Who benefits from another Depression?

[Try2B Comprehensive]

From an article entitled, "DOOM! Our economic nightmare is just beginning (http://www.tnr.com/article/economy/magazine/94963/economic-doom)." in the Oct. 6 issue of The New Republic:

in the wake of the battle over raising the debt ceiling and Standard & Poor’s decision to downgrade America’s credit rating, [Romney] has come to Concord, New Hampshire, to speak to the local Chamber of Commerce. Beforehand, he agreed to answer a few questions from reporters.
Romney endorsed the congressional Republican plan, dubbed “cut, cap, and balance,” which would slash $111 billion from next year’s budget, reduce federal spending as a percentage of GDP from 22.5 to 19.7 percent in six years, and adopt a balanced budget amendment to the Constitution. The plan represents an attempt to achieve private-sector prosperity through public-sector austerity.

"Mr. Romney,"... "I want to ask you something about history. you know, when Herbert Hoover had to face a financial crisis and then unemployment, his strategy was to balance the budget and cut spending, and that made things worse. When Roosevelt came in, unemployment was twenty-five and went to fourteen percent by 1937. With deficits. Aren't you repeating the Hoover mistake?".... "Do you really think so?" he asked...

"Let's go back to the Hoover days," Romney began. "The issue in the Hoover years was what was happening in the budget that year. This year, we are spending $1.6 trillion more than we take in, and that would have made anyone in either party blush if they saw numbers like that. And the issue today is not just this year's deficit, it's deficits as far as the eyes can see.... America has to rein in the excessive spending not just this year, but over a long period of time."

.... he seemed to be suggesting that the premise of my question was flawed because deficits are much larger today and wll probably continue unabated. And they are larger- but that is because our GDP and government are also larger. Meanwhile, if our deficits stretch "as far as the eyes can see," so did the deficits in Hoover's day, which continued unabated for 16 years. Romney was insisting that there was nothing to be learned from Hoover's response to the Great Depression. But, in fact, what happened in the United States and Europe in the '30s in an excellent- perhaps, the best- guide to what is happening to us now.

The article then points out other leaders like David Cameron, Angela Merkel and Japan's prime minister Yoshihiko Noda who are currently going down the austerity path. This is contrasted with Obama's plans which generally follow the Keynesian approach, but we all know how Obama's plans turn out lately- he can't get anything passed. As the article's title suggests, the author thinks this is very bad, and he continues:
Unless there is a fundamental-and difficult-to-imagine- change in the way our politics interacts with our economy, the United States and much of the world are headed for a very grim future.
You get the point- he is warning that repeating the mistakes of the past will lead to the results of the past, namely another Depression.

My feeling is that top leaders who propose/apply austerity know where that will lead. Am I wrong in thinking that world leaders are familiar with economic history?

If they know what they are doing and are purposefully leading us into another Depression, ITSM they must be motivated by that being of benefit to somebody. Who benefits from another Depression? Or are they simply unfazed by the prospect of another Depression? What explains their behavior?

[Terr]

You get the point- he is warning that repeating the mistakes of the past will lead to the results of the past, namely another Depression.
There is another saying in financial circles. "Past performance does not guarantee future results".

[smiling bandit]

The idea that Hoover was some kind of budget-conscious conservative is also rather nuts. He embarked on a rather ambitious welfare scheme - a large and very fast expansion of the budget. Never was clear where that myth came from.

[Der Trihs]

If they know what they are doing and are purposefully leading us into another Depression, ITSM they must be motivated by that being of benefit to somebody. Who benefits from another Depression? The rich for one. It hurts them relatively much less, while increasing their power. People desperate for a job will put up with less pay, worse treatment, worse conditions. And since money largely equates to political power, them being the only ones with a significant amount left increases their power relative to those who have none left to spare.

Another group that would benefit would be the "starve the beast" anti-government fanatics, who have been pushing for many years for massive debt and economic disaster in order to starve the government of revenue and force it to drastically shrink. They don't care about the suffering involved or the other consequences; that's what makes them fanatics.

The evangelical Christians who think that suffering and despair are good things because they promote faith.

