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Other takes on why capitalism didn’t end in 1929

September 27, 2009 Leave a comment Go to comments

Since the question of why capitalism didn’t end in 1929 has such obvious relevance to our present circumstances, it is no surprise some of the most important – or the most irritatingly ubiquitous – voices in economics have weighed in with their various theories. All of these theories consist, in one way or another, of a description of how Washington and its many subdivisions fixed the economy, and set it back on the road to ceaseless expansion.

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NOBEL-ECONOMICS/Paul Krugman says government fiscal intervention in the economy during the Great Depression was effective in reversing the depression, but ultimately failed because it was too timid – a flaw only fixed once the bodies began piling up on the battlefields of Europe, Africa and Asia:

… F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.” …

What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

This history offers important lessons for the incoming administration. …

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

The point Saint Paul appears to be making here  is that either the Messiah should be prepared to eventually spend about 40 percent of GDP on stimulus – one would like to see how China reacts to that – or, we need a war bubble to follow on Krugman’s previous suggestion for a housing bubble.

But, what this passage really highlights is that they give Nobel Prizes for economics to any asshole who produces enough shit passing for economic analysis to qualify as an expert by the weak standards of American economics.

Krugman apparently believes it was not the estimated $1,000,000,000,000 (that’s $1 trillion) in lost output, in starvation of hundreds of millions of desperate working families on every continent, in destruction of the productive facilities of nearly every major industrial nation, and in the sudden disapearance of most global competitors to American business – all of which had to be replaced after the war, and would be replaced by the single remaining functioning industrial power after the war – which might have cleared the ground (so to speak) for the post-war expansion, but the measly increment of borrowed money spent by Washington, to help inflict this incalculable horror, which caused the American economy to rebound.

Fine Paul – And Fuck You too!

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Christina+Romer+Gives+Talk+American+Recovery+jRmyN0e7hKKlIn 1992, Christina Romer, who now chairs the Council of Economic Advisers for the Messiah, credited an expansion of the money supply for ending the depression. However, as she notes, much of this expansion came from the flood of gold into the US as nervous investors fled Europe taking their money with them.

… fiscal policy was of little consequence even as late as 1942, suggest[ing] an interesting twist on the usual view that World War II caused, or at least accelerated, the recovery from the Great Depression. Since the economy was essentially back to its trend level before the fiscal stimulus started in earnest, it would be difficult to argue that the changes in government spending caused by the war were a major factor in the recovery. However, Bloomfield’s and Friedman and Schwartz’s analyses suggested that the U.S. money supply rose dramatically after war was declared in Europe because capital flight from countries involved in the conflict swelled the U.S. gold inflow. In this way, the war may have aided the recovery after 1938 by causing the U.S. money supply to grow rapidly. Thus, World War II may indeed have helped to end the Great Depression in the United States, but its expansionary benefits worked initially through monetary developments rather than through fiscal policy.

Romer adds, however, that the key factor here was the Argentina-style devaluation of the dollar in 1933:

My analysis also supports studies that emphasize the devaluation of 1933-34 as the engine of recovery. Peter Temin and Wigmore argued that the devaluation signalled the end of a deflationary monetary regime and that this change in regime was crucial to improving expectations. In this explanation it was the change in expectations that brought about the turning point in the spring of 1933. My work bolsters Temin and Wigmore’s conclusion by showing that the deflationary regime was indeed replaced by a very inflationary monetary policy.

In other words, the expansion of the money supply was achieved following a wholesale 69% reduction in the value of wages, goods and existing capital!!!!

A little background may be required to understand this point by Romer.

In 1933 President Roosevelt issued Presidential Executive Order 6102, confiscating privately held gold, and outlawing private gold hoards. This executive order directed all person, groups and corporations within the US having gold in their possession to deliver that gold to the Federal Reserve Bank, and made it a crime to own, hold, or trade gold.

This was followed by the The Gold Reserve Act of 1934 which “outlawed most private possession of gold, forcing individuals to sell it to the Treasury, after which it was stored in Fort Knox and other locations. The Act also changed the nominal price of gold from $20.67 per troy ounce to $35 per ounce.” (Wiki)

By outlawing private possession of gold, and devaluing the US dollar against gold, Washington essentially impoverished the majority of American who now were forced to give up their gold, and trade it in for paper dollars at significantly less face value than existed before.

Since, both the weak recovery and the inflow of gold from Europe followed from this devaluation, it is reasonable to ask if, and to what extent, the cause of this weak recovery might not been the devaluation of the existing stock of capital, and the real reduction of wages produced by the devaluation of the dollar – both of which, Marx’s theory assumes, aids in recovery. To offer a change in the money supply as the cause of the recovery from the Great Depression without accounting for the devaluation of capital and the reduction of real wage that precedes it, when an existing theory already offers those two as means of recovering from a depression is quite in keeping with the lazy ignorant style of American economics.

BTW: Christina, good luck with your next devaluation of the dollar! What will it be this time? 100-1?

China is going to be pissed.

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