Wednesday, May 24, 2017

What caused the Great Depression?

Marginal Revolution University has another good short video, documenting its various causes, including some of the self-defeating efforts to fix it.

1 comment:

  1. The great depression showed the implications of deflation, something that the government now trys to avoid at all costs. During the Great Depression, money supply was backed by gold, meaning that the amount of gold in the vault dictates how much money is in supply. I think this is one of the reasons why the bridge between savings and investors collapsed – there was not enough money to go around, especially since the amount of debt increased in a deflationary period. Fast forward to the Great Recession; while the impact was not a great as the great depression, part of this (I think) is due to going off the gold standard back in the 70’s, the credit expansion in the 80’s (making more money available to people via credit) and quantitative easing times 3 (QE 1, 2, & 3) increasing the velocity of money. This increase in volume of money has allowed consumers to invest more and also gave banks more money to invest; the federal reserve was even able to step in to save the day (i.e. the banks) where as this did not happen during the great depression. This shifts the aggregate demand curve to the right.

    To get out of the great recession, the aggregate demand curve was shifted to the right to increase GDP and reduce unemployment, the opposite that happened in the great depression. Now after the great recession, the aggregate curve is still shifted to the right with the continued efforts to reduce unemployment and increase production. Although, I am going to argue that the “real” aggregate demand curve is shifting left. I think there is a perception of economic growth if looking at unemployment, but there are flaws in measuring unemployment that make it look better than what it is. The overall GDP has not been that great, and since the first quarter of 2017 it continues to decline. Oil, food, precious metals prices are deflating, which leads some people to believe we are moving into another deflationary period, despite what the stock market shows.