The Economy

I don't think we're going to see a repeat of 1929. For one thing, the currency is totally off the gold standard, which was inelastic and produced depression after depression in the late 19th and early 20th centuries as the country industrialized.
That we could follow in Japan's footsteps is a definite possibility. We've done exactly what Japan did when its '70s-80s growth spurt petered out. At some point the piper must be paid. Reagan tried to put the hammer to "welfare queens" by replacing low-income subsidies with the earned-income credit. The next thing you know, the upper half of the tax table was complaining that they were paying all the taxes. Well, duh.
The bottom line is that income taxes must be raised. I'd love to see significant spending cuts as well. But the country is undertaxed, that's for sure.
One of the sacred cows of entitlements is Social Security. When my wife took a lump-sum buyout from her company, I was surprised to discover that SS taxes were capped at something like $110K. That's ridiculous -- in some parts of the country that's a middle-class income. Jack it up to half a mil, and make the outlay progressive. That'll never happen, of course, because the wealthy would throw a shitfit if they didn't get every ounce out of the system.

 

Beat me to it.

Was it really any better back when a boat full of gold could sink, sparking a depression?

 

Study up on the Panic of 1873, very much related to coinage of precious metals. Gold also played a large part in the Panic of 1893. In both cases, the basis of precious metals prevented the government from digging the country out of an economic trough (the condtion was actually worldwide, but other industrialized countries shared the same constraints). As a result, the resulting depressions lasted for years.

Western farmers in the 1890s tried to get Washington to inflate the economy by ordering the free coinage of silver. Williams Jennings Bryan is still rememberd for his "Cross of Gold" speech.

FDR saw the limitations of gold-based currency and reduced it greatly in 1933 after the country had been mired in years of economic contracti0n.

 

https://en.m.wikipedia.org/wiki/SS_Central_America

The sinking of the USS Central America helped spark the panic of 1857.

My thesis is “our economy wasn’t better back when the sinking of one boat could cause a collapse.”

 

This never works for me. If I am hung way over, a four-Bloody Mary regimen doesn't work any better than a three-Bloody Mary one.

 

Railroad bonds had an impact domestically. But the depression following the Panic of 1873 extended throughout the Western World, it was not just limited to the US (at the time a relatively minor player in the global economy). The economic collapse occurred first in Europe, which also based its economies on gold and, to a degree, silver. They had their own inflationary stimuli, but when the bubble popped, their treasuries did not have the resources to rescue their economies. The result was years of depression.

Two issues regarding the gold standard: while governments maintained coinage more or less consistent per capita in the 1800s, it could not account for the increase in individual productivity that was under way as industrialization occurred during the late 19th century. As a result, the money supply failed to expand with the growing economy. Hence, structural deflation.

Second, most businesses historically have operated with some amount of debt. But even a moderate amount of debt can become unsustainable when money is in short supply. Consider the number of farmers who lost their homes in the Great Depression (and in the years leading up to it). These weren't speculators, they were families trying to eke out a living. But they had to borrow to put a crop in the ground. That was the case for my grandfather, who lost his farm to creditors in 1928.

Certainly the Fed's pumping up of the economy has gone on far too long. It probably should have ended, to put a number on it, about 2013, once the emergency the Fed caused under Alan Greenspan had largely passed. I agree that we are now in a hole we must dig out of a la Paul Voelker.

BTW, if you want to see deflation at work in the here and now, consider Bitcoin. Its supply is finite, and it has gone in value from $1 to $33,000. El Salvador has adopted it as its national legal tender; it'll be interesting to see how that pans out.

 

Say you're in the business of making widgets. Or, say you're a farmer, raising corn. You go into the enterprise thinking you can sell your product for $x. But when the time comes to sell what you've made, the market only allows you $x-2.

Meanwhile, you borrowed $20x to buy equiment and supplies to make widgets. You have to pay installments on that loan, which does not diminish just because deflation has rendered the dollar more valuable and your product cheaper.

You hired a person at $1x a day to help you produce your product. But it turns out the work they're turning out is costing you money. That person gets laid off.

The worker has a mortgage to pay, but can't make payments anymore because they're out of work.

You may consider borrowing money to get over the rough patch, but banks are loath to lend. Even worse, some depositors lost faith in banks and started a run on the place until it became insolvent and closed. Also, the value of your property is less than when you took out the original loan on it.

For a person with a lot of money and no debt, deflation is great. For a business that seeks to grow, deflation is a red light. That's why the Fed has a goal of maintaining inflation in the low single digits -- it encourages economic growth.