[gonzomax]

It would hurt the country. The rich have ways to survive. The rest of us don't.
An austerity program would be an economic death spiral. There is no bottom and no up once gutting starts. The tax base shrinks with every job cut and every home lost.
We need demand. More people paying taxes will balance the budget. Cutting will shrink the economy, result in more jobs slashed and a steady drop in America's economy. It will cut demand and the impetus to hire. That in turn will cut more demand. An austerity program would be a disaster taking millions of Americans down. It would keep the rich ensconced in their gated communities, safe , for a while.
This could end the American experiment.

[Linden Arden]

Anyone with liquidity who wants to buy distressed assets benefit during a Depression.

The Fox Theatre in Atlanta cost $2.75 million to build and opened in 1929. After the owners declared bankruptcy in 1932 it was auctioned. The winning bid was $75,000.

The Fed exacerbated the Depression then with a tight monetary policy. Interest rates were raised to over 5%.

Today they know better.

[Wesley Clark]

I can't find the entire article online, and am not subscribed to the new republic. But I would guess it is just short sightedness on the part of politicians and the public who elect them. We ignore climate change for the same reason.

Plus is there a unanimous consensus among economists that the concept of austerity will lead to more depression? Seeing how most didn't seem to see the current depression coming (if there were alarm bells coming from economists before 2007, I don't remember hearing them en masse), it makes them seem less credible.

Plus there are serious risks to constantly spending and borrowing. Where is all the borrowed money going to come from (ie, can you continue to borrow trillions year after year? Eventually people will realize you won't pay it back and raise interest rates). I am not an economist, but if the US is borrowing 1.6 trillion a year, Europe is running deficits of roughly 10% of GDP too. If a country gets too deep in debt that does have serious problems in and of itself.

But who wins? Whoever has cash to buy resources that are being sold off cheap. Around now is probably a good time to invest in real estate. China used its cash reserves to buy up a lot of natural resources back in 2008 and 2009, since nations were desperate for money. I don't remember the details, but they cut some pretty good deals with nations like Russia where in exchange for money now, China would get oil at a discount for decades.

So the only people who win are those with liquid assets who want to invest and hold onto the investments for when the economy recovers.

[SeldomSeen]

Who benefits from a depression? The individuals and companies with a low debt load and strong cash position going in. People who are holding durable assets and are able to hang onto them for the duration. A depression drives down labor costs and lowers the purchase price of long-term investment items such as real estate, and drives out weaker competitors - and those who are able to take advantage of lower investment costs and hold out until the inevitable turnaround will ultimately be in a far better position.

One surprising thing about the current recession is that the agricultural sector has stayed very strong. Commodity prices have remained relatively high, demand, especially for exports, has stayed strong, labor costs have not increased for several years, and the value of agricultural real estate has stayed at pre-recession levels (unlike, say, residential property). Those farmers and rural landowners who have kept their debt low and reinvested in their operation stand to do very well indeed.

The people who can afford to buy low during a recession/depression, then hold their assets and eventually sell high will come out of the current situation stronger and richer than ever.
SS

ETA: Or what Wesley Clark posted as I was typing.

[Trinopus]

Also, some specialized investors make a lot of money trading in "negative numbers." I remember, some years ago, people making millions of dollars (of real money!) in swapping around Brazilian debt futures. It's a little like making a bet on which race-horse comes in last in a specific race: the owner, trainer, and jockey are in a world of hurt...but they guy making the bet comes out smiling.

Trinopus

[Terr]

Also, some specialized investors make a lot of money trading in "negative numbers." I remember, some years ago, people making millions of dollars (of real money!) in swapping around Brazilian debt futures. It's a little like making a bet on which race-horse comes in last in a specific race: the owner, trainer, and jockey are in a world of hurt...but they guy making the bet comes out smiling."Specialized"? Anyone can do it, for any equity (or option, or futures contract) you can go either short or long. And any investor with any degree of sophistication goes short at least once in a while to hedge his gains. There is nothing wrong with that. Of course, if you decide to go naked short, and there is a sudden rally, you can get wiped out - but that's the market for you.

[BrainGlutton]

Who benefits from another Depression?

Hollywood (or its equivalent), eventually.

