Econ 101 essay on Y2K and depression - needs critiquegreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
I've summarized my latest Y2K readings and research on the Great Depression. Critique it for me. I'd like to be reassured that I'm wrong.
If efficiency increases faster than buying power (increased wages and/or falling prices), then economic slow-down ensues due to over-production. This can be forestalled by expanding credit. However, this creates a bubble economy which inevitably collapses. Credit cant expand indefinitely.
With the 1929 depression it was the industrial revolution and production-line assembly that lead to increased efficiency. Machines were doing an increased amount of the work and human labor was becoming better organized. Some wages rose and some prices fell, but not commensurately with the rise in efficiency. This excess of efficiency (wealth) was increasingly concentrated in the hands of a few. (Because the savings of the new efficiency were not fully passed on to consumers or laborers.) Purchasing on credit was encouraged and became rampant, especially within the stock market itself through buying on margin. When the bubble collapsed it collapsed dramatically.
Today the increased efficiency has come through information technology and other advances. Prices have held steady for the most part, with little inflation and limited deflation. Real wages have risen very little (if at all) despite low unemployment. This excess of efficiency (wealth) is increasingly concentrated in the hands of a few. (The savings of this new efficiency are not being fully passed on to consumers or laborers.) Debt-spending is greater than ever and stock market speculation is high.
The collapse of 1929 was sparked by the stock market crash. The next collapse may be sparked the same way, with Y2K problems playing a major role. The sunny economic times of today dont guarantee sunny times tomorrow. The twenties were a time of affluence and optimism comparable to the nineties.
Greedy people wanted more than they needed. Foolish people thought they could get something for nothing. Impulsive people bought now in the hope of paying later. Income and wealth were distributed unfairly and dangerously. (A Nation In Torment Edward Robb Ellis)
The Great Depression had no significant external causes. It was pure human error. People were too confident in the system and then they were not confident enough. All that is equally true today, along with the upcoming technical troubles.
Im no economist, Im a laid-off construction worker with a philosophy degree. Im not trying to sell this picture and I am no kind of expert. Im just trying to get a clear understanding of all this.
-- Gus (firstname.lastname@example.org), November 20, 1999
Well written and easy to follow. Maybe you should take the GMAT and go for an MBA. Good luck!
-- r white (email@example.com), November 20, 1999.
Its been a long time since I studied economics, but a significant factor in the Great Depression was the collapse of the monetary system and the ensuing deflation. The economic theories of the time did not allow for adquate government intervention either to shore up demand or to control the supply of money (depending on your school of thought.)
Your first paragraph sounds Marxist. Marxist economics has not turned out to be a very good description or prediction of reality.
-- kermit (firstname.lastname@example.org), November 20, 1999.
Your sources are not very good. I suggest you go to www.prudentbear.com and read up on the market commentaries. And thier archives.
Also, www.contraryinvestor.com Also, the Top Analysts Research Index @ www.goldeagle.com
Gus, dump the -nation in torment- guy. And, dont use your own paragraphs in your report. Use ones from the guys that specialize in this stuff, and YOU comment and introduce the ideas in your report. Keep your comments to a minimum. No offense meant. And then you will have a report that will be top notch and will reflect well on your self education. Post it when you are done. You will like the sources I mentioned.
-- billburke (email@example.com), November 20, 1999.
From: Y2K, ` la Carte by Dancr (pic), near Monterey, California
The way I understand it is this... If the bank computers continue working we'll have inflation for two reasons: a lot of cash has been pumped into the system to keep people from panicking, and people will have stocked up so much they won't be in the mood to buy more.
If the bank computers don't hold up we'll have massive deflation because even though there's more cash on hand and some people have stocked up, the cash is negligable compared to the enormous loss of electronic money, and there are plenty of more people who didn't stock up.
On the other hand, somewhat independent of what happens with the banks, if the transportation industry gets crippled, it could be too much money chasing too little goods, and therefore inflation.
No matter how well everyone else is doing, if your company isn't competitive, it may mean unemployment. If there's a lot of unemployment, that means deflation.
Who knows in what combination all this stuff may strike? Nobody does.
-- Dancr (firstname.lastname@example.org), November 20, 1999.
Newspaper headlines from the summer and fall of 1929:
An account of 1927, 1928 and 1929 but before the crash:
"The Big Bull Market"
A few things to put "The Big Bull Market" into perspective...there was a fairly mild recession in 1926-27, followed by a recovery that pushed the unemployment rate down to an average rate of 3.2% for 1929. Consumer prices had been rising at a rate of about 1% earlier in 1929 before the crash and had declined slightly in 1927 and 1928.
-- Linkmeister (email@example.com), November 20, 1999.
