This page has been archived and commenting is disabled.
Guest Post: The Great Imbalance: A Critique Of The Recession Of 1920-21 - Causes, Responses And Insights
The Great Imbalance: A Critique Of The Recession Of 1920-21 - Causes, Responses And Insights, Submitted by Andrew Mellon
»
- 12192 reads
- Printer-friendly version
- Send to friend
- advertisements -
Long read, but worth it.
" Lords of Finance " does a good job with this forgotten period of post WWI.
And all politicians should read " House of Morgan " and " Mellon "....assuming they read anything. Only difference between that period and today is a lack of moral will and guts and that the bureaucrats and electeds of today run the government exclusively for their own self-serving benefit.
The government tail wags the taxpayer dog.....easily acheived through encouraging American Idol-type ignorance of the masses.
Lords of Finance is real bad.
Jim Grant's review of LOF = http://online.wsj.com/article/SB123311138869622913.html#printMode
Great, no gold standard nor specie in the way today, just hide the liabilities, print and borrow, no problems.
Jesus, Andrew Mellon must be 150 years old by now. I commend the man for his continued efforts to promote liquidation of malinvestments as the only cure to an artificial boom.
That Andrew Mellon actually was Treasury Secretary in 1921.
Yes, and I suspect that the author is using him as a pseudonym because it would be a hell of a coincidence if someone named Andrew Mellon was promoting the solution of liquidation over extend-and-pretend. Hence my bad joke that the author is 150 years old.
Did Andrew write this or submit this?
Andrew = http://amellon.wordpress.com/who-is-andrew-mellon/, yes?
That was a great piece. Thanks, Tyler. I had heard references to the 1920-21 recessesion before, but I didn't know what caused it. And now I understand more fully why the Federal Reserve was created. It's part of a recurring theme of solving problems caused by government interventions into the economy with more and greater government interventions into the economy.
It was a depression, not a recession. Prices deflated in the neighborhood of 38%-40%.
No problem the central bank that brought you the liquidity solution to insolvency now brings you a revenue solution (VAT) to a cost problem. The gang that simply can't shoot straight. You know it is bad when even Karzai is telling Hillary to pound sand
"Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax "was not as toxic an idea" as it has been in the past and also said a carbon or other energy-related tax may become necessary" Volker per Reuters
http://www.atimes.com/atimes/South_Asia/LD02Df02.html
Just what we need a large energy tax on top to $100 pb oil to crush our economy ... well maybe deflation can come ... we crash and burn and the Phoenix of America can rise once again.
what economy?
you seem to be labouring under the delusion that the US is an exporter. Rising oil prices help the US economy vs its competitors
38-40% huh? We are almost there!
However I stand my call from over a year ago. The depression started January 2009.
I'm afraid Mr. Mellon is missing a key difference between the current economy and the 1920-21 recession. Total credit market debt as a percent of GDP is the highest now in American history, far exceeding the ratio of 1920-21 and even that of the Great Depression. We are facing dual evils of excess capacity and the need to create $4 of credit to generate a dollar of GDP.
Okay, I plead ignorant. One of the reason's I'm here is to learn more about our inevitable doom. Please explain or expand on "We are facing dual evils of excess capacity and the need to create $4 of credit to generate a dollar of GDP."
Thanks!
Both are results of the massive Fed credit-fueled boom:
As the Federal Reserve continuously lowered interest rates, making dollars more and more easily available, and banks took this free money and leveraged even more credit 10-1, 20-1, 30-1 on top of that, floods of almost free money were unleashed into the creation of what seemed like hugely profitable enterprises. Since almost anyone could access this credit, it seemed like there was endless demand from the American consumer for gadgets, gizmos and mcmansions.
To satisfy this credit-created demand, more credit was used to, in the U.S., build houses and build stores that supplied houses and build huge malls that sold gizmos, gadgets and fancy women's shoes, all of which were produced in Asia (where labor is cheap) by factories built using even more credit. All of this, the credit-financed worldwide car, gizmo, gadget, fancy women's shoe factories, the American mcmansions and the Home Depots and huge outlet malls is now excess capacity.
