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Friday, February 8, 2013

Transcript: Back to the Depression, Commodities and Steve Keen in Seattle

Today on the podcast, some history and history repeating itself, then commodities, and finally Steve Keen in Seattle.
From 1921 through 1929, the conservatives in power made fully manifest the content of their national policies.  These policies revealed, among other things, an almost complete abnegation of the necessary role of the Government in the modern world, perhaps best exemplified by the famous statement of President Calvin Coolidge that "the business of government is business."  They revealed practically  no awareness of the public responsibility to help those who needed help and could not help themselves, and were blind to the emergence of imbalances in the private economy which ended up in the Great Crash.
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In the private economy, the advance of technology and productivity in both industry and agriculture led to immense increases in our capabilities to turn out more and more goods and services.  This was accompanied by a remarkably stable price level (except for falling farm prices); this in itself was proof positive that price trends alone do not determine economic results, and that stable prices may be experienced at too high costs.  For the remarkably stable price level accompanied by vast increases in technology and productivity accrued predominantly to the benefit of the investor and profit functions, because farm income was in deep trouble at a time when farmers constituted a very large proportion of the total population, and because wage rate increases lagged far behind productivity gains.  To illustrate, from 1923 to 1929, productivity in manufacturing rose 31 percent while average weekly earnings rose only 5 percent.  Union membership was small, and the Government hardly took steps to interfere with industrial refusal to recognize unions or with bloody assaults upon workers by company "guards" and imported thugs.  Thus, the gap between the ability to produce and the ability to consume -- a condition of severe economic imbalances -- grew fairly constantly, and the chronic under-consumption problem in the U.S. economy appeared in virulent form.


During the latter years of this glittering decade, the stupendous increases in stock prices were regarded by many as a sign that all was well.  It was not recognized that this speculative binge was a sign of disease rather than health.  It reflected the fact that far too large a share of the national income was in the hands of those who bid up stock prices in a frenzied desire to get rich quick  During more recent years ... [1983] excessive ebullience in the stock market has been similarly misread.  When the stock market upsurge collapsed in late 1929, those in public and private power did not realize that this was not the fundamental cause of the general economic collapse which followed.  It was but the spark which could not have brought about the general conflagration if the ignitable materials were not in place in every sector of the economy.  And even the first stages of the stock market crash were accompanied by assurances from the most respected that all would turn out for the best.

Tax cuts in the wrong directions

While the government largely stood by in its rapt admiration of things as they were, there were some examples of positive action.  Taxes were cut, primarily for those who were already contributing to the economic imbalances in the form of relatively excessive saving, investment and profits.  This, too, added to the growing economic imbalances.

A striking feature during the 1920s was the inability of the recognized leadership of the economic profession to bring economics into contact with reality.  If one were now to make a listing of the fifty most honored leadership people in America who substituted complacency for a call to action, a goodly proportion of them were among the greatest names in the academic profession.  All joined in the chorus that we were in for endless years of unabated prosperity.  They dubbed this the "New Era."

That was from Leon Keyserling, Liberal and Conservative National Economic Policies and Their Consequences, 1919-1979.  See the chapter on Keyserling in Demand Side the Book.  demandsidebooks.com.

Our first observation is that this is us all over again.  Absent the New Deal programs of unemployment insurance, social security, deposit insurance, low rent housing, protection of collective bargaining, minimum wage laws, farm price supports and so on, this would be the Great Depression.

But the decade of the 1920s as described here, with its low inflation, booming stock market, capture of productivity not in wages, but in the investor class, is very familiar, too.  Even the over-investment and under-consumption is the same, mitigated only by the base of demand that is a legacy from the New Deal, and by the larger size of government acting somewhat as ballast.  And it is public goods that are now under-consumed.  Roads, education, health care, mitigation and avoidance of catastrophic climate change.

Likewise mistaking  stock market  highs as a sign that all is well.  In fact, it is the program to make things well. The Fed wants to see the wealth effect lead us out, and that is one of the overt purposes of QE.  Make safe investments pay nothing, so as to force people into risky investments.  The real wealth effect has happened with the collapse of housing wealth.  The economy is thus struggling with an inflated stock market making some people happy.

We have to note the new, shorter piece by Claudio Borio of the Bank for International Settlements.  Macroeconomics without the Financial Cycle, Hamlet without the Prince.  He reprises his basically mainstreaming of Hyman Minsky, with nice graphs.  We note that the financial cycle began in earnest this time with the rise of Reaganomics and exactly the favoritism to the wealthy class that Keyserling indicated here.  

And lastly, today, this week was Commodities, Commons and Resources week at reMacroBaseline.com.  We outlined our old position that commodity prices are casino prices, not physical supply and demand prices.  In this week's post we concentrated on the ETFs, the vehicle by which the average investor can join in speculation.  Not that the mass of ETFs is bought by the average investor.  Jim Rogers calls them physical assets.  We call them products.

Several charts demonstrate the prices relative to the growth of ETF's.  Here is some audio from Michael Greenberger, courtesy CTV, which responds to the Security and Exchange Commission approving a new ETF for copper, indicating the range of the problem in this commodity.  Greenberger is now a law professor at the University of Maryland, and was formerly director of Trading and Markets at the Commodity Futures Trading Commission.


Finally today, we are very pleased to let you know that Demand Side has partnered with the Seattle Economics council to bring Steve Keen to Seattle May 23rd at Town Hall.  Six o'clock PM public event.  With two special sessions prior, also at Town Hall.  One will be a demonstration of "Minsky," Keen's ambitious and progressing modeling project.  The second session will be a panel discussion, working title "Money, Monetary Policy and Financial Repression."  All events at Seattle's Town Hall.

Keen, of course, is notable for winning the Revere Prize for the economist who best predicted the Great Financial Crisis and Recession and whose policy framework is most likely to produce results going forward.  Right now he is on the front page in his native Australia for accuracy in predicting that country's economy over the past year.  And he has a chapter in Demand Side the Book, available at demandsidebooks.com.  A long chapter on money, debt and the credit accelerator.  He is in the direct line from Hyman Minsky.

The public event -- in keeping with Town Hall practice -- will be $5 only.  The two special sessions will be in the $20 - $35 range, with a catered light lunch for the panel.

As long as we have him in the neighborhood, those of you who may be listening in Vancouver, British Columbia, or Portland, Oregon, we could possibly schedule something for Friday the 24th of May or Saturday the 25th.  That is Memorial Day weekend here in the states.  Friday and Saturday, not the best for lectures, but do-able.

Let us know directly at demandside@live.com or 206.459.5067.  Look for the SteveKeenInSeattle.com website coming soon to a screen near you.

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