There is little evidence that we are seeing increased efficiency in most industries. Prices are being kept low and profits high because corporations have learned to shift manufacturing and procurement to countries with large and cheap labor pools. I believe you are correct, however, by thinking that the next depression will occur because of excessive investment in questionable ventures such as internet companies and also by excessive credit expansion.
-- Dave (firstname.lastname@example.org), November 20, 1999.
You have grasped some of the mechanisms at work: overproduction and rapid expansion of consumer debt are very important factors. But the globalization of production and borderless movement of money are also involved in reproducing a similar dynamic to the 1920s.
For a very well-researched and well-reasoned view of what is going on, try reading "One World, Ready or Not", by William Greider. He will take what you already know and add to it significantly. You are definitely on the right track.
-- Brian McLaughlin (email@example.com), November 20, 1999.
Simple questions from an all American, favorer of free enterprise, freedom loving Mom---
Why is it when anyone puts forth a statement to the effect that the workers who cause the profits to happen, by their labor should in turn reap an equal share of such profits is proclaimed to be a speaker who is pro socialist?
Why is it that the only person who is deemed worthy of such profits is the one who first put forth the money to cause the orgaization to come into being but is certainly not the ONLY one who caused it to profit?
Should not ALL who caused a profit to come into being be rewarded with such a profit? What is the use of a person bustin their butt on the job or generating creative ideas if THEY are not rewarded? I bust my butt to get rewarded so my family can live better, not to cause some grand piece of S#++ in a big house to be able to take more vacations at the expense of my "humble" servitude.
If hard times come, the laborer is certainly punished by lower wages and loss of job, if profits decrease.
I do not believe it is socialist to stand up the for the (white or blue collars)labors justice. I think it is very AMERICAN to support efforts that promote profits should be given to the labors who built this country.
Only people who have run their business all alone by themselves should keep all the profits when profit taking time comes.
-- Onebyone (firstname.lastname@example.org), November 20, 1999.
If there is a lot of unemployment you will see wages go down and working conditions get worse. That's what happened in the depression.
-- Amy (email@example.com), November 20, 1999.
The stock market crash is not the great depression. There are som timing problems for one. The depression happening especially in Europe before Oct 29, 1929. If anything the depression and the crash were systems reminding us that there is no free ride. Human error yes and no. There was no single decision that caused the market drop. It was the "madness of crowds" that drove prices up and also drove them back down. Panics are like that, prone to excess.
I do like the reminder of the credit situation. In 1929 the US was the largest single Lender with Britian being the largest single Creditor. They were attempting to finance through credit their Empire, we on the other hand are financing a standard of living through credit. The crash and depression were the swan song of the great empire, y2k might be ours.
-- squid (Itsdark@down.here), November 20, 1999.
What would we EVER do with Linkmeister???? Phenominal.
-- King of Spain (firstname.lastname@example.org), November 20, 1999.
The depression of the 1930's was caused -- and sustained -- by the Federal Reserve's failure to perform one of its primary missions, to keep the supply of money roughly in sync with the supply of goods and services. The Fed turned the serious recession of 1930-1931 into a catastrophic depression by allowing a collapse of the nation's money supply.
By 1935, the nation's money supply was approximately two-thirds what it had been at the start of the decade. In examining that situation, we must remember too that prices are a powerful mechanism for transmitting information among consumers and producers as to what consumer demand exists for a product or a service. The collapse of the money supply -- and its powerful downward influence on prices -- had the effect of sending a false signal to the economy, a signal which indicated that demand for goods and services was less than it actually was. Over time, the monetary collapse and the economic collapse reinforced each other, the result being untold misery, and on a worldwide scale. The Federal Reserve had the power to break that vicious circle, but failed to take the steps necessary to stabilize the crisis.
Think about what might happen today if the Federal Reserve loses control of the money supply. In spite of the difficulties inherent in using a fractional reserve banking system as the primary mechanism for controlling the supply of money, and hence for implementing monetary policy, the Fed has been very successful over the last decade in pursuing its twin objectives of low inflation and high economic growth. Computers have played a central role in maintaining the Fed's policy objectives, by allowing it to maintain effective control over monetary policy, in spite of the limitations of fractional reserve banking for that purpose. What will happen if computers are no longer as effective in playing this vital role?
-- ExBigSkyGuy (email@example.com), November 21, 1999.
One thing I don't understand: if the workers, who are being paid too little to be able to afford to buy what they produce, just wait till they have the money (as opposed to borrowing), wouldn't the producers be forced to reduce the price so they could afford to buy? Isn't that the point of supply and demand, in which there is no corruption skewing things?
Also: isn't it a little foolish to deliberately pay money just to avoid having to wait (buying on credit)? I read in one article that if people avoided debt, they would have a standard of living 33% higher than if they lived on credit. Perhaps that is just a good principle overall. Pain first, gain later.
Anyway, I found all of these ideas to be very interesting.
-- S. Kohl (firstname.lastname@example.org), November 24, 1999.