The reason that it is excess, and not just massive capacity, is that, at some point, the American consumer realized it had taken too much of this credit on and now could barely afford to pay its debts. So the consumer can no longer take on debt and can no longer provide the demand for all of this supply of stuff.
And, because there is so much debt permeating the system, more debt is now used mainly to pay back old debt, which is why it now takes $4 of credit to generate a dollar of GDP, as the first $3 new dollars of credit is used to pay back $3 of old debt + interest.
Hope that helps- buy physical gold
Your "credit boom" wasn't created by any Fed policy but by BOJ policy: Japan and not US maintained 0% interest in order to impel capital from Japan to higher interest rate nations like Australia UK EU and...US; the result was American consumers' accumulation of of rapidly depreciating consumer goods for debt. China and Japan have all the high-tech manufacturing capacity while US has your strip malls and mounds of stuff.
Well, at least we can feel good calling one another on our i Phones ... and did you hear that Verizon will soon have an i Phone offering ... I can't wait.
I think I can take this one. 1st, when you have 30% of your manufacturing capacity sitting idle, what good is it to invest in a new factory? World is not demanding production and production creates value..value needed to service debt.
2nd, there's so much debt and so little production to earn the income required to service that debt, the Gov't needs to go crazy in expanding the debt, like a ponzi scheme, but need to spend $4 in debt to create a $1 increase in GDP.
Now actually, in 2009, total non financial debt increased $1.125 trillion yet GDP went down $183.2 Billion!!!
No differant than using a barral of oil worth of energy to get 7/8's of a barral of energy in return.
As a guy who went by the name Walstreetpro2 on youtube once said "when you have to borrow money just to pay interest, you are F#$@ed."
I think he's speaking of the diminishing marginal utility of adding additional credit/debt to help goose GDP.
Here's an article that might be on point:
The Declining Usefulness of Debthttp://seekingalpha.com/article/136058-the-declining-usefulness-of-debt
Exactly, Mr. B.
Back in the day, when there were no highways to build, we built them. For every dollar we spent, we eventually got back eight. As the country became more built up and fewer major projects were technologically available, the amount of money actually returned to the economy from the tax money spent declined. At work here is the economic/revenue scale of diminishing returns.
In 2010, in order to create a dollar of GDP, it takes a lot more money to create bigger and grander things in order to influence economic activty.
In the meantime, as the humongus projects are waiting on the drawing boards (think, for instance about a national electrified high-speed rail system. Enormous cost...but how much would we really get back out of it?)...in the meantime, workers are sitting around making "capacity." Like the closed-up facotories down the block, the unemployed then become excess capacity and so an overall burden on society. That means that it will be a long time before anyone hires them, so wage pressure- and thus true inflaton- won't happen for a long, long time.
:D
to put simply the commenter claims it takes 4 dollars of credit derived currency to generate 1 dollar of real currency.
According to the fed if i recall correctly its more like a 1.2 to 1 ratio, now. still far out of balance and unprecedented.
research velocity of money aka when someone says i made so and so dollars today they didn't really create money, they traded for it. the more trades the higher the velocity.
Andrew Mellon's stupidity is clearly demonstrated both by his comparison between US today and in 1920's and by his not discerning among nations today; for US in 1920's was the primary financial and industrial nation then while today China is the primary industrial nation and Japan is the primary financial one, and too China recently never receded while US only now is emerging from an abyss. The very same reason that impedes US' clearly infirm essays at reflating its economy also expedes China's vigorous growth policies: the reason is China's assuming primacy as a consuming nation while US relinquishes primacy along with eventual retraction of Japanese capital. Someone here needs to assist Mellon in finding China on a map.
One should not compare communist China and the USA.
China can afford to build empty cities. Why? Because China still has close to 1 Billion peasants good many of whom will be moving to and populate these empty cities.
