The Great depression how it happened and I'm betting it will again.

http://www.shambhala.org/business/goldocean/causdep.html


---------------snip---------------------

The 1929 stock market crash marked the beginning of the Depression. Prior to the crash the stock market had been an important source of funding for industry; thus the crash itself was a contributing factor to the downturn as well as a harbinger of things to come. Since stock prices are based on estimates of future earnings potential, the stock market performance of the 1920's tells a story of runaway optimism for the future. When it peaked a few weeks before the crash, The Dow Jones had risen 597% over the previous 8 years. It was soon to become a symbol of runaway pessimism.

The freeing of capital from government use to commercial use following World War I caused commodity prices to inflate. In 1920, Ben Strong of the US Federal Reserve Bank of New York raised interest rates sharply to prevent inflation. This caused a recession and the stock market to fall. Once hard assets like commodities and real estate were no longer rising in price, money began to pour into stocks and bonds. The Dow started climbing from its low at 63.90 in 1921 and rose 150% over the four years to 1925.



According to Ron Chernow, in "The House of Morgan", It was in 1925 that Ben Strong made a secret commitment to Montague Norman, Governor of the Bank of England, to help England reinstate the Gold Standard. This action would later be shown to have undermined the British economy but the Pound had been the main medium of international exchange at that time and it was felt to be in everyone's interest to have it be exchangeable for gold. With moral support from the US Treasury, Strong chose to help strengthen the value of the Pound by depressing US interest rates. This depressed the value of the US Dollar and caused the already robust economy to boom.

It was suddenly cheaper to borrow money to invest in the stock market (called margin investing). Since the Dow had risen steadily since 1921, "small investors leapt giddily into the stock market in large numbers". The margin requirement at that time was only 10%, meaning you could buy $10,000 worth of stock with only $1,000 down, borrowing the rest. With artificially low interest rates and a booming economy people and companies were more apt than ever to invest in grandiose business expansions and over-priced stocks. Mergers and acquisitions soared.

to think that we'll never again experience a fluctuation like that again is a bad bet, IMO.

and then it didnt happened, numbers started going up a bet. but then i wasnt around then, so maybe it took a bit of time ot get there. so clearly i saw just his. yup

in the here and now. How many years have people been paying off credit cards, car loans and other purchases with inflated interest? Let's see, if the inflation rate is A, and the prime interest rate is B, why are people being charged B + 10% (or more)? Every time you pay a dollar of interest at an inflated rate, that is money going into the hands of those already wealthy, making them more wealthy, and increasing the gap between them and the rest of the society. Borrow a dollar. Pay back a dollar twenty. Earn the same paycheck every week or however often. Guess what? You lose! Your money is going into the pockets of wealthy people, and you have less and less to spend. Eventually, enough will have nothing. It's the new, improved American way.

i believe this is an incredibly over simplified explanation of the great depression.
pbs's "the american experience" did a really great episode on the depression. one of the things that i really did not know, that has some parallel today, is that it was the wave of new inventions, radio, electric lights, mr fords cars, that really enticed smnall investors into the market. these miracles were on their kitchen tables, and in their driveways.
i think the tech bubble is very much like the bubble that burst in 1929. however, there was much, much more corruption on wall street at the time than there is now. (yes, i know, there is plenty to go around today, but a lot of the people who lost it in the crash had bought shares of absolutely nothing.)
i think we have weathered the tech bubble bursting. i think we will survive the corporate governance scandals that we are seeing.
i think we could be in for a long recession, but i do not think we will have another depression like the 30's. all presuming the end of the rule of chimpy & co, of course.

the Federal Reserve System caused the Great Depression. After 1929, the economy started to recover but the Fed raised rates and screwed the pooch repeatedly.

I don't buy this anlaysis for a second. The leverages points of the economy are completely different now then they were in 1929.

Also, the funding of corporate growth does not come from the equity markets like it did in the 20's, because those companies are NOT selling equity anymore. They did that 75 or more years ago.

The stock trading is an exchange of small bits of equity in many companies for cash or small bits of different companies. The investor money is all that changes hands now.

Moreover, the issue of margin buying is glossed over rather lightly. It's not that easy to do anymore, and requires huge capital reserves to assure repayment. That wasn't the case in '29.

There is also a mistake in the analysis. The productivity in the 20's never justified the growth of the equity markets, and consumption was NOT stable for the years preceding the crash. The entire market was a speculative bubble (making the one in the 90's look like an amoeba) for which there was no sound economic basis.

The reasons for the crash are much more rooted in rampant speculation without regard to sustainability and a lack of securities regulation than to any of the causes mentioned in this paper.

The two periods are so dissimilar in the areas of true economic leverage that i can safely conclude that whatever this paper predicts is highly unlikely to occur.
The Professor

. . . was a major factor, leading to a deflationary spiral. That is, products being produced by workers who could not afford to purchase the goods produced.

No need to worry about all of the products coming in from low wage countries were the workers have no purchasing power. Outsourcing is good for the US economy, or so they tell us.

I feel the following quote sums up our economic future.

"The primary aim of modern warfare . . . is to use up the products of the machine without raising the general standard of living"

Emmanuel Goldstein

the fact that if jobs are outsourced as the numbers predict (50% more in 05' than this year) then that means we will simply not have enough jobs for people to earn enough money to cause an inflation.

If there are 100 people in nation EVIL
the unemployment rate is 7 percent
so 93 people are employed
Nation Evil outsources 20 more
leaving 73 employed
therefore seventy three people with a steady income
manufacture the products,
and inflation is udner control due to the unemployment rate
With outsourcing goods are just cheap enough for Nation evils employed to buy the goods

of corporate dominated fascism.

By comparison, a depression may be preferrable to alter the course.

... I'm not sure exactly what you mean. If you mean that there will be a stock market crash and/or a severe economic downturn, I tend to agree with you. But, I don't think it will come about in any way similar to the Great Depression.

I think we've learned some things since then. For instance, the deflationary pressures that were put on the international economy are fairly well understood now. I don't think many countries are going to be return to the gold standard; nor would I expect anyone to increase taxes in a serious downturn.

What do you expect to be the cause of the next downturn?

I think the combination of the federal deficit and outsourcing is a real potential source of financial disaster. Jobs are being outsourced to places where workers cannot buy the product of their work - which I believe will lead to a dramatic drop in demand. If the US ceases to be a market for the world's goods, then, we won't be able to finance our debt. Just like most economists missed the obvious in the run-up to the depression, I think they're missing the obvious today. Most economists celebrate the outsourcing of jobs to places that pay subsistence wages.

I'm sure there are other areas of potential financial disaster.