Opinion: Chilling ways the global economy echoes 1930s Great Depression era

marketwatch.com ^ | February 19, 2016 | John Coumarianos

[John W]

One view of what caused the Great Depression in the 1930s is that the Federal Reserve failed to prevent a collapse in the money supply.

This is the famous thesis of Milton Friedman's and Anna Schwartz's A Monetary History of the United States, 1867-1960, and it was, more or less, the view of Ben Bernanke when he was chairman of the Federal Reserve.

The global economy today resembles that of the 1930s in several ominous ways.

Financial author Edward Chancellor recently called attention to a paper written by Caludio Borio, head economist at the Bank of International Settlements, that provides a fuller picture of the causes of the Great Depression. The paper also draws parallels between global economic conditions that led to the rise of protectionism in the 1930s and our situation now.

The paper's thesis is that "financial elasticity" characterizes both the pre-Depression global economy and today's global economy. Elasticity refers to the buildup of capital imbalances such as money flows into emerging markets because of low rates in developed markets.

[Oatka]

Each family can only turn in X-amount of the old currency in exchange for X-amount of the new currency.

My brother was in the 1960s Army in Korea, where they used Military Payment Certificates instead of dollars.

One evening he was out by the base's back fence and saw the local prostitutes throwing wads of these bills over the fence. He scooped up a bunch and thought he was a rich man. The next day they were all assembled and told that there was a new MPC issue and that the old worthless MPCs were to be turned in - any large amounts would be questioned. Sic transit gloria.

He figured the hookers had gotten wind of this "secret" maneuver and threw the soon-to-be-worthless "money" on to the base on the theory that they would soon get it all back anyway.

[Sidebar] I remember reading that before WWII, the French Franc was worth 4.3 to the dollar. After the war, inflation took the rate higher and higher. At some point the govt. waited until it was 430:1, moved the decimal two points to the left, declared only the new currency was acceptable and redeemed the old currency at that rate.

The reason govts hate gold is that they can't tell you the one ounce coin you have now only weighs one half ounce.

[SampleMan]

I was in Brazil when they were moving the decimal three places to the left.

Bought a cheeseburger, fries, & coke with a $5 bill U.S. and got around 850,000 Brazilian Real in return. I got the old bills, so the change on a $5 fill both my hands. It cracked me up that they took the time to count the change out, as if I knew or cared what the change was.

[SampleMan]

Simple question. Cash windfall...pay off 28 year mortgage at 4.5 percent or keep cash?

Probably neither. Buy more property with the cash.