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Comment by derf_ | Hacker News Reader

"According to two new papers, the crucial variable that separates relatively harmless frenzies from disastrous ones is debt."

Also according to, like, Irving Fisher in 1933: https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

"I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate rôle as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price-level disturbances."

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Very hard to have sustained deflation when you are using a fiat currency. The only example in history has been Japan and this only occurred because of a political decision.

We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east.

Great deflation is your GD as opposed to Great depression? Since you are talking about Japan

I meant the Great Depression :)

While it is worth looking to the past to gain understanding we need to be really careful about doing so since the past really is a foreign land.

Edit. If a country wants me to cure their deflation problem just give me control of their printing press for a few months. I can guarantee that by the time I am finished Zimbabwe will be held up as a paragon of financial rectitude compared to my handy work.

I completely agree.

Even characterizations of our past financial crisis (late 2000s financial crisis) as being "the worst since the Great Depression" miss the major difference between it and previous financial crises.

The superficial similarity is that it was tangentially related to an 'asset bubble' (which is the common shared element of most financial crises), but the deeper and more troubling component (troubling in the sense of it hopefully not being an omen for later crises to occur) was the fact that it got out of control because of the omnipresence in late '08 markets of financial instruments designed to allow accredited investors to gain exposure to specific market segments, which then became extremely popular among banking houses and other financial market actors. People commonly view this as the same thing but never before had a class of specific financial products (in this case, RMBSs - residential mortgage backed securities and their related derivative instruments) become so extremely popular that their universal acceptance acted as a prelude to their total deterioration in value.

To preempt subsequent comments:

Yes, LBOs became super popular in the 80s and are kinda sorta similar but these aren't really financial products at all. They are mechanisms to finance the takeover of companies based on debt and financial products are involved but never before had downturns been so driven by the creation of market-specific financial instruments.

The increasing complexity of financial markets is super awesome and will allow the blossoming of a wide variety of financial opportunities for interested parties, but this obfuscation should not come at the cost of... submerging entire market economics lol

I always feel like the more relevant example for our current financial bubbles would be the South Seas Bubble[1]

[1]https://en.wikipedia.org/wiki/South_Sea_Company

> We really should stop looking to the GD as a lesson for today’s problems. We don’t use the 30 Years War as means of explaining religious conflict or the Crusades to explain the state of the middle east.

I don't know anything about the Thirty Years war, but I doubt that there's any major recent act of stupidity that was caused by excessive cleaving to (or knowledge of) historical experience.

I suspect we'll keep on looking back at the great depression until it ceases to seem salient.

Oh, and the Crusades explain quite a bit about the state of the middle east.

Maybe if every western country decided to shithouse ISIS for their brutalities with their younger sons. And all of Occupy Wall Street banded together behind some charismatic idiot and marched over there without warlike equipment to fight the Arab/Turk.

If you really want to see an explanation of the Middle East, look at the way France and the UK divided up the region in the wake of WW1, and then abdicated their responsibilities after WW2.

Yeah we've all watched Lawrence of Arabia.

I was thinking more about Leon Uris' Exodus.

Most of the faults of colonialism seem to come from how poorly the handoff between the imperial powers and the local population went. It's an interesting dynamic, since almost all of the traditional colonial powers were a shell of themselves by 1945, while the two ascendant powers were the USA and USSR, who really hadn't been involved in the Victorian era colonial land-grabs, at least to the extent that the UK, France, Germany, Belgium, and even Italy were.

>I don't know anything about the Thirty Years war, but I doubt that there's any major recent act of stupidity that was caused by excessive cleaving to (or knowledge of) historical experience.

Let me introduce you to Balkans war(s) of the 1990s. People who had been living side-by-side peacefully for decades decided to rehash hundreds of years of historical conflicts which to outsiders looked insane.

>I suspect we'll keep on looking back at the great depression until it ceases to seem salient.

The Great Depression is no longer relevant since we don't live in a world on the gold standard. The factors that drove the economy into the ground in the 1930s (massive deflation and bank failures) are not going to happen again. Deflation because countries can print as much cash as they like (Greece excepted), while in regards bank failures we now know banks (and bankers) are too big to fail.

>Oh, and the Crusades explain quite a bit about the state of the middle east.

Nothing about the middle east today is the result of the Crusades except some misguided people thinking the Crusades are relevant.

No, the OP is correct about the Crusades, particularly if you care about the POV of the political actors in the Middle East itself.