[BrainGlutton]

The idea that Hoover was some kind of budget-conscious conservative is also rather nuts. He embarked on a rather ambitious welfare scheme - a large and very fast expansion of the budget. Never was clear where that myth came from.

From somewhere in here: (http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression)

Calls for greater government assistance increased as the U.S. economy continued to decline. Hoover rejected direct federal relief payments to individuals, as he believed that a dole would be addictive, and reduce the incentive to work. He was also a firm believer in balanced budgets, and was unwilling to run a budget deficit to fund welfare programs.[43] However, Hoover did pursue many policies in an attempt to pull the country out of depression. In 1929, Hoover authorized the Mexican Repatriation program to combat rampant unemployment, reduce the burden on municipal aid services, and remove people seen as usurpers of American jobs. The program was largely a forced migration of approximately 500,000 Mexicans and Mexican Americans to Mexico, and continued until 1937. In June 1930, over the objection of many economists, Congress approved and Hoover signed into law the Smoot–Hawley Tariff Act. The legislation raised tariffs on thousands of imported items. The intent of the Act was to encourage the purchase of American-made products by increasing the cost of imported goods, while raising revenue for the federal government and protecting farmers. However, economic depression now spread through much of the world, and other nations increased tariffs on American-made goods in retaliation, reducing international trade, and worsening the Depression.[44]

[Jonathan Chance]

"Specialized"? Anyone can do it, for any equity (or option, or futures contract) you can go either short or long. And any investor with any degree of sophistication goes short at least once in a while to hedge his gains. There is nothing wrong with that. Of course, if you decide to go naked short, and there is a sudden rally, you can get wiped out - but that's the market for you.

Flag on the play. Just a small one.

While it's true that the use of options, both puts and calls, can and is used by a wide variety of people and investors it would be at least a bit over the top to say anyone can do it. There are generally certain requirements to quality for a broker dealer certification on margin accounts. They are not terrible stringent but there are some.

- Jonathan Chance, FA, Ser7

[Try2B Comprehensive]

From Rich People Create Jobs! and five other myths that must die for our economy to live (http://motherjones.com/politics/2011/10/charts-economic-myths-jobs-deficit-taxes):
Only an Idiot Turns Down Free Money

The real answer to future deficits is to spend money now to get the economy growing again. Yields on federal bonds are at record lows. That means, as University of California-Berkeley economist J. Bradford DeLong has calculated, that the government could inject a big stimulus into the economy at an unbeatably low price: Spend $1 trillion but (because of low interest rates and the tax revenue from a faster-growing economy) borrow only $400 billion. Act now!

Estimated short-term economic impact from $1 of government speding: $1.50
Estimated short-term economic impact from $1 trillion of spending: $1.5 trillion
Estimated resulting short-term increase in tax revenue: $600 billion
Due to boost to tax revenue, amount US actually has to borrow long-term: $400 billion
Cost of borrowing $400 billion by issuing 30-year bonds at 2% interest: $640 billion
Cost to government for each $1 of economic impact: $.043

That's the Keynesian view. It appears Romney/The GOP would prevent such returns on taxpayers' money since gains for the public don't always translate to gains for the top.

[amarone]

From Rich People Create Jobs! and five other myths that must die for our economy to live (http://motherjones.com/politics/2011/10/charts-economic-myths-jobs-deficit-taxes):

The real answer to future deficits is to spend money now to get the economy growing again. Yields on federal bonds are at record lows. That means, as University of California-Berkeley economist J. Bradford DeLong has calculated, that the government could inject a big stimulus into the economy at an unbeatably low price: Spend $1 trillion but (because of low interest rates and the tax revenue from a faster-growing economy) borrow only $400 billion. Act now!

Estimated short-term economic impact from $1 of government speding: $1.50
Estimated short-term economic impact from $1 trillion of spending: $1.5 trillion
Estimated resulting short-term increase in tax revenue: $600 billion
Due to boost to tax revenue, amount US actually has to borrow long-term: $400 billion
Cost of borrowing $400 billion by issuing 30-year bonds at 2% interest: $640 billion
Cost to government for each $1 of economic impact: $.043

Has someone got a decimal place wrong? It looks to me as if the cost of $1 of economic impact is $0.43 ($640 bn divided by $1.5 trillion).

