once a bubble is burst and a stock market crashes to reality, the rest of the train wreck is inevitable (to mix metaphors! )
If we relate it to what we where we are at today, it seems we are just at the very beginning. That stock market crash took two months.
If things happen at the same rate as they did back then, we may not see the next step, the bank closures for another six months!
The Great Depression didn't really take hold till 1933, three years later!
Part of the problem, as I see it, is that the general Joe Blow in the street still has a job, has some money in the bank and can't see what the panic is all about.

oz,

As can be seen, stockmarket crashes were far more common, and the 1929 crash albeit starting from a higher "bubble" level and highest P/E to date, due to a very leveraged capital structure, at that point didn't suggest that the crash would morph into the eventual depression that it did.

It was the leaking of problems associated to the stockmarket, into the "real economy" that intensified and spread the problem, specifically the Banks.

In 2008, it was the "housing crisis" that triggered the "financial crisis" via MBS and their derivative CDS into the Banking system.

Banks sit in the middle of the real economy, and the financial system. When the banking system becomes impaired, and cannot facilitate the transfer of credit [real or fractional] then the economy sputters due to the reliance of credit in transacting business.

In the 1930's there was no FDIC and the Fed did not furnish any elasticity to the currency, both omissions exacerbated the banking failures.

In 2008, both the Treasury & Fed + Central Banks worldwide are providing FDIC guarantees and ample liquidity. The problem being that excessive credit to inappropriate borrowers was provided by Greenspan, which was then leveraged to insane levels, again exacerbating the effect of poor credit allocation.

This phenomenon traveled the globe with housing bubbles fueled on cheap credit almost everywhere, and now they are collapsing simultaneously worldwide, with the effects leaking into real economies.

The inflationary era of the 1970-1980's "taught" people to mistrust cash, and rather invest it in an appreciating asset, houses, common stocks. This mindset has persevered, and many peoples savings, and thus wealth, are caught up within financial assets, that can at periods of severe dislocations exhibit severe volatility.

The destruction of financial asset wealth, is now being transmitted into the real economy via reduced consumption. Reduced consumption squeezes profit margins, which are most easily protected via layoffs or reduced hours.

Thus the pernicious cycle of unemployment can take hold. The US has lost in excess of 1M jobs in a very short timeframe due to the collapse in two major sectors [Housing & Financial] and this of course contributes a positive feed-forward stimulus to an already stressed system.

Where it will end, relies in no small part as to whether the proposal of credit, by the Federal Reserve & other Central Banks, will result in the disposal of credit by the end user, the consumer and corporate capital spending.

Neither look too promising currently. The supreme irony being just as the consumer abandons their fear of inflation and returns to cash, we are likely to again experience a highly inflationary period via huge Central Bank stimulus.

jog on
duc

 

[It's Snake Pliskin]

oz,

As can be seen, stockmarket crashes were far more common, and the 1929 crash albeit starting from a higher "bubble" level and highest P/E to date, due to a very leveraged capital structure, at that point didn't suggest that the crash would morph into the eventual depression that it did.

It was the leaking of problems associated to the stockmarket, into the "real economy" that intensified and spread the problem, specifically the Banks.

In 2008, it was the "housing crisis" that triggered the "financial crisis" via MBS and their derivative CDS into the Banking system.

Banks sit in the middle of the real economy, and the financial system. When the banking system becomes impaired, and cannot facilitate the transfer of credit [real or fractional] then the economy sputters due to the reliance of credit in transacting business.

In the 1930's there was no FDIC and the Fed did not furnish any elasticity to the currency, both omissions exacerbated the banking failures.

In 2008, both the Treasury & Fed + Central Banks worldwide are providing FDIC guarantees and ample liquidity. The problem being that excessive credit to inappropriate borrowers was provided by Greenspan, which was then leveraged to insane levels, again exacerbating the effect of poor credit allocation.

This phenomenon traveled the globe with housing bubbles fueled on cheap credit almost everywhere, and now they are collapsing simultaneously worldwide, with the effects leaking into real economies.

The inflationary era of the 1970-1980's "taught" people to mistrust cash, and rather invest it in an appreciating asset, houses, common stocks. This mindset has persevered, and many peoples savings, and thus wealth, are caught up within financial assets, that can at periods of severe dislocations exhibit severe volatility.

The destruction of financial asset wealth, is now being transmitted into the real economy via reduced consumption. Reduced consumption squeezes profit margins, which are most easily protected via layoffs or reduced hours.

Thus the pernicious cycle of unemployment can take hold. The US has lost in excess of 1M jobs in a very short timeframe due to the collapse in two major sectors [Housing & Financial] and this of course contributes a positive feed-forward stimulus to an already stressed system.

Where it will end, relies in no small part as to whether the proposal of credit, by the Federal Reserve & other Central Banks, will result in the disposal of credit by the end user, the consumer and corporate capital spending.

Neither look too promising currently. The supreme irony being just as the consumer abandons their fear of inflation and returns to cash, we are likely to again experience a highly inflationary period via huge Central Bank stimulus.

jog on
duc

Thanks for the comments Duc.

How long could we expect for the highly inflationary period?