Some actors in the middle east like to claim that any involvement of the west is another Crusade, but no western country is interested in “freeing the Holy Land” from non-christians.

You are correct of course. Unfortunately some Western leaders have been a little unwise when speaking publicly:

"this crusade, this war on terrorism, is going to take awhile." - GW Bush[1].

"President Bush said to all of us: 'I am driven with a mission from God'. God would tell me, 'George go and fight these terrorists in Afghanistan'. And I did. And then God would tell me 'George, go and end the tyranny in Iraq'. And I did."[2]

It's pretty easy to paint a picture of attempted cultural (if not religious) domination by the West even without quotes like that. Add that stuff in and it is harder to explain how it isn't the same.

[1] http://www.csmonitor.com/2001/0919/p12s2-woeu.html

[2] http://www.theguardian.com/world/2005/oct/07/iraq.usa

Yes there has been some lose language been used in this area by people how should have known better. The problem is the word “crusade” has a meaning in English different to its original historical origins.

The word "crusade" has the same meaning it always had. It has a positive connotation, just as it always had. And the same goes for the word "jihad" in the Islamic world.

I am of the thought that it is very much a crusade, because there is no reason to believe the actual crusades were anything beyond riling up the peasants for the benefit of the rich.

This is an interesting hypothesis, but I think we should consider that the nobles actually believed in the religious aspects of the Crusades. While I am sure some were in it for the money or prestige at least the first couple of crusades appeared to have been motivated by religious zeal.

Don't mistake excuses for motivations. The law of primogeniture (inheritance to eldest son) along with large family size played a big role in the causes of the crusades.

Let's suppose you've managed, as a family, to hack and slash your way to the top of the nobility. Grandfather was a friend of the guy who became king, father inherited lands and got them productive, and now five brothers have all survived. The eldest gets the land. The next four have learned to ride horses, swing swords, and wear armor. One of them decides that the Church isn't so bad, and thus effectively goes into politics. There are still 3 armed badasses who won't be getting the power and wealth they are used to... unless they go and take it from someone else.

Their brothers in the Church have an idea: maybe you can go be violent somewhere else?

This also had a pretty big impact on South and to a lesser extent North America. All the guys who had finally driven the Moors out of Spain only knew how to fight so went off to Mexico with Hernán Cortés to carry on doing more of the same.

My father -- German Jew who escaped in 1938 (only mentioning this because this view is often conflated with anti-semitism) -- was of the view that Israel was a new crusade and would have much the same impact and outcomes. Recall that the medieval crusades also resulted in some long term occupations of the holy land, and they did not have support of an unrivaled superpower.

There's a difference between knowing history and bearing grudges. Generally folks who bear grudges have a very poor (and one-sided) view of history.

The Great Depression was not solely caused by the gold standard, although getting rid of it certainly seems to have aided recovery (worth noting since some argue for returning to it).

Iraq wasn't going to be like Vietnam either because the people loved us, and our weapons were so much awesomer. Incidentally, Bremer was reading about the occupation of Germany and Japan after WWII on his way to Baghdad. History can be instructive, but you need to use it wisely, not cherry pick the instances that support your existing view. There's plenty of Roman history (for example) that maps beautifully onto modern America, even though we are very different from the Romans.

History can be a guide, but an untrustworthy guide. Use history, but always be aware that today is not a repeat of yesterday.

In regards the Great Depression the gold standard seems to be mostly responsible. The countries that left the gold standard first were the first to recover and those that delayed suffered longer. The USA is an interesting exception since Roosevelt revalued gold by fiat in 1933 which had the effect of getting the USA effectively off the gold standard and introducing inflation into a deflationary spiral.

Replace "history" with any body of knowledge and you get an equally valid truism.

You are correct about the Crusades. And the below commentators act as though you have to somehow choose between the post-WW2 context and that time period for explanatory power, when of course Middle East history is lengthy and rich and has room for both and a lot of important additional contexts besides, including the Ottoman empire, the Persian empire, the breakup of the original Caliphate, etc. etc. "Those who cannot learn from history," and so on.

The gov't decides the policy of the central bank, so it's always political. Right now, the scheme is to drive inflation which pours newly printed money into gov't coffers as that's how new money makes it into the economy: through gov't bonds.

If the gov't created a policy of deflation (which would be against them growing their budget as much as possible) then there would be deflation.

The central bank policy is always political.

