Thursday, December 13, 2007

”The Austrian View”…sounds familiar??

Great Depression

Same thing all over again:- ''Another explanation [for the Great Depression] comes from the Austrian School of economics...the key cause of the Depression was the expansion of the money supply in the 1920s that lead to an unsustainable credit driven boom....in the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and in capital goods. By the time the Fed belatedly tightened in 1928, it was far too late and, in the Austrian view, a depression was inevitable.''

Posted by hpwatcher @ 12:41 PM (645 views)
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7 thoughts on “”The Austrian View”…sounds familiar??

  • Can somebody please increase my understanding of a particular point please….

    I do believe that excessive credit caused the depression in the 1930s, but my understanding is that a lot of that credit availability was as a result of printing money. This time round I have a suspicion that the supply of credit is massively more because of the reduced use of paper money. My thinking is that all of the numbers in bank accounts that only change when people use a cash card. All the electronically held details. All the transfer of money from “mortgager” to “mortgagee” (??) is just numbers in an electronic database. No-one but NO-ONE can know the full extent of this ‘made-up’ money, but surely it will still have to come out in the wash??

    Are any of these thoughts realistically going to contribute to the mess that is going to happen this time round?

    Reply
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  • I think there is a real crisis in the value of asset values…I mean, who in their right mind would pay 2m for JK Rowlings latest book?

    It’s absolutely nuts. As you say, there is too much ‘made up’ money wooshing around the system.

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  • Urine Trouble says:

    If say the government made it illegal to have savings, and savers were made to use thier savings to pay a friends debt off so in theory no person or company had savings or debt or money in pocket, I personally don’t believe there would be enough cash. I think this is when they print money to fill the void and so money becomes worth less and less as time goes by. Hello inflation.

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  • dohousescrashinthewoods says:

    Inbreeda, I’m on the same lines. Financial meltdowns are caused by “inventing” money. Whether that is printing notes, tweaking databases, or a collective mania that bids up prices of an asset, money seems to appear from nowhere.

    Sure enough, there comes a point when someone says “but the emperor hasn’t any clothes on” and, after a spate of ridicule and denial, nervousness – and then panic – set in and it all gets back to “normal”: something approximating true value.

    Since each time has been more serious than the last, I guess we’re basically in for the biggest meltdown in history – the biggest numbers (in real terms) that have ever been banded about, all on debt (think: trading on margin, private equity, CDOs [aka blobs of bits of mortgages]).

    This is going to be a lot bigger than the government will admit (let’s face it, they are already burying CPI) but might not be the end of the world. It may get very very messy for longer than anyone expects, but one day htere will be born yesterdays who will do it all over again.

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  • Dohousescrashinthewoods says:

    “unsustainable credit driven boom”

    Perfectly put. That is how we got here today.

    “government efforts to prop up the economy after the crash of [2007] only made things worse.”

    Brilliant. I say this is a forecast for how the Fed will behave.

    I think This forcast will be closer to the truth than any Assetzzz prediction.

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  • dohousescrashinthewoods says:

    “unsustainable credit driven boom”

    That is how we got here today.

    “government efforts to prop up the economy after the crash of 1929 only made things worse.”

    I say this is a forecast for how the Fed will behave.

    I think This forcast will be closer to the events which we will see unfold than any Assetzzz prediction.

    Reply
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  • Inbreda, I think you are spot on. This is how I understand the money supply growing way beyond the printed money:

    I earn £100 and deposit it in a high street bank
    The bank lends the £100 to punter A
    Punter A buys an iPod from Comet for £100
    Comet deposits the £100 in the high street bank
    The bank lends £100 to Punter B
    Punter B buys a bike from Halfords for £100
    Halfords deposits the £100 in the high street bank
    Rinse and repeat as often as you like.

    My deposit has been leveraged into debt many times over.
    Bank only needs to have a small margin between interest paid on deposits and interest charged on loans to earn lots of return.

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