And why use a 2% interest rate for 30 year bonds? I am not sure that yields have ever been that low. Even in the current very low interest rate era, the yield on 30-year bonds is 3.36% Strangely, when I calculate the cost of borrowing $400bn over 30 years at 3.36%, I get $640bn - exactly the amount quoted for a 2% rate.

[Try2B Comprehensive]

Has someone got a decimal place wrong? It looks to me as if the cost of $1 of economic impact is $0.43 ($640 bn divided by $1.5 trillion).
Oops. Should have been $0.43, you are right.

And why use a 2% interest rate for 30 year bonds? I am not sure that yields have ever been that low. Even in the current very low interest rate era, the yield on 30-year bonds is 3.36% Strangely, when I calculate the cost of borrowing $400bn over 30 years at 3.36%, I get $640bn - exactly the amount quoted for a 2% rate.


That's a good question too. Maybe they meant to suggest borrowing at the Fed's rate. Or maybe they are talking about 'real rates'- in the section before these charts the author points out:
As I'm writing this, 10-year real treasury yields are at 0.00 percent. The seven year rate is actually negative
I gotta go, I'll try to figure it out later.

[amarone]

Or maybe they are talking about 'real rates'.
That would make sense - it gives a better number for the true cost than using nominal rates. 2% would then be conservative.

[BrainGlutton]

Look, is there really a subset of the PTB sitting in a boardroom somewhere saying, "A Depression would be good for our interests, how do we bring it about?"

[Try2B Comprehensive]

Look, is there really a subset of the PTB sitting in a boardroom somewhere saying, "A Depression would be good for our interests, how do we bring it about?"

PTB? What does the Worker's Party of Belgium have to do with this?

[BrainGlutton]

PTB? What does the Worker's Party of Belgium have to do with this?

Those fools are deluded dupes of the Dutch, I tells ya! :mad:

[ralph124c]

I can't find the entire article online, and am not subscribed to the new republic. But I would guess it is just short sightedness on the part of politicians and the public who elect them. We ignore climate change for the same reason.

Plus is there a unanimous consensus among economists that the concept of austerity will lead to more depression? Seeing how most didn't seem to see the current depression coming (if there were alarm bells coming from economists before 2007, I don't remember hearing them en masse), it makes them seem less credible.

Plus there are serious risks to constantly spending and borrowing. Where is all the borrowed money going to come from (ie, can you continue to borrow trillions year after year? Eventually people will realize you won't pay it back and raise interest rates). I am not an economist, but if the US is borrowing 1.6 trillion a year, Europe is running deficits of roughly 10% of GDP too. If a country gets too deep in debt that does have serious problems in and of itself.

But who wins? Whoever has cash to buy resources that are being sold off cheap. Around now is probably a good time to invest in real estate. China used its cash reserves to buy up a lot of natural resources back in 2008 and 2009, since nations were desperate for money. I don't remember the details, but they cut some pretty good deals with nations like Russia where in exchange for money now, China would get oil at a discount for decades.

So the only people who win are those with liquid assets who want to invest and hold onto the investments for when the economy recovers.

Very true. If you have cash, buy real estate (in extremely depressed amrkets). But be careful-there are lots of "Detroits" out there..where real estate will never come back.
I figure that depressed RE markets like California (provided it is near a major city), and Florida, will come back nicely.
Places like Buffalo NY, Detroit, Gary Indiana will continue to decline (ageing population, fleeing industries, inept local government) will never recover-at best, these places will stay even.
Now if Detroit could magically reinvent itself (honest city government, low tax rates,low crime rate) it might have a future..but thats as likely as $50/barrel oil.

[kaylasdad99]

Well, I've got a shit-ton of signs that say "APPLES 5 CENTS," so I stand to earn quite a bit in franchise fees...

[septimus]

Flag on the play. Just a small one.

While it's true that the use of options, both puts and calls, can and is used by a wide variety of people and investors it would be at least a bit over the top to say anyone can do it. There are generally certain requirements to quality for a broker dealer certification on margin accounts. They are not terrible stringent but there are some.

Even when such requirements are fulfilled, the game is stacked against the small player in certain ways.