If you don't compare capitalist China with Socialist US then you're as confused as the above poster. Don't use circular reasoning: if cities are being built in China for "peasants" who will move into them, then the cities aren't "empty"; if however American condos are being built for "flippers" who have no "peasant" buyers, then those US cities really are empty.
The effects of Central Bank induced credit expansion are pretty standard regardless of what kind of activity a country's economomy is primarily engaged. None of the things you listed have any effect whatsoever on the consequences of and proscriptions for a boom, only their nature.
Someone here needs to assist you in finding Mises in a library.
If only they had guaranteed every bond ever written we wouldn't have had the GD1.
Somebody, please get me the hell off this crazy train.
Please!
Lol! Thanks man! The stupidity is rampant. I am trying to enlighten as many as possible. Even my parents financial planner is mesmerized by the new bull market we are in and tells my parents NY is having problems with their finances, but will be more then fine in 3 years. Lol... CFP, wow! WTF mate!
Does anyone have Andrew Mellon's email address? I want to discuss some issues with him...
/:
i do pm me
8/
Orly, my email is mellonsmusings@gmail.com.
We're goin' off the rails...
http://www.youtube.com/watch?v=3MLp7YNTznE
Someone invent a time machine and bring back that Federal Reserve board.
It seems like they understood the situation perfectly and knew exactly the best route to recovery.
Granted, we would be better off without one period. However, that Federal Reserve doesn't seem to resemble ours at all.
During the 1990s, inflationary Federal Reserve policy fueled a tech stock bubble. When that bubble burst, the Fed inflated a larger one in real estate. Now that the real estate bubble has burst, the Fed is inflating the biggest bubble of them all – a bubble in government. While the earlier booms at least provided the illusion of prosperity and some fun while they lasted, the government bubble will cripple the economy and deliver widespread misery to the vast majority of Americans.
Of course, there will be winners in the government bubble, at least for a while. As was the case with the stock and real estate bubbles, plenty of money will be made by the well-connected and parasitic classes. Government employees will continue to enjoy pay raises at our expense, as will anyone benefiting from the new wave of subsidies, such as Wall Street investment bankers, financial speculators, and those working in health care or education.
These gains will come at the expense of the taxpayers who foot the bill and the consumers who face higher prices. As government grows, it deprives the private sector of the resources it needs to survive and grow. The result is a lower overall standard of living. Not only are government jobs less productive than private sector jobs, but bureaucratic interference actually makes the remaining private sector jobs less efficient as well.
Our economy is being transformed from a mostly capitalistic one to a mostly socialistic one. More decisions are being made by politicians and lawyers in Washington and fewer by entrepreneurs. The motivation behind this shift is the mistaken belief that the financial crisis of 2008 was caused by too much capitalism and a lack of proper government oversight. This conclusion is self-serving for those in power, and couldn't be more economically misguided. Through corruption or just plain ignorance, Congress and this Administration have embraced an ideology that has failed every time it has been tried.
Take the recent student loan reforms that were slipped into the health care bill. Obama wants to reduce the cost of providing student loans by taking the profits out of the industry. According to Obama, student loans are too expensive because banks profit from making them. If the government nationalizes the function, we would apparently bring down costs by eliminating those pesky profits.
This is a Marxist argument, pure and simple. If true, it would apply to all industries, not just banking. States like Cuba and North Korea would be the envy of the world, as they prohibit profits across the board. The truth is that profits, earned from free-market competition, keep cost down. By taking the profits out and putting the bureaucrats in, any incentive to provide better service or lower costs is eliminated. It's not hard to predict that student loan costs will now rise faster than ever.
That is clearly not the result we want. To solve the problem, people must understand that college tuitions are so expensive specifically because the government has guaranteed student loans (see my video blog on this topic for a detailed explanation). Guaranteed loans don't mean more access to education, but rather that universities are free to charge more per pupil than if their customers were paying out-of-pocket.
Obama's plan only serves to remove more market forces and creates an even bigger moral hazard. Under the new rules, students will be required to repay a much smaller portion of what they borrow. As a result, students will be willing to borrow even greater amounts of cash to pay inflated tuitions, making it that much easier for colleges and universities to raise them.
