Sunday, November 23, 2008

Yes Virginia, The Big Recessions and Depressions ARE the Same

Here we go again. Although every recession is unique in the details, this one and those the country has experienced since the 1800s have at least one fundamental underlying similarity: The boom that preceded them.

magicmountain
[Thanks to Themeparks.about.com for this image of Tatsu, a new ride at Magic Mountain.]

Let’s compare what is happening today to what happened during the Great Depression. In the 1920s after World War I inflating of the currency, Florida underwent a damaging real estate boom and bust cycle. Florida’s experience was so violent that one contemporary economist in 1928 called it "the Florida gamble."

"When Florida land first started its upward course there were good substantial reasons for advancing prices ... [but] advancing prices drew those individuals who were speculatively inclined as molasses draws flies. ... Large building projects gave an appearance of substance and worth to the whole affair. In 1924, pessimists were nearly all united that the Florida boom must soon end. But the mass of people, than whom there are no greater gamblers, had Florida fever. ... Then the bubble broke, as they always have and always will. In the wake of the boom followed disaster, defunct banks, and depression."


Hmm. Real estate bubble. Sounds familiar.


In 1925 through 1928 as the Florida gamble unwound, the concomitant US stock market boom was showing foreboding signs of euphoria. The article continues:

"The [stock market] boom has not collapsed, and, from all appearances, is stronger than it has been for some time. That seeming invulnerability and capacity for unlimited progress is a market feature of all such speculative periods as they near an end. It is to be hoped that the Florida bubble will not be completely paralleled [in the stock market]. Banks all over the country have entered on a new experiment in the past few years, the practice of loaning large amounts against securities [italics added]. [Also sound familiar?] A collapse in the stock market would make thousands of banks unwilling investors, very much as the Florida banks found themselves in the real estate business after 1925. Such an experience, with the inevitable blood-letting at the hands of receivers for the least fortunate, would be a blow to our progress that would force upon the country many months of painful convalescence." [Quote from an unpublished paper, "Stock Speculation Versus Florida Memories," E.C. Harwood, 1928.]

As we now know, the Florida real estate bust of 1925 was followed by the stock market crash months after Harwood wrote this prescient article.


Hmmm. Stock market bubble. Again, sounds familiar.

Between 1800 and 2008, Americans have experienced boom and bust cycles; yet economists as a class are known for their disagreement about the cause, with two notable exceptions.

One is the Austrian school of economists, scholars like Von Mises and Hayek, to whom our attention seems to turn cyclically after every recession, but of whom we tend to lose sight as soon as we get another taste of easy credit. They've been warning about credit imbalances and poor banking practices for over a century.

A more scientific thinker, this time from among the empirical economists, is the author of the articles noted above. Through extensive study of banking statistics, Harwood concluded that markets in general, and international markets in particular, work best when unhampered; but that they can only function well when the trading medium is staid. Like the Austrians, he concluded that fluctuating fiat currencies and/or poor banking standards are a catalyst for excessive credit creation, resulting in speculative boom/bust cycles. Using his analysis, he predicted the 1929 crash as evidenced in his articles published in The Annalist of 1928 and early and mid-1929. He also predicted the devaluation and flight from the dollar of the 1970s.

Furthermore, he maintained that the world would continue to suffer damaging speculative peaks and crashes until voters realize that it is our incompetent monetary policymakers who create them. Legislators must acquire enough humility to admit that human agents cannot micromanage the quantity of money—a failing even Milton Friedman feared—and that government’s only role should be to support the natural money-creation process through the establishment and maintenance of sound banking principles and of some form of currency measuring stick.

Both Harwood and the Austrians believe that, to date, the only such device that has succeeded for any length of time is the gold standard in one form or another. The duty of our economic wizards is to find the version of it that fits today’s parameters.

What are the chances our present or future administration will see fit to look for this solution? About zero. Expect more rides in the future.

See more about Edward C. Harwood at the American Institute for Economic Research.

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2 Comments:

Anonymous the economic fractalist said...

The Time Based Fractal Solution for the Commodity and Equity Asset Low and for the US Debt Instrument and Dollar High Saturation Valuations

The macroeconomic system of total wages, savings, debt, asset valuation, and asset supply conforms completely to a mathematical and mechanistic model. The complex system produces asset saturation valuation curve data in hourly, weekly, monthly, and yearly units. These data establish simple repetitive fractal patterns which define the complex macroeconomic system as a science just as the simple mathematical laws of gravity describe the relationships of proximal heavily bodies under the influence of unseen but mathematically discernible and consistent fractal energy forces emanating from the mass-energy bodies.

Within any given section of the asset valuation saturation curve, fractal patterns at various time orders are identifiable. This is the nature of fractals. But in order to prospectively and accurately determine the true ongoing asset valuation fractal pattern, the complete curve and the longer, intermediate and shorter fractal patterns must be viewed in totality and with relational consistency. Likewise the short term and long term decay and growth fractal relationships of debt valuations, currency valuations, commodity valuations, and equity valuations and their respective inverse growth and decay fractal relationships must be consistent. The world is at the historical time frame for a nonlinear commodity and equity collapse involving the most invested and monied second fractal asset valuation saturation curve in the history of the world - the terminal portion of the150 year US equity valuation second fractal. Saturated real estate market assets and saturated equity assets and saturated commodity assets rotationally peaked within a 2 and 1/2 year period of each other - limited by ongoing debt, overvaluation, and oversupply of durable goods including housing involving basic commodities. Now a collapsing real economy: diminishing jobs, diminishing total wages, collapsing commodity, equity, and real prices is an exponential feed back system causing more oversupply, less demand, and greater debt default. And because the United States has been such a dominant force in the world's - debt driven, US consumer driven, US financial facilitator industry driven, US low interest rate driven -macroeconomy, the entire world has operated under the umbrella of the United States- dominant long range 150 year second fractal pattern - especially for the last 50 years since the second world war. The first 70-71 year asset valuation growth cycle for the United States began coincidentally with the writing of its constitution and ended in 1858 shortly before the American civil war. Nonlinearity between the 2x and 2.5x time frame characterizes the terminal portion of asset valuation second fractals. Asset nonlinear devolution has been transpiring in earnest for the last three months and will now accelerate percentage wise in a precise and predictable nonlinear fractal pattern. This predictable nonlinearity has the potential for dislocating the entire global macroeconomic, debt obligation, political, social, ownership, and currency systems.

While the qualitative guidance for the rotational collapse of real estate, equities, and commodities has been accurate, the prospective daily quantitative identification for the daily fractal sequence of the collapse has not been. The prior fractal decay estimations included portions of saturation curve and parts of the various asset elements but not all of the assets within the context of intermediate and longer fractal progression and linked in mechanistic optimal lock step with each other. There is now a fractal solution that fits all parameters: debt instrument growth, commodity and equity collapse, and US dollar growth relative to other basket currencies. This fractal solution provides a time table within which the emanating epiphenomena continuous stream of bad news - collapsing banks, corporations. and retailers; exponentially rising unemployment; unbalanceable state budgets, state budget cuts, tuition increases, defaulting local community bonds, defaulting pension plans, collapsing GDP numbers, and finally (here's the humor) decreasing Big Mac sales - will occur. As of 22 November 2008, the inverse fractal daily decay growth pattern is prospectively predicted as 33/14 of 83/25 days.

1:12 PM  
Blogger Katy said...

I actually made it to the punch line. Nice work.

2:55 PM  

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