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"In the publication, A Monetary History of the United States, 1867–1960 by Friedman and Anna J. Schwartz, they argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policymaking by the Federal Reserve System and the continuous crises of the banking system."
So, if Friedman's your man, then the actions taken by the Fed from 2008 to the present to prevent "continuous crises of the banking system" would seem to be justified.
• • • Add:
Thanks to @davidmoran for his additional link on this topic (below). It's an excellent extended discussion of Milton Friedman (authored by Paul Krugman), and includes the following quote with respect to the Great Depression :
"when in fact what Friedman and Schwartz claimed was that the government should have been more active, not less."
While not identical to the quote from Wickipedia, Friedman did suggest that the Central Bank should play a more active role in recession/depression situations, as in fact they are presently doing.
At the same time, Friedman also had "unqualified contempt for the ability of Federal Reserve officials to do better if given discretion." So there's something of a paradox: "the government" (in this case the Fed) didn't do well with the Great Depression; "the government" (still the Fed) is incapable of doing better; but [the Fed] still "should have been more active". Seems a little hard on the Fed, from my point of view.
Friedman was no fan of Keynes, who essentially advocated a combination of fiscal and monetary loosening to offset recessionary cycles. Because Congress has refused to use the fiscal tools in the current situation, we have been left with the attempt of the Fed, who Friedman apparently believed was incapable of any productive action, attempting to follow Friedman's advice and do the best that they could using only the monetary set of tools. The end results remain to be seen, but at least to this point we have not had a replay of the Great Depression.
LB, thanks much for Wiesenthal quick overview; he's good.
It still would be smart at some point to prudently raise revenues / taxes and pay for what we need to do. Wish there were some smart thinkers on the nonprogressive side, just for kicks. Ideal time to hit infrastructure and education big, and much else.
I would hope that physics and economics would have at least one principle/theory in common. I propose the “Uncertainty Principle”. The usual physical example is an experiment to precisely measure the position and velocity of a speeding bullet; the more precise the position is known, the less precise the velocity is known. In economics we might be interested in knowing precisely the price of an asset and the rate of change of the price. A possible application would be to detect when someone/computer is attempting to spoof the market (e.g. the product of the standard deviations of the price and rate of change of price compared to some constant):
Another interesting phenomena is the “Observer Effect” that states the act of attempting measure a system changes the system. For example measuring the pressure of a tire usually results in a small loss of air from the tire. Taking 100 measurements and dividing by 100 will probably not give a good answer to the initial or final tire pressures. Perhaps this would explain why an indicator that finds increasing use can become less reliable. This is a general concept that can, for example, encompasses both observer-bias and regency effects mentioned in blogs and literature.
Our federal debt history certainly is spike-filled with peaks during war years. The spikes notwithstanding, the national debt as a percentage of GDP has been rising since a low of under 10% in 1900 to its present value of over 100% today. That’s a little scary trend, but not so much when contrasted to Japan’s ratio which is north of 200%. We’re higher than other countries that I respect, but because of a multiplicity of valid reasons.
Simple, general answers likely don’t exist. But I’m optimistic. I’m a firm believer in a regression-to-the-mean iron rule that seems to be universal in the financial world. At least I hope so.
You can not just use one measurement. You need to look at several and the interrelationship among them.
You mentioned Japan's debt to GDP but you need to also look at the balance of trade.
Basically, Japan has had a positive balance of trade and a positive net debt position. While their debt to GDP is 230% they are in some ways in a better position then the USA.
The big problem will be when US interest rates return to historical norms. The USA is paying near 400B/year - if it was at historical norms - what would it be? 1.3T?????? That is why I think we will have a VAT to address the issue -- just like Europe did.
"Another interesting phenomena is the “Observer Effect” that states the act of attempting [to] measure a system changes the system"
Yes, that's always been an issue in electronics, for example. If you use a voltmeter to measure the voltage at a certain point, some of that voltage is used to cause the indication on the voltmeter, thus distorting the measurement. This actually is much less of a problem now, as the earlier metering technology loaded the circuit under measurement much more so than modern equipment.
Comments
"In the publication, A Monetary History of the United States, 1867–1960 by Friedman and Anna J. Schwartz, they argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policymaking by the Federal Reserve System and the continuous crises of the banking system."
So, if Friedman's your man, then the actions taken by the Fed from 2008 to the present to prevent "continuous crises of the banking system" would seem to be justified.
• • • Add:
Thanks to @davidmoran for his additional link on this topic (below). It's an excellent extended discussion of Milton Friedman (authored by Paul Krugman), and includes the following quote with respect to the Great Depression :
"when in fact what Friedman and Schwartz claimed was that the government should have been more active, not less."
While not identical to the quote from Wickipedia, Friedman did suggest that the Central Bank should play a more active role in recession/depression situations, as in fact they are presently doing.
At the same time, Friedman also had "unqualified contempt for the ability of Federal Reserve officials to do better if given discretion." So there's something of a paradox: "the government" (in this case the Fed) didn't do well with the Great Depression; "the government" (still the Fed) is incapable of doing better; but [the Fed] still "should have been more active". Seems a little hard on the Fed, from my point of view.
Friedman was no fan of Keynes, who essentially advocated a combination of fiscal and monetary loosening to offset recessionary cycles. Because Congress has refused to use the fiscal tools in the current situation, we have been left with the attempt of the Fed, who Friedman apparently believed was incapable of any productive action, attempting to follow Friedman's advice and do the best that they could using only the monetary set of tools. The end results remain to be seen, but at least to this point we have not had a replay of the Great Depression.
http://www.nybooks.com/articles/archives/2007/feb/15/who-was-milton-friedman/
plus two good letters. And all from 8y ago.
LB, thanks much for Wiesenthal quick overview; he's good.
It still would be smart at some point to prudently raise revenues / taxes and pay for what we need to do. Wish there were some smart thinkers on the nonprogressive side, just for kicks. Ideal time to hit infrastructure and education big, and much else.
http://www.bloomberg.com/graphics/2015-spoofing/
https://en.wikipedia.org/wiki/Uncertainty_principle
Another interesting phenomena is the “Observer Effect” that states the act of attempting measure a system changes the system. For example measuring the pressure of a tire usually results in a small loss of air from the tire. Taking 100 measurements and dividing by 100 will probably not give a good answer to the initial or final tire pressures. Perhaps this would explain why an indicator that finds increasing use can become less reliable. This is a general concept that can, for example, encompasses both observer-bias and regency effects mentioned in blogs and literature.
https://en.wikipedia.org/wiki/Observer_effect
These are general concepts, not specific applications. I hope you find these concepts interesting.
You mentioned Japan's debt to GDP but you need to also look at the balance of trade.
http://www.tradingeconomics.com/japan/balance-of-trade
http://www.tradingeconomics.com/united-states/balance-of-trade
and net debt position
http://www.tradingeconomics.com/japan/external-debt
http://www.tradingeconomics.com/united-states/external-debt
Basically, Japan has had a positive balance of trade and a positive net debt position. While their debt to GDP is 230% they are in some ways in a better position then the USA.
The big problem will be when US interest rates return to historical norms. The USA is paying near 400B/year - if it was at historical norms - what would it be? 1.3T?????? That is why I think we will have a VAT to address the issue -- just like Europe did.
https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
Yes, that's always been an issue in electronics, for example. If you use a voltmeter to measure the voltage at a certain point, some of that voltage is used to cause the indication on the voltmeter, thus distorting the measurement. This actually is much less of a problem now, as the earlier metering technology loaded the circuit under measurement much more so than modern equipment.