The Great Depression (NEW CONCEPTS)

[Ishmael]

Right. So Hatty's idea is a new one.

[Mick Harper]

Very well, let us be clear. I think you will agree that 'most commentators' link the Rise of the Nazis with a) the Great Depression and b) the Great Inflation (that 'ruined the middle classes'). Because this is pretty well all that 'most commentators' are interested in about this era of German history, the connection is made, however vaguely, that all three are somehow inter-connected.

My animus against this argument has always been that everybody seems to ignore the fact that there was a period of 'unexcelled prosperity' in the period between the Inflation and the Depression/ Rise of the Nazis, so that (in my opinion) there is no particular link.

To that extent I agree that it would indeed be a new theory to say that The Great Inflation caused the Great Depression. I (therefore) await this explanation with some eagerness. Let us hope it does not contain the dread phrase "Dawes Plan".

[nemesis8]

Seems like to me that the Great Depression was quite a good thing.

It was really just the final enactment of the monetary union started in 1789.

I can't claim originality as the same process is happening in Europe now. The edge is going under the centre refuses to help. We will only get full union when all these partial bailouts catch up with the Krauts. When the Krauts finally go under we will have a new Great Depression and European Monetary Union will then miraculously be achieved....

Took the Yanks 140 odd years and a civil war......

The key to acheiving a massive Double King Size Depression is to unify a whole load of disparate economies/industries together, by artificial links.... so when a regional shock hits it takes the whole lot down.

http://www.youtube.com/watch?v=LEX6QQJei9U

[Grant]

So what's the answer, Ishmael?

[Ishmael]

Really. I've just freed your mind to pursue an wholly original angle. Only Hatty was able to take advantage of the opening.

By now it should be you telling me the answer.

[Grant]

All right. Depressions happen once a bout of inflation has been controlled.

[Grant]

Or, and this interests me:

A recession/depression happens following major changes in society, specially new innovations. In the 1930s it was mass production. Today it's the www

Why? Because a major innovation causes our pricing mechanisms to go wrong. Too much money is invested in defunct industries and a recession is inevitable.

[Ishmael]

By now, all of you have more than enough information to solve the problem -- as much as I did when I began this investigation.

I did not begin by considering the cause of the Great Depression. I began by actively wondering about the causes of our current economic conditions. I noticed immediately, however, that this "Great Recession" shared some common characteristics with the Great Depression, foremost among these: The fact that everyone disagrees on what caused it.

Applied Epistemology posits as a rule-of-thumb the notion that where disagreement over causes persists, paradigm error is likely to blame.

With respect to our current crises, right-wingers like me blame the government pushing loans on poor people. Left-wingers blame Wallstreet for selling bad loans and hiding the associated risks. Those are just the broadest categories though. There are a myriad other suggested causes.

Most observers today conclude that the collapse was caused by the intersection of multiple factors. The same is often said for the Great Depression. It too was the product of multiple causes.

This violates a cardinal rule of Applied Epistemology: Every effect stems from a singular cause.

There should be one thing that caused the great depression and one thing that caused the great recession.

[Ishmael]

And yet, though both economic collapses are attributed to a multiplicity of causes, there is almost no overlap between the two sets of causal factors cited by experts; no suggested cause for our current economic conditions has been also employed to explain the Great Depression. The collapse of 2008 and the collapse of 1929 were the products of completely different causes, no matter the causes to which you ascribe either collapse.

This breaks another cardinal rule of Applied Epistemology: Same effect, same cause.

All economic catastrophe ought to have one common cause.

[Ishmael]

Now the problem with economic crashes is that they tend to reveal weaknesses inherent in the totality of the economic structure and as that structure collapses, any one of these weak points can appear to be causal. That's why the right picks its favorite weak point and the left picks another. Neither is any less a valid a choice than the other.

How can we separate a real cause from an apparent cause?

The real cause is present wherever the effect is seen.

So what is the effect? Massive economic collapse. But what constitutes massive economic collapse? Every recession? Maybe.

What we are going to do is take two economic downturns of significant size and world-wide scale, develop a theory to fit them both, then see if it's strong enough to explain any other similar phenomenon.