A notable and often overlooked example of this (though inapplicable in today's low interest environment) is interest ("rebate") on short sale proceeds. To clarify how this works, let me work a specific example:

Suppose broker lends at 8% and pays interest of 4% on cash balances, or 3% on sequestered cash. Suppose Universal Widget pays 6% dividend. Suppose you borrow to buy Widget. You pay 8% interest, receive 6% dividend, so lose 2% net on the margined half of the stock if the stock price stays fixed, or gain 8% or lose 12% net if the price moves 10% during a year.

Now suppose you borrow stock and sell it. This should be conceptually just the opposite of the margined buy -- instead of borrowing money and trading it for stock, you're borrowing stock and trading it for money. (It is important to understand that both the stock and the money paid when you sell it are real, even though it wasn't your stock to start.) You should receive 3% interest on the cash proceeds, but must pay the 6% dividend, so you net a 7% gain or 13% loss if the price moves 10% during the year.

Except you don't if you're a small investor, because no 3% "short rebate" is paid to you. The broker earns interest on your cash proceeds, but doesn't pay it to you. Thus while the hedge fund needs the stock to drop 3% over the year for it to break even, you need the stock to drop 6% over the year just to break even. Yes, this is irrelevant with today's interest rates, but in a normal interest environment this is enough to effectively make short sales irrational for the small investor.

[gonzomax]

Very true. If you have cash, buy real estate (in extremely depressed amrkets). But be careful-there are lots of "Detroits" out there..where real estate will never come back.
I figure that depressed RE markets like California (provided it is near a major city), and Florida, will come back nicely.
Places like Buffalo NY, Detroit, Gary Indiana will continue to decline (ageing population, fleeing industries, inept local government) will never recover-at best, these places will stay even.
Now if Detroit could magically reinvent itself (honest city government, low tax rates,low crime rate) it might have a future..but thats as likely as $50/barrel oil.

Real estate might be a good investment if homes are at the bottom of the price drop and will go only up. I am not so sure that has been reached. If you buy a bunch of homes and they continue to go down , they will take you with them.
Who will survive a depression well? The rich. They are insulated from the danger of the economy. They can even go abroad if things get too ugly here.

[BrainGlutton]

Well, I've got a shit-ton of signs that say "APPLES 5 CENTS," so I stand to earn quite a bit in franchise fees...

I'll outsell you 10-to-1 with my "HANDGUNS 5 DOLLARS". Not that we're in direct competition.*

(Don't ask me where I got handguns for less than $5 and I won't look too close at your suspiciously-cheap apples.)

*But I win anyway, because I also invested in a sign-printing business.

[Voyager]

There is another saying in financial circles. "Past performance does not guarantee future results".

And in non-financial circles: "Those who cannot remember the past are condemned to repeat it."

[Voyager]

Plus is there a unanimous consensus among economists that the concept of austerity will lead to more depression? Seeing how most didn't seem to see the current depression coming (if there were alarm bells coming from economists before 2007, I don't remember hearing them en masse), it makes them seem less credible.

You should have been reading Krugman. I'm not sure he specifically predicted the great recession, but he sure was sounding the alert about the impact of the eventual deflation of the housing bubble if the Fed didn't do anything to ease it down slowly. Which is something Greenspan refused to do, since it would have probably thrown the economy into a mild recession, and because he was ideologically blind to what was going on. Krugman apologized for not seeing the full picture, but he was more correct than a lot of people.

Plus there are serious risks to constantly spending and borrowing. Where is all the borrowed money going to come from (ie, can you continue to borrow trillions year after year? Eventually people will realize you won't pay it back and raise interest rates). I am not an economist, but if the US is borrowing 1.6 trillion a year, Europe is running deficits of roughly 10% of GDP too. If a country gets too deep in debt that does have serious problems in and of itself.

The continued low interest rates for Treasuries shows that the market does not agree. The only way to dig ourselves out of this mess is to have a growing economy that both naturally increases tax revenues and cuts spending on things like unemployment and welfare, and I hope allows us to raise taxes some without the usual suspects pitching a fit.

In my local paper this morning they published information on job growth or non-growth in the Bay Area. The tech sector is hiring like crazy - which I can testify as being true. However other segments are not, which is holding down the recovery. The worst one - government, which had the biggest absolute job loss of anyone. During a period of low growth that is stupid. Government should be making things better, not worse.

