Business Booms and Depressions Since 1775 (1943)

The water surface in the ocean is almost never at "sea level".

Markets are a chaotic system.

> the booms seem roughly balanced with the busts until the great depression

Yup. Like waves in the ocean!

> The prosperity of WWI seems to have set up the cycle of bust for the great depression.

The setup was to peg the dollar exchange rate with gold, and then inflate the money. Such "pegging" historically has always led to a massive correction.

Iirc that is exactly the problem that the Soviets claimed they solved with state-owned and centrally planned production, no more boom/bust cycle. And early on it did have some in the West worried about it. Turned out not to work, probably b/c you can't stablize an inherently unstable complex system.

After reading Taleb, these "boom or bust" cycles are a feature not a bug. My own simplified interpretation: You need booms to fund moonshot ideas and busts to get rid of ideas that don't work. Also a bit similar to neural network training. You first pump in all kinds of information and then aggressively prune to get rid of mostly bad information.

And do you even want stability? The boom cycle produces exuberance that allows funding risky projects of which a small number become smashing success. The bust destroys the rest of risky project, which allows recycling of labor and resources. Arguably this is a better model for economic advancement, compared to a steady state where stagnating businesses continue to stagnate, hoarding resources in under-productive pursuits.

That fiscal policy prevented collapse in 2008 by creating an unimaginably large asset bubble we're still living in.

> We're still feeling ripple effects from 2008, but things aren't nearly as bas as they could have been.

Those aren't ripple effects, it's the strain from an unsustainable "solution" to a crisis we still haven't really felt yet.

Compare unemployment in the Great Depression vs Great Recession:

https://i.imgur.com/pjyczeq.png

Fiscal policy certainly did help, but the Great Recession probably would have still been significantly smaller than the Great Depression for several reasons.

(I suspect the Great Recession is more analogous to the Long Depression of the late 19th century, in that both of them significantly worsened inequality, while the Great Depression reduced inequality. I suspect whenever the US starts dealing with its mountain of debt, the resulting recession/panic/depression will also reduce inequality, though I doubt too many people will be cheering that when it happens).

But how long the downturns last is a policy choice:

> I would summarize the Keynesian view in terms of four points:

> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.

> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.

> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.

> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

* https://archive.nytimes.com/krugman.blogs.nytimes.com/2015/0...

0. https://en.wikipedia.org/wiki/Crisis_theory

What part of the chart shows this?

1. pegging the dollar to gold

2. inflating the dollar

3. having the Fed set the money supply by fiat rather than the pre-1914 way of letting the market forces do it

And canals:

* https://en.wikipedia.org/wiki/Canal_Mania

And railroads:

* https://en.wikipedia.org/wiki/Railway_Mania

And a whole bunch of other things:

* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...

Getting overly excited about things seems to just be a thin humans tend to do.

When your money becomes more valuable if you don't spend it, people spend less, which depressed prices further, so people spend even less, which even further depresses prices.

https://web.mit.edu/krugman/www/spiral.html

Isn't it usually? Such as the housing price deflation of 2008-2011.

These nominal agreements are significantly less flexible than real-valued ones; people are much more able to buy fewer steak dinners when they're $20 instead of $15, and much less able to stay in their house when their paycheck is $1500 instead of $2000.

So we mostly kept the same system, but tried to tweak them to make deflation 1) much rarer and 2) less destructive.

Or if you do not have monetary policy flexibility, like when you're on the Gold Standard, as happened in the Great Depression (until FDR went off of it).

See Bernanke and James (1990):

> However, Temin (1989) argues that, once these destabiliz- ing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individ- ual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the ab- sence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.

* https://www.nber.org/system/files/chapters/c11482/c11482.pdf

For a fuller treatment, see Eichengreen:

> This book offers a reassessment of the international monetary problems that led to the global economic crisis of the 1930s. It explores the connections between the gold standard--the framework regulating international monetary affairs until 1931--and the Great Depression that broke out in 1929. Eichengreen shows how economic policies, in conjunction with the imbalances created by World War I, gave rise to the global crisis of the 1930s. He demonstrates that the gold standard fundamentally constrained the economic policies that were pursued and that it was largely responsible for creating the unstable economic environment on which those policies acted. The book also provides a valuable perspective on the economic policies of the post-World War II period and their consequences.

* https://www.goodreads.com/en/book/show/775143

Following the rules of the gold standard is what caused the initial "negligent and incompetent" action. Of course later (1937) on they raised rates too soon (and the government dialled back deficit spending), which caused an economic slowdown.

It was not until the giant stimulus packaged often referred to as "World War Two" that the economy picked up again.

I look forward to minimum wage jobs being 25 dollars an hour, and still poverty wages - because then the debts I have will be roughly half what they are now in constant dollars.

See Japan for the last 3 decades!

Clearly, I am not a monetary policy buff, but certainly I've heard people talk about the US getting off of the gold standard in 1971. When the currency is by policy backed by something, you can't just print money (unless you dig a new mine, I suppose), right? When I google around for what our policy was in the 1920s, I see that it was a bit complicated in that many countries suspended the gold standard during WWI and in some cases there were pegged exchange rates, and the US intervened in gold imports.

Not to mention -1% is not a "plunge", it is well within the normal variance.