[Torie]

What all of this analysis misses is that money supply contracted after the stock market crash in 1929, and then protectionism ensued. In a global economy, and with a Fed that won't contract the money supply, I really don't see the analogy. Debtors are balanced by creditors, and the key is to let the money flow between them on a global basis. Granted, if loans are imprudent, there is economic waste, which must be paid for. But in the modern economic era, that need not lead to a depression.

[David]

"What all of this analysis misses is that money supply contracted after the stock market crash in 1929, and then protectionism ensued. In a global economy, and with a Fed that won't contract the money supply, I really don't see the analogy."

With all due respect, I think that is probably not correct.

It is a fact that the money supply contracted after the stock market crash of 1929. But it is also a fact that the money supply is probably contracting (when we agree on what the measure of the real money supply is) today, when the Fed is running the printing press as fast as it can with no letup in sight.

It works that way because in order for printing press money (additional bank reserves or cheaper bank reserves) to get into the money supply, the reserves must be the base for additional net lending. Didn't happen in the 1930's; not happening today either.

Reason why, today, is because borrowers and potential borrowers don't have available additional excess liqudity to make payments on additional net borrowings. A little different from 1929 because in 1929, the cycle came to an end because stock values collapsed and could no longer serve as a base for additional borrowing. The measurable deflation results in part because of debt retirements as it did in the 1930's. Although much debt retirement in the 1930's resulted from foreclosures which are just getting started today.

Point is that the only way that can be reversed is if incomes go up; if tax revenues go up; if business profits go, creating additional liquidity flow to pay for new net marginal acquisitions. I don't see any way that can happen.

"Protectionism"? Well I was taught, like you, that Smoot- Hawley (the tarriff act) was one of the primary causes of the depression. I no longer think that is true either.

No doubt that in an expanding economy, free trade benefits the largest part of a domestic economy--the only losers are domestic suppliers at prices higher than the free trade world price.

But in a deflation/depression, a little protectionism probably does not make very much difference one way or another. The "Smoot-Hawley caused the depression" argument is another afterthought that was devised to defend the fed against responsbility for the great depression. Real bottom line is that deflation is a monetary phenomonon resulting from defective Fed policy. We don't have protectionism now and deflation is becoming embeded and will become a Greater Depression in the near future.

We don't have protectionism today and we have the problem; I don't think Smoot-Hawley had much to do with the depression we got in the 30's either.