I completely disagree with your assertion that you can "cure" deflation with a printing press. And how is Japan not a relevant example?

You can certainly raise prices of financial assets but when the long rates are low for so long (and are made lower by QE) there emerges a negative feedback loop of overproduction -> oversupply -> lower prices for goods, with a stronger concentration of this effect low on the value chain (CPI ex-housing). In fact, if you look at domestic and european CPI's ex-housing (European countries are ex-housing by default), you will see that the inflation rates has been nearly 0 since the financial crisis despite printing trillions of dollars. But stocks are expensive. Quote from Greenspan: "As the cost of capital approaches zero, so too will the return on capital."

And to pose another question to you: from what transmission mechanism will your printing press create inflation when long rates are already low?

Like another poster below, I suggest reading the material at http://www.economicprinciples.org/

I have to agree that monetary stimulus alone isn't enough. Some call this the "zero lower bound" and that fiscal policy needs to drive inflation.

https://en.wikipedia.org/wiki/Zero_lower_bound

Mind you I think 0% interest rates from a central bank and reckless gov't spending are idiotic policies.

You can have negative interest rates (Switzerland and Sweden currently have them) so the zero lower bound does not need to exist. Of course monetary stimulus only works if the banks decide to actual lend all this cheap money. If they don’t then the money just piles up on their balance sheet and has no effect on aggregate demand.

Sweden has negative rates when loaning in money, not when loaning out money. That is, they are not violating the zero lower bound - they are simply a bit closer to it.

The Swedish negative rates are for banks borrowing from the central bank, but in theory there is nothing stopping banks lending money to individuals at a negative interest rate. In a deflationary environment such loans will still have a positive real interest rate. The banks of course would only do so if the negative interest rate was less than what the central bank charged.

That assumes that alternative tools like Quantitative Easing are not available. Central banks don't like to engage in Quantitative Easing because it hasn't been done very often and central bank models of it aren't very precise but it has certainly had an effect when tried.

https://en.wikipedia.org/wiki/Quantitative_easing

>I completely disagree with your assertion that you can "cure" deflation with a printing press. And how is Japan not a relevant example?

Of course you can always “cure” deflation by printing money. If you gave me control of the printing press for a few weeks I would print up a few billion dollars for each person (or maybe just a few trillion for my friends) and give it away. You can be sure that a dollar would be worth nothing after this exercise.

To answer your second question you can’t create inflation unless you actually get the money into the hands of consumers. The central banks have not been printing and handing the money out to consumers, they have been printing and giving it to banks. If the banks don’t have anyone they want to lend to then the money just sits in the bank and has no effect on demand. If I printed off a few trillion dollars for myself and just left it in a huge vault there would be no inflation - we would only get inflation if I went out a started buying every asset under the sun.

It's important to note that they've been printing it and paying banks not to give it to consumers. Back at the start of the crisis inflation had nosedived but the most recent inflation number the Fed had still showed high inflation. They knew that they were going to have to print lots of money to support the banks so they embarked on the unprecedented Interest On Reserves program to counteract the expansionary effects. That change in the rules of the game is probably a good part of why the Fed's models were so badly off during the crisis.

I think the problem is more that most people only learn about the Great Depression in a strictly historical context and only the theories about its causes that were popularly discussed at the time make their way into high school history textbooks. I doubt there are many serious scholars of the Great Depression these days would talk about the stock market crash as causing the depression. However, all the policy makers at the time knew about the stockmarket crash because it was obvious. The monthly industrial production numbers took months to assemble and while they show a decline that started well before the crash that information wasn't available to politicians until well after information about the stock market was. And it never really made the newspapers or got into the public consciousness.

Also according to Kindleberger ("manias, panics, crashes"), which is slightly more accessible than Fisher. I cannot recommend this book more to people interested in having insightful things to say about market bubbles.

http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest...

Even the economist has previously commented on this, but I guess the writer of this article forgot

http://www.economist.com/node/1923462

its debt cycles that one should really watch...check out Ray Dalio's "How The Economic Machine Works"...there's a video and a paper...the paper is much more informative.

The Austrians have been saying this since about the same time or earlier. Read only if you're interested in the theory of economic bubbles.

The Austrian business cycle theory (ABCT) is an economic theory developed by the Austrian School of economics about how business cycles occur. The theory views business cycles as the consequence of excessive growth in bank credit, due to artificially low interest rates set by a central bank or fractional reserve banks.

https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

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