[lisper]

> is the economic policy that moderated the cycles just setting us up for an extreme crash to come

It's actually not that complicated. All of the complexity of the economy ultimately boils down a very simple thing: it's a mechanism that allows people to exchange current wealth (i.e. stuff) for claims on future wealth (i.e. money). As long as everyone believes that their claims on future wealth will be redeemable at some rate they consider a fair trade, everything hums along. As soon as people stop believing this, everything falls apart.

What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately after. But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time. The same thing happened in reverse in the Weimar republic where the problem was effectively the exact opposite: inflation caused by government paying debts by (literally) printing money. (That was a little different because Weimar Germany wasn't very productive, having never really recovered from WWI, but that doesn't really change the basic conceptual simplicity of what happened in both cases.)

[AnthonyMouse]

> But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time.

It wasn't the claims on future wealth (i.e. money) that they lost faith in, it was their job security.

You see the stock market crash so you tighten your belt in anticipation of potentially losing your job. So does everyone else. So people don't buy things which means companies don't need workers to make them and people lose their jobs. Then people who lose their jobs don't spend money, and people see people losing their jobs and tighten their belts even more for fear they're next, and you get a deflationary spiral.

You can lay this on the Fed for not providing enough liquidity, but the real reason this happens is that the Fed is the only one allowed to do it.

Suppose you're a candlemaker in the US during a deflationary spiral. Nobody will give you dollars for your candles. However, someone might give you euros or pesos or something like that. But now you have to pay your rent. If you can pay it in pesos, you're all set. If you can't, you have to buy dollars with pesos, which bids up the price of dollars and accelerates the deflationary spiral.

The problem comes when the government privileges its own currency. If you can't easily get a bank account denominated in another currency without converting it to dollars, if you can't pay your taxes in pesos even when that was what you received from the buyer, then people still have to convert the other currency into dollars and continue the deflationary spiral.

Whereas without that government restriction, a shortage of dollars would be resolved by using something more available as the medium of exchange.

[dzdt]

At the time of the great depression, every important currency was on a gold standard. So in an important sense there was only one currency: gold. The impossibility of increasing currency supply because of the gold standard is recognized as a major contributor to the depression.

[AnthonyMouse]

Even when countries were on the gold standard, they still had fractional reserve banking. If a troy ounce of gold was $100 , the bank had one ounce of gold and three separate people had a $100 bill, any one of them could go to the bank and get the gold, as long as not all of them did.

It's also possible to have a gold standard without holding your reserves in gold. The bank could hold them in anything -- other metals, bonds, real estate -- and then exchange that thing for gold in the market in the event that the customer comes for it, which they only do if they lack confidence that the bank will be able to make good, which doesn't happen when the bank is holding valuable assets. And then you can create as much "money" as you need by, for example, making mortgage loans backed by real estate.

You can still get into trouble there if the value of the assets declines (see 2008 housing crash), but that's a different kind of problem than the original one with separate methods to avoid it.

[headShrinker]

> Even when countries were on the gold standard, they still had fractional reserve banking. If a troy ounce of gold was $100 , the bank had one ounce of gold and three separate people had a $100 bill, any one of them could go to the bank and get the gold, as long as not all of them did.

Fractional Reserve is easier to understand as debt than as an asset. A bank is given $1000 from a central bank. The bank can now loan that $1000 with interest for a total of $1100. The bank is allowed to loan that debt promise at a fraction reserve rate of 7-1 or 5-1 as loans to other customers. The $1100 promise can be loaned as $800 plus interest for the total loan value of $880. That can then be loaned out as $660 including interest. Then $440 can be loaned out. Then $220.

So the original $1000 from the central bank was used to create $3300 worth of debt.

Money is created using debt promises.

[sprafa]

Interesting ideas - any place one could learn more on how to think like this? Ie books or ? Basically How did you manage to get it to this simple statement, which seems intuitively correct when so much macro economics I’ve tried to read seem like obvious nonsense

[JanisL]

Start from first principles and look at the economic data directly (understanding game theory is a crucial piece of this). Make sure to ignore the narratives as these tend to obscure the understanding of the fundamentals (since most people pushing various narratives about the market are driven by vested interests rather than educational interests).