One reason the stimulus package didn't perform as well as it should was that major cutbacks in state budgets meant it only added about 2% to GDP (based on a New Yorker column from a few weeks ago) which did not give the push it should have.

[Der Trihs]

Look, is there really a subset of the PTB sitting in a boardroom somewhere saying, "A Depression would be good for our interests, how do we bring it about?"Well, yes; that's pretty much what the "starve the beast" people have been pushing for for years.

[Try2B Comprehensive]

Look, is there really a subset of the PTB sitting in a boardroom somewhere saying, "A Depression would be good for our interests, how do we bring it about?"

No really- what does PTB mean?

Whoever they are, I don't think there is a cabal specifically bent on causing a Depression per se. More like they don't care if a Depression is the effect of their quest for profits.

I don't know though- Romeny's plan appears pretty stark with its massive cuts, a balanced budget amendment and obviously no tax increases. If he/They want a Depression that is a good start. And considering its seeming ignorance of both history and the current state of treasuries you gotta wonder.

[PBear42]

No really- what does PTB mean?Powers That Be

[Trom]

Even when such requirements are fulfilled, the game is stacked against the small player in certain ways.

A notable and often overlooked example of this (though inapplicable in today's low interest environment) is interest ("rebate") on short sale proceeds. To clarify how this works, let me work a specific example:

Suppose broker lends at 8% and pays interest of 4% on cash balances, or 3% on sequestered cash. Suppose Universal Widget pays 6% dividend. Suppose you borrow to buy Widget. You pay 8% interest, receive 6% dividend, so lose 2% net on the margined half of the stock if the stock price stays fixed, or gain 8% or lose 12% net if the price moves 10% during a year.

Now suppose you borrow stock and sell it. This should be conceptually just the opposite of the margined buy -- instead of borrowing money and trading it for stock, you're borrowing stock and trading it for money. (It is important to understand that both the stock and the money paid when you sell it are real, even though it wasn't your stock to start.) You should receive 3% interest on the cash proceeds, but must pay the 6% dividend, so you net a 7% gain or 13% loss if the price moves 10% during the year.

Except you don't if you're a small investor, because no 3% "short rebate" is paid to you. The broker earns interest on your cash proceeds, but doesn't pay it to you. Thus while the hedge fund needs the stock to drop 3% over the year for it to break even, you need the stock to drop 6% over the year just to break even. Yes, this is irrelevant with today's interest rates, but in a normal interest environment this is enough to effectively make short sales irrational for the small investor.

There are certain brokerages that will offer retail accounts a portion of the interest from short sales, but usually only for large positions. Single stock futures, traded at OneChicago (http://www.onechicago.com/), offer some unique benefits (http://www.onechicago.com/?page_id=68)for both shorts and longs.

[yorick73]

My feeling is that top leaders who propose/apply austerity know where that will lead. Am I wrong in thinking that world leaders are familiar with economic history?

If they know what they are doing and are purposefully leading us into another Depression, ITSM they must be motivated by that being of benefit to somebody. Who benefits from another Depression? Or are they simply unfazed by the prospect of another Depression? What explains their behavior?

You assume that those in favor of austerity know that they are incorrect. Have you considered that they think they are correct? Have you even considered that they may be correct? FDR's own Treasury Secretary did not believe government spending was working.

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot."

[puddleglum]

From Rich People Create Jobs! and five other myths that must die for our economy to live (http://motherjones.com/politics/2011/10/charts-economic-myths-jobs-deficit-taxes):


That's the Keynesian view. It appears Romney/The GOP would prevent such returns on taxpayers' money since gains for the public don't always translate to gains for the top.

How do you know macroeconomists have a since of humor? They use decimal places.
There have been many studies done to estimate the multiplier of new spending. 1.5 is generally the highest result ever found. Most estimates are between .5 and 1.5. If the multiplier is below one than all of this government spending is destroying the economy and you are also lowering tax revenue increasing the cost of the spending. The risk of non-action if the multiplier is higher than one is a slower economy for a few years, the risk of action if the multiplier is lower than one is Greece.
Estimates from studies of multiplier generally make multipliers from tax cuts higher than from government spending. Christina Romer who was Chairman of Obama's Council of Economic Advisers did a study with her husband that found the multiplier for tax cuts was twice as high as for government spending.

