Posted on 09/25/2009 7:11:06 AM PDT by 1rudeboy
The 1930s has become the sole object lesson for today's monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there's been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.
Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.
While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.
(Excerpt) Read more at online.wsj.com ...
But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.
No laffing matter, this.
Whatever recovery policies this administration thinks it is applying, the Japanese are not impressed. We have just lost another dollar against the yen...today.
HiTech: “No laffing matter, this.”
No, it’s not. Whatever will they do when the interest rate is ZERO and it still isn’t enough to prime the economic pump?
this should be your Treasury Secretary in a Palin Administration
And even then, with all the government attempts to raise Federal Revenue, they only collected around 20% of GDP.
(Hauser’s Law)
The people rose up against the governments attempts of ‘Central Planning’ during the Depression. (Sons Of Liberty). Even Ray Moley, FDR brain trust, noted in a politically free society, it would take a police state to implement central planning of the economy.
FDR became angry when his tax increases did not raise revenue levels. The ‘rich’ were dragged into court.
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not
bound to choose that pattern which best pays the treasury. There is not even a patriotic
duty to increase one’s taxes. Over and over again the Courts have said that there is
nothing sinister in
so arranging affairs as to keep taxes as low as possible. Everyone does it,
rich and poor alike and all do right, for nobody owes any public duty to pay
more than the law demands.”
(US Appeals Court Justice the Honourable Learned Hand)
Starve the Beast!
What do you mean “when” ? Look around..
By that time, demand for imports and exports had fallen to Depression levels--the tariff bill had no real impact.
He is closer to the mark on the tax increase proposition although that was responsive to economic conditions rather than causative. It made any effort to initiate a recovery more difficult.
The real cause of the first Depression in the late 1920's was the same as the cause of the current second Depression--debt service costs on existing indebtedness exceeded liquidity flow available to pay. Simple as that. And the resulting liquidation doesn't stop until the aggregate debt is reduced to a level that can be serviced from an available share of liquidity flow.
The point about taxes is applicable today. I tend to want to believe that state and local taxing authorities today recognize that increasing tax rates is likely to produce decreasing tax revenue under the circumstances of this contraction. That may well be wrong.
I’m not sure what you are driving at—Smoot-Hawley was a tax increase, and it helped torpedo U.S. exports—that’s what Laffer is saying: tax increases of all types helped us get into the mess.
“His point about Smoot Hawley is probably not correct. The bill didn’t become law until over a year after the deflationary liquidation was well established.”
Most economists would profoundly disagree with you.
Retaliation against the US happened way before the bill was enacted. As soon as it passed the House, over 40 letters of protest from trading partners were delivered to the US. 23 countries began rataliation, including our largest trading partner, who put tarriffs on over 15 products.
The bill wasn’t put into effect until a full year after it was voted on and passed in the US House.
Note the bill passed the House in May of 1929 and wasn’t enacted into law until June of 1930.
I would prefer she keep MILES away from this guy. Nobody is right all the time, but Laffer was so spectacularly wrong when he bet a penny that Peter Schiff was wrong when he predicted the real estate collapse in 2006/2007. If you haven't seen it, check out this YouTube between 53 seconds and 1:53 of the 8-minute montage.
A month or so ago I saw Laffer on a talk show promoting his latest book and when the host asked him about that miscall, he said, "That's why I only bet a penny". Too glib for my taste, for he reality he admits he's full of crap.
Schiff was right, but then he recommended his clients buy foreign currencies, foreign stocks and commodities. They were crushed when the dollar soared and commodities tanked.
Great article
Unless it DOES hit $5,000. Then, I suspect, Laffer will bet another penny. :-)
I was around when gold possession was legalized. At that time I was buying gold sovereigns (1/4 oz) at $13 ea and Mex 50 pesos (1 1/4) at $60 as I KNEW gold would take off - to around $105 by my estimation. That's where I sold out, kissing my hands over how smart I was. When it kept on going up I got back in at $400 and bailed at $600 as it couldn't POSSIBLY go higher - again kissing my hands. Didn't get back in, even when my heretofore conservative neighbors were climbing on board at $800.
Same with silver. Started hoarding silver coins in '67, sold out at 5x face, kissing . . . In the end, even I was stunned when I raided my coin albums for common date silvers and got $1,000 plus for $52.00 face.
Moral: NEVER discount ridiculous estimates of precious metals. Right now I think Schiff is off base as I still believe a Depression is coming and cash, however debased, will be king.
As I said, "Nobody is right all the time." However, if those folks would have held on, the losses wouldn't have been as much as if they listened to Laffer, et al.
I'm not a blind champion of Schiff as I think he's wrong about the dollar. That being said, I would trust him more than I would Laffer and the "experts". Those people are completely out of touch. Or, they know the score, are scared spitless, and are trying to position themselves to ride out the storm, all the while lying to the public.
On the facts? I don't think so. Smoot Hawley was enacted in 1930 long after the deflationary liquidation was in fact well established.
Lots of economists disagree with me. On the other hand, I make a lot more money than any of them do and if you go back and look at my economic forecasts on FR, my forecasting average is a lot better than any economist you know of.
The focus on Smoot Hawley is just another apologist line for the fed. The first Depression, like the second, was caused by creation of too much credit money supply by the fed in the mid 1920's (the 1990's in the case of the second). At least in the 1990's, the excess credit money creation was a political act, not a screw up by the planners at the fed.
After the House election in 1994, Clinton's political managers and Robert Rubin were concerned about the 1996 election in the context of a possibly contracting economy. So in conjunction with Greenspan, they embarked on a money creation project in late 1995.
What Greenspan really thought we will need to wait to find out until Post-Mortum publication of the story.
Let's ship more jobs to China!
What? we're a bunch of sissies and can't handle 25% unemployment?
Don't forget that FDR dropped gold from $20USD to $35 .....
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