To paraphrase Ayn Rand: “reality is the out there as seen by the in-here”. In other words, our reality is our perception of the ‘real world’. To the extent that our map fits the territory is the extent to which we will be successful. This proposition goes against much of what is being taught as a success model - that our reality determines the ‘real world’.
It’s a message the Governments of the world seem to have taken to heart as they ‘battle to save us from the ravages of a deep recession’.
In this blog I’d like to address some popular misconceptions about the Great Depression; in particular I’d like to consider what caused it. In doing so, I’ll look at the depression of 1920 to 1921.
Oh yes, there was a depression in 1920 to 1921. To finance World War I, the Fed inflated the money supply. By mid 1920, the downturn in production was worse than they would be one year into the Great Depression. To cope with this downturn, the Fed and US Government did nothing or at least very little. What the US Government did do was to keep spending and taxation low. As a result, the US economy rebounded quickly, so that by August 1921, the economy was on the mend.
It would be useful to compare the Japanese response in the 1920s. To prevent falling prices, the Japanese Government, banks and industry combined together to keep commodity prices high. This resulted in a banking crisis in 1927 that sank many a bank and industry. Unlike the US that recovered within 12 months, Japan took seven years. No sooner did it appear that it had recovered that Japan had to face the Great Depression.
Let’s turn to that and examine US FED policy.
Between 1921 and 1929, the FED increased the money supply by a massive 55% - an annual rate of 7.3%. This increase took the form of easy loans to business. As a result we saw a bubble in the stock market and the October 1929 crash.
At this point one of the greatest myths enters US history - that Hoover was a laissez-faire President. In fact Hoover was one of the greatest interventionists of all time. A study of US economic history shows that he:
- launched public work projects
- raised taxes
- extended emergency loans to failing institutions
- reduced international trade through ‘protective’ legislation
- attempted to prop up wages
If we examine FDR’s policies, we find that much of the New Deal was to expand, extend and institutionalize Hoover’s policies.
Now, let’s turn to today’s crisis.
The bubbles - stock market, credit and real estate bubbles - were caused by cheap money leading to a misallocation of resources. So too was the cause of the 1929 crash. To deal with the crisis, both Hoover and FDR embarked on a massive spending spree - so too did Bush and so too has Obama; and so too did Japan.
When this crisis first broke out, I had hopes that it would be over in two or three years. Not any more - 2015 is my best guess. Of course, we’ll see rallies. If we are lucky, we’ll have a 1966 to 1982 type recession rather than a 1929 type deflation. But even if we experience the latter, if history rhymes, we should see some sort of decent rally in 2010 to 2011.
When we surface from this morass and we will, my only question will be: will politicians ever learn to keep their mitts off the economy?
Refer this blog post to a friend or colleague…