[puddleglum]

From somewhere in here: (http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression)

This is misleading in that it makes it appear as though Hoover's belief in balanced budgets is incompatible with his being a big spender. This is not true he spend alot but he also believed in raising taxes to pay for that spending. In his first year the federal budget was 3 billion dollars. In his last year it was 4.5 billion dollars. Federal spending was increased by 50% during Hoover's term. This was during a period of deflation so the actual increae in real terms was bigger. Hoover also raised top tax rates from 25% to 63%.
We are lucky in that we have Hoover's bad example to learn from. I mean now nobody would be dumb enough to propose large increases government spending and huge tax hikes in the middle of a recession right?

[Try2B Comprehensive]

You assume that those in favor of austerity know that they are incorrect. Have you considered that they think they are correct? Well, ultimately it comes down to 'correct for whom'. Part of the point of asking who benefits from another Depression (is that word capitalized, in proper usage?) is to determine if people generally believe anyone benefits from it. If all the great minds of the 'dope had come in here and demonstrated, "Why, not a single person benefits from a Depression", it would pretty much blow the hypothesis that depressions are something that humans may/do cause.

But the consensus seems to be that wealthy people benefit from a recession, if they are on-the-ball with their money. And wealthy people also happen to be the group in a position to make the kinds of decions that possibly could cause a depression.

Have you even considered that they may be correct?
Clearly. They may be correct in believing that another Depression would increase their power and profit in the long run. It'd screw all of us hoi polloi, but that they don't really care is also part of they hypothesis.

FDR's own Treasury Secretary did not believe government spending was working.

People in a free country like ours may believe pretty much anything. In some matters, thinking does not make it so. I don't think the reality of the effectiveness of the New Deal was altered by FDR's Treasury Secretary's beliefs.

Herman Cain believes in 9-9-9. I believe Rick Perry promotes some kind of flat tax. But since we're talking about Mitt Romney, note that he ostensibly believes Mormon Doctrine states that God established the Constitution of the United States in order to found the LDS religion1 (http://boards.straightdope.com/sdmb/showpost.php?p=14392442&postcount=757). What if it turns out Mormons benefit from another Depression? It is a potentially sound hypothesis. Mormons own a lot of gold. And in Gold Faithful: Profiting from Paranoia with Precious Metals (http://blogs.wsj.com/marketbeat/2011/06/13/gold-crazy-as-dot-com-and-housing-argues-thomas-frank/):

Mr. Frank argues that gold is currently in a bubble as crazy as dot-com stocks in the 1990s and houses in the 2000s, that a gold standard has historically crushed the same little guy who’s crying out for it today, and that the bubble is due to burst when it becomes clear that we are not about to collapse into a Mad Max-style apocalyptic hellscape.
Maybe, if we get the tax code just 'right', that Mad Max-style apocalyptic hellscape (for the rest of us) isn't that far out of reach. Yes, I've considered that they may be correct.

[Try2B Comprehensive]

The risk of non-action if the multiplier is higher than one is a slower economy for a few years, the risk of action if the multiplier is lower than one is Greece.
We aren't anywhere near the condition of Greece, and with treasuries so low we aren't going to get there anytime soon. And insofar as the real-world multiplier number probably cannot be known until after the fact, the risk that it is less than 1 is also pretty low.
Estimates from studies of multiplier generally make multipliers from tax cuts higher than from government spending. Christina Romer who was Chairman of Obama's Council of Economic Advisers did a study with her husband that found the multiplier for tax cuts was twice as high as for government spending.

Is that tax cuts for the rich vs. any kind of government spending, or what? If you can prove it with a cite I'd be enriched.

[XT]

GlaxoSmithKline??

-XT

[amarone]

But the consensus seems to be that wealthy people benefit from a recession, if they are on-the-ball with their money.
Is that really the consensus? And if so, does it mean anything other than this board is populated with people with a blind hatred of the rich? Is there any evidence that the wealthy prosper from a recession/depression?