[lisper]

Years of practice :-)

Seriously though, I am actually in the process of writing a book/blog about this sort of thing (and a whole lot more). In the meantime, you can check out my old blog. See my profile for a link. When the new blog launches I'll post an announcement on the old one, so subscribe there if you want to be notified.

And thanks for the kind words!

[nosianu]

It already helps A LOT if you decouple your thinking from "money". If you realize that "stuff" (tangible but also tangible) is not directly impacted, and that a crash that "destroys billons of wealth" in fact does no such thing, you can start looking at the world sans "money". You will get a much better grip on reality. Of course financials impact stuff - but why? It's all the ideas and assumptions in our heads - and they can change. In fact, they changed a lot over time, and the meaning of "money" is many things.

The second big thing is to understand that ideas for individuals (firms or people), for example "costs are bad because I lose something", have a completely different meaning for the economy. Because cost is income. Cutting costs may make sense for a company, but if you cut costs in the economy people lose jobs. You will actually have to trouble yourself and look away from the money to see what the flow of money actually achieves in the real world to make a judgement. Just looking at the money is meaningless.

The third big thing is about "pensions". While putting back money into some account makes sense individually, again it has no meaning for the economy. Because "saving money" has no useful meaning on the economy scale. Everything is produced and consumed NOW. Nobody puts back stuff into warehouses to be used decades later for the retired, especially not services. So relax when there is talk about "pension crisis" on an economic scale. Sure, who gets what is important and for any one individual the financial stuff really matters because they are bound into the system, but for the economy all that matters is what people in the future will produce. Money "saved" for pensions does not send any products or services into the future, nor is it needed for "investment" (our finance system does not need that, money can be and is created on demand for debt). It sends information into the future, which future generations may or may not use to determine how much of what they produce then they will give to you (in retirement). However, what is available overall and what the then-society will be willing to use for pensions will be up to them. It does not matter one bit (overall!) what irrelevant virtual numbers are written in some "accounts".

Another thing is debt: For an individual it's bad unless it's debt used to produce cash flow. For an economy - it does not matter (of course the details matter, if done bad it can reduce confidence and have a big bad ripple impact). "Debt is money" is not just some phrase. Debt creates money (yes yes money is very complex - much like a quantum particle, it depends on what you look at and context). The best simple example I saw was a story where a kid wrote a promise to mow a lawn (any lawn), and that promise was handed around in the neighborhood to "pay" for neighborhood favor things. If the debt - having to mow the lawn - was actually repaid by the kid this piece of "currency" would just be gone.

I'll leave it up to the reader to think about what "saving" on the economic scale really achieves, it's a fun little exercise. Again it works best if you ignore "money", or treat is as secondary - looking at its effects instead of at it.

TL;DR I recommend not going too technical. The deeper you look the less you see of the big picture. Just start thinking about stuff - ignoring money completely or see it as the completely virtual made-up control-carrot that it is - while doing walks in the park or forest.

[andrekandre]

  > Another thing is debt: For an individual it's bad unless it's debt used to produce cash flow. 

in other words... capital, right?

[nosianu]

I must admit I have no idea what your point is.

Debt is a very specific word. Yes you can get capital by going into debt. But just "capital" can also mean it was yours to begin with. Debt means you created an obligation to somebody else, which is additional information. You have X amount of money - capital - but there is a difference if you get it by borrowing or if it was already yours.

[andrekandre]

sorry for being unclear

what i meant was, that if people dont use debt as a form of capital (investment in something to get a larger return) then it is basically bad as you say because you will be under water when paying the interest..

basically, people who go into debt need to think like a capitalist, and invest it in something (thier skills, a car to get a better job somewhere, etc)

thats what i mean.... sorry if it was confusing

[andrekandre]

  > What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately a

apologies for a potentially ignorant question, but werent most economic crisis in the past (and near recent) caused by liquidity issues?

[dllthomas]

> inflation caused by government paying debts by (literally) printing money.

My understanding is that it was paying debts by buying the thing the debt was denominated in (gold?) by printing money. Which meant that as the early money printed caused some level of inflation, they then needed to print that much more to make the next payment.