Also, since the government will actually be loaning the money directly, rather than simply guaranteeing private-sector loans, the Treasury will actually have to borrow the money itself before it can re-lend it to students. I suppose the irony of going into debt to loan money never registers in Washington. Further, as this bill will cause tuitions to rise even faster, it will necessitate even larger loans that will produce even greater taxpayer losses when the loans end in default or forbearance.
Whether it is in education, housing, health care, automobiles, insurance, or banking, greater government involvement in the economy means higher prices, lower productivity, more bailouts, bigger deficits, increased taxes, diminished industrial capacity, fewer private sector jobs, less freedom, and a falling standard of living.
In the end, when runaway inflation and skyrocketing interest rates burst the government bubble, there will be no more bubbles to replace it – just one hell of a hangover.
Bloody Mary anyone?
You rang???
Overspeculate, overspend, over tax, go to war/revolution.
Rinse and repeat.
Fresh ponzi members' healthcare taxes without payouts for 4 years, just what the pyramid scheme needed.
Frankly, I wouldn't mind paying premium taxes for them to do nothing ... I'll pay every legislator and government administrator a big bonus if they just stay home. Our new Tea Party rallying cry "Just Stay Home"
That was my observation regarding the news story of someone throwing a brick at a congress-critter's office: Why would anyone throw away a perfectly good brick?
It is obvious that the present-day US political elite and the WallStreet oligarchy are exclusively interested in preserving and enhancing their own privileged status. The National interests and general society well-being of no consequence to them.
Well, it should not be a surprise since to many of leading Congressional and White House members are having a dual citizenship.
Thomas E Woods, Jr. discussed the differences between the U.S. responses to the two depressions that started in the 1920s in this video: http://blog.mises.org/10805/how-the-depression-of-1920-was-conquered/
and this article: http://mises.org/daily/3788
Murray Rothbard's book, "America's Great Depression" gives a lot of the history that is often not covered or mentioned in the mainstream media. It's available online: http://mises.org/rothbard/agd.pdf
outstanding article. thanks for posting this zh
I think there is an accompanying video on the web by the author of the article. It is also very interesting.
Can't find the link!!!
Grrrrrrrrrrrrr
+1 I just wish it was required reading for elected officials and man of the year recipients. Ron Paul for president, if we get to elect another one.
I just want to know what america got from the 5.5 trillion bush/cheney spent ?????????????? Maybe you can ask the french king how that worked out for him in the late 1700`s !!! funny ben franklin made a mess in france, ben B made a mess in america.
Thank you for another excellent article!
The sesquicentennial, which begins April 12, 2011 - the 150th anniversary of the Confederate attack on Fort Sumter in Charleston harbor..
I think this date next year, followed by the annual April 15 tax deadline will be a tense period..
Every business owner is sucking their company dry before the taxes increase next year..many will be firing staff to get under the 50 employee limit in the healthcare bill.
I suspect after 4 months of negative economic news not to mention any further egressions by the current socialist regime Americans will be on edge.
This was a great read and confirms many common sense causalities that have been repeated in this space day in and day out. But for this kind of policy to take effect means someone loses! And those someones are currently extremely powerful and well-connected. Thus we have a situation where those we are hoping to make the change are the ones who would be hurt by it. We need a peaceful revolution. There is no doubt.
By all means peaceful. The 1% want violence so they can take away the last of our rights, ampedstatus wants the 99% to stop paying taxes. But their taxes are mainly witheld. I say the 99% should vote for a cancellation of govt bonds. From village water district to UST. Let the 1% have their corp bonds and their lives. The 50th to the 99th will lose the part of their IRA's in govt bonds but then we can lower taxes by 50%. China has a great economy. They wont miss their $900 BN in UST's....LOL
1st repost ever, but this is important to me.
