With all the troubling economic news that has come out of late, such as the UK Northern Rock fiasco, or the US housing and mortgage crunch, there has been a fair bit of headscratching on how bad it could all get. Amity Shlaes has an item looking at the mistakes made in the 1920s and 1930s around the time of the Wall Street Crash and the subsequent depression. In a nutshell, she says that errors on monetary policy, a disastrous ratcheting up of protectionism and intervenionist economics turned a bad but temporary situation into a catastrophe. This book also comes to the same conclusion and points out how much of Roosevelt’s New Deal failed, even on its own terms, to work, since unemployment actually was worse by the outbreak of WW2 than when FDR was elected.
Meanwhile, to keep us in a jolly mood, the Daily Telegraph highlights some recent economic data from those old-style monetarists at Lombard Street Research, pointing out that there has been a dramatic contraction in the “broad money” measure of the US money supply, known as M3. The Fed stopped publishing data on this in 2005, on account of it not being reliable. That sounds a bit fishy to me. Anyway, the author of the piece, Ambrose Evans-Pritchard, points out that sharp moves in his measure presage significant changes, either inflationary or the opposite. He is surely correct. For much of the ‘Noughties, the world was awash with cheap money, much of it in the form of recycled savings from Asia. To a degree, the spigot has been shut, with an obvious impact on asset prices.
My only caveat here is that Pritchard has tended to be a bit of a permanent “we are all doomed” voice these days. If I earned a pound every time he had predicted the demise of the euro, for example, I’d be able to retire to the South of France. But he may be right this time.
Everyone is right at least once in their lives.
J P:
Given your background, another “measurement” that you might find intriguing is one that concerned us as students 60 years ago – the velocity of money.
Since practically all the functions of money are performed today by credit, the correlation of credit flows to velocity of money merits observation.
Whether or not it will be predictive is another issue.
How about two UCLA economists?
FDR’s Policies Prolonged Depression by 7 Years, UCLA Economists Calculate
“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”
“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”
Well, at least some Gold is coming your way from the Olympics! Well done! That should stimulate the economy.
I have been following the inflation/deflation debate with some interest because I really don’t know where I stand.
On the one side we have Tim Congdon who I think is the best economist in the world.
On the other is Alice whose figures seem to be better. See Yes, the money supply really is still growing quickly
For the time being I’m with Alice: the money supply is still increasing, inflation will rise and remain high, the necessary correction will be postponed.
I have not got on with Tim Congdon (not that he would remember a nonperson like me) since many years ago at a conference he replied to my doubts about bank lending not being from real savings by saying that I was in favour of the ban on overseas trade imposed by the later Ming Empire in China.
No I do not understand the response either – but I did not get a follow up question.
As for bust.
If you want to prevent a bust – prevent the credit money expansion (the “boom” ) that created it.
I doubt that Tim Congdon would be in favour of preventing such an increase in the money supply – being a “keep the price level stable” type of person (rather than a “let prices fall over time” type of person).
However, once you have a bust there is a choice.
Let prices and wages adjust – and cut taxes and government spending. Like Warren Harding in 1921.
Or try everything to try and prevent prices and wages adjusting downwards – and increase taxes and government spending. Like BOTH Herbert “The Forgotten Progressive” Hoover, and President Franklin Roosevelt.
Logic and reason (as stressed by the Austrian School) suggest doing the former.
The “empirical evidence” (that anti Austrian School people are supposed to favour) also favours doing the latter.
So, I suppose, the power that be will do the latter.
So stand by for more taxes, more government spending, and more regulations.
Doom is not inevitable – the powers that be MAKE it happen (intentionally or unintentionally).
I should have typed that the “empirical evidence” suggests doing the former – allowing prices and wages to adjust downwards to a bust (and VERY IMPORTANT removing any restrictions, such as pro union power statutes and regulations that prevent this happening).
Not “the latter” – the orgy of government “help” that is already starting.
I hear it is not just the voters in “their” houses (the ones they should not have tried to buy), but the big finance houses – and not just “Freddie” and “Fannie”.
A ban on “short selling” the stock of politically connected finance industry operations in the United States has already gone into effect.
Almost (but not quite) needless to say – I know that the poor people who bought houses (and the people who ran up credit card debt and ……..) were misled by easy credit.
That is the vile evil that “easy credit” (i.e. an increase in the money supply – lending out money that does not 100% come from real savings) is.
But there is no way to protect everyone from the consequences of the bust.
Such efforts make things even worse.