We will choose the Great Depression and we will choose what is, I would argue, the greatest, most-significant recession to hit the world since the Great Depression: Our current collapse.

Our goal is to find a factor common to both that might have proven causal. If that factor is causal, it will show up again in other historical instances of massive collapse and will manifest in accordance with a consistent pattern.

[Ishmael]

Any factor to which me might attribute the cause of the Great Depression must precede the Great Depression. However, that a phenomena precedes that Great Depression is hardly enough to attribute to it causality.

The truth is always obvious, says a maxim of Applied Epistemology. If so, we should look first to the great stock market crash of 1929. This crash immediately preceded the onset of the Great Depression and is routinely cited by most observers -- both at the time and on through today -- as causal (at least to some extent).

Moreover, the Stock Market crash is not only consistent with the AE rule favoring the obvious, it is also consistent with the AE rule favoring consistency: Same effect, same cause. The Great Recession of 2008 was also precipitated by a market crash. This would allow for the same cause to produce the identical effect.

However, the maxims of Applied Epistemology universally allow for exceptions in every case where there is clear evidence to the contrary. The stock market crash of 1929 is the most obvious candidate cause for the Great Depression and this conclusion would be consistent with observations from 2008. Yet this cause can be eliminated if there is clear evidence against the attribution.

Is there such evidence?

[Mick Harper]

You are getting perilously close to arguing that the weathervane causes the weather since every time the wind blows, blow me, there's the goddamn weather vane pointing it out. But anyway, as far as I am concerned, yes it's true that right at the beginning of both crashes there was a Stock Market crash. But not perhaps just before.

[Mick Harper]

It doesn't apply (so far as I know) to 1929 but a common feature of the start of Big Slumps is the collapse of a major financial institution. The collapse of Lehman Brothers was similar to the bankrupting of Overend & Gurney in 1866 as signalling the end of the bubble and (presumably) the start of the anti-bubble. However the collapse of a bubble (eg the Internet Collapse at the turn of the last century) doesn't necessarily mean the start of a slump.

I suppose the question here is whether the weather vane effect can also be real. If enough people look at the weather vane at the same time and conclude the weather must have changed then, via the "butterfly effect". loads of stuff can start moving in the opposite direction. It may not matter that the wind can blow from any direction without much harm done, only that a lot of people observing the wind-change can cause a catastrophic resequencing.

[Ishmael]

The first thing to note regarding this thesis is that consistency itself is of decreasing significance with proximity to the event. Consistency is more significant the further ahead of events we find it.

As the economic collapses of 1929 and 2008 unfolded, they were characterized by a succession of similar events: Bank collapses and price deflation in certain markets, for example. These are phenomenon that define a market collapse rather than necessarily initiate such a collapse. So too may it be with stock market crashes. They are as likely to be effects of the collapse as they are to be causative.

Indeed, the worst stock market crash in U.S. history did not occur until 1930 and lasted all the way to 1932. This market crash was concurrent with the worst of the depression. Then the second-worst market-crash in History happened in 1937-1938, but this came at nearly the end of the Great Depression. Indeed, its a wonder no one has suggested this crash caused the Depression to end.

The crash of '29 was actually only the 4th worst in U.S. history. The third-worst market crash occurred in 1907. Significantly, it failed to trigger a Great Depression though it was worse than that of 1929.

Most damning to those who would attribute the Great Depression to the crash of the stock market; the roaring 20s were ushered in with the fifth-worst stock market crash of all time: The crash of 1919-1921.

Though all depressions appear to be preceded by stock market crashes, not all stock market crashes presage depressions. That would appear to rule them out as necessary causes (and a necessary cause is what we are after).

[Ishmael]

It's worth noting that the stock market crash of 2008 doesn't even make the top 10 list of worst crashes in US History. The market crash of 2000 -- when the tech bubble burst -- was worse. Yet no Depression followed. Indeed, the economy improved and eventually boomed, even post 9/11.

Yet despite having been preceded by one of the more mild of stock crashes, the economic collapse that began in 2008 has been one of the deepest and most prolonged recessions in American History.