So Max Keiser is killing it and he cleared some shit up for me. We have until $20.92 to buy silver (this is its nominal high), because that is when JPM should be done unloading their shorts (more specifically the shorts they inherited from Bear Sterns). Once that happens, the whole market should capitulate, and then silver to the MOON (we have our own Argonaut, GET THE FUCK IN THE BOAT PEOPLE!) followed by gold and oil. By my calculations we will reach $20.92 at mid summer, then the market should capuitulate for 2-6 weeks, depending on how bad peak oil is right now, and then KABOOM! Anyway, my two sense...I could be wrong. MB anyone?
Also, a low of $8.88 during the "crisis". They are saying something. They are saying 'We will run this town for infinaty'. I cry ISIS! Then I go to war with these damn JPM "M"arket "M"anipulators. Join me! BUY SILVER!
War Is My Destiny:
http://www.youtube.com/watch?v=JRLl2yVrJzE
"Income based repayment
On July 1, 2009, the federal government's new Income Based Repayment (IBR) program went into effect. The IBR program was created to help college graduates manage their increasingly large student loan payment obligations. Under the program, a borrower’s monthly student loan payment is calculated based on income and family size. A borrower is allowed to pay 15% of his or her discretionary income to student loan payments, with any remaining debt forgiven after 25 years. The program is open to graduates with a federal Stafford Loan, Graduate PLUS Loan, or Consolidation Loan made under either the Direct Loan program or the FFEL program.
The new legislation enhances the IBR program. Under the legislation, borrowers who take out new federal student loans after July 1, 2014, will pay 10% of their discretionary income to student loan payments, with any remaining debt forgiven after 20 years."
borrow 100 - 200K, invest, make a minimum annual payment and in 20 years, JACK POT.
most will waste $ for the world travel though, got to live to the fullest !!!
RE 's next.
Save, why save?
Welcome to the USSA.
If only.
interesting subject, but this is really a primer in hayekian theory, with some great quotes by harding and others, plus a wee bit of analysis of the 1920-21 recession and recovery. i agree that deflation is a better cure for a burst credit bubble than reflation, but this article really only recites why that is so according to hayekian theory and old-fashioned economic liberals like harding, it doesn't go deep enough into what happened in 1920-21 to demonstrate much of anything.
Tom's right: Andrew M may be correct, but he hardly made his case.
Statistics from that era are very hard to come by and somewhat suspect when you can obtain them. A situation of war-induced malinvestment accompanied by inflation (causing the 20-21 recession) is way different from today: a credit bust accompanied by a huge output gap (inadequate aggregate demand).
The mal-investment of yore could be reallocated, albeit painfully, to other uses. What the hell are we going to do with all these houses/condos we've built?
Apparently perpetuate the malinvestment with more of the same.
That our G made the problem of malinvestment much worse this time because our monetary system is way nuttier in the past doesn't change the fact that more malinvestment is not the solution.
Andrew makes clear that the situation is different today, but that's besides the point. The solution remains the same - more G (the cause of the problem) is not the answer.
http://www.spiegel.de/international/business/0,1518,grossbild-1581094-635051,00.html
is a good read... I looked to properly Thank who posted this link... but it has been flaged andd therefore junked?
Great post and even better link all to only disapear?
Thank you poster whoever you where and are..
Sincerely, JW
Good linux hosting package offered by ucvhost which not only provides the best in terms of hosting packages but also believes in truly being there for the customer, 24x7. cheap hosting Moreover , they offer unlimited bandwidth as well as nearly 1GB storage along with database maintenance, email facility along with storage, availability of sub domain and many other important features for a very low price. windows hosting Thanks forex vps
+10 to JeffB for the reference to Rothbard's book. It's phenomenal reading for anyone trying to make sense of government's response to the credit crisis. Even if you don't read all of it (it's long), just read the series of introductions for each of the 5 editions, and then ch. 10: it's so familiar, it will grab you by the throat.
If this analysis is the big picture, then the crucial detail in the landscape is an explanation of how financial deregulation led to explosive growth of a gargantuan debt monster that is not yet slain. Watch anything you can find on YouTube featuring William Black, former regulator, for a crystal explanation of that fearfull dropping of the ball by those we trust to have the knowledge and discipline to run things properly.