Let's take a look at the Forbes 500 in 2009 (http://www.forbes.com/2009/03/11/worlds-richest-people-billionaires-2009-billionaires-intro.html)when the most recent recession hit.


The world has become a wealth wasteland. Like the rest of us, the richest people in the world have endured a financial disaster over the past year. Today there are 793 people on our list of the World's Billionaires, a 30% decline from a year ago.

Of the 1,125 billionaires who made last year's ranking, 373 fell off the list--355 from declining fortunes and 18 who died.

[Try2B Comprehensive]

We're not talking about a snapshot, but long-term. In '09 you coulda bought Ford at $2 a share. Who cares if your overall fortune declined 30%, by now your investments would have multiplied sixfold. And everything else goes back up again during the recovery.

[amarone]

We're not talking about a snapshot, but long-term. In '09 you coulda bought Ford at $2 a share. Who cares if your overall fortune declined 30%, by now your investments would have multiplied sixfold. And everything else goes back up again during the recovery.
Are you seriously suggesting that when the market falls 60%, then nearly 3 years later is still down 15% or so from its high, that rich people will do better than in non-recessionary times when the market averages an increase of 10% per year?

Evidence please.

[Mijin]

FWIW, I'm another person that does not believe that the austerity measures are trying to bring about a depression.

e.g. with Greece, you have extremely generous social security, lots of public employment (with salaries which have doubled in recent years), plus widespread tax avoidance. Without the recession there still would have been a crash for Greece, it's just this way it's crashed harder.

Many european countries have similar issues, though to a lesser degree. No-one knows how to fix this mess, but spending less seems like an obvious first move.

If spending is necessary to stimulate growth, then that money should be targeted at doing exactly that, rather than preserving jobs or services which don't give much bang for buck.

[Try2B Comprehensive]

Are you seriously suggesting that when the market falls 60%, then nearly 3 years later is still down 15% or so from its high, that rich people will do better than in non-recessionary times when the market averages an increase of 10% per year?

Evidence please.

First, your previous post/cite was a pretty good counter-point to what I'm talking about here. Billionaire-ism is down post recession, so it does appear that (so far) these conditions are not helping them. I can only suggest that they are buying or will buy up cheap assets which will give them a bigger return later.

And what do we make of the fact that corporations are sitting on so much cash (http://www.politifact.com/truth-o-meter/statements/2011/feb/10/barack-obama/obama-says-companies-have-nearly-2-trillion-sittin/)?

Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4 percent of the companies' total assets — the largest share since 1959.
I can imagine it being worthwhile for corporations to hold out until Mitt Romney gets elected, crashes the economy and then they dump that $2 trillion into amassing a huge pile of cheap assets while everyone else is going bankrupt. Similar to Romney's plan of letting the mortgage crisis 'run its course', which means many people lose their homes and rich people buy them at a huge discount.

[msmith537]

I can't find the entire article online, and am not subscribed to the new republic. But I would guess it is just short sightedness on the part of politicians and the public who elect them. We ignore climate change for the same reason.

Also, politicians are elected by their constituents, not economists. Most people have no understanding of monetary policy, Keynesian economics or...really anything. They understand "common sense" things like "budgets should be balanced", "immigration and outsourcing steal jobs", "protectionism saves jobs" and "poor people need money and rich people have it".

There are also competing and equally valid schools of economic thought as well. So it's not simply a clear case of government spending will automatically be a panacea for curing all economic ills.

[puddleglum]

We aren't anywhere near the condition of Greece, and with treasuries so low we aren't going to get there anytime soon. And insofar as the real-world multiplier number probably cannot be known until after the fact, the risk that it is less than 1 is also pretty low..

America is in so much debt that it will eventually either have to raise taxes, cut spending, or become Greece. Everyone who can read the newspapers knows this. Thus those who are supposed to be stimulated with the government are expecting to either have the spending cut off or their taxes raised. In an environment where expectations are that any spending boost will either be temporary or offset by tax hikes the multiplier is likely to be below one. See the Ramey paper from July 12, Does Government Spending Stimulate Private Activity? This paper asks whether increases in government spending stimulate private
activity. Using a variety of identification methods and samples, I find that in most
cases private spending falls significantly in response to an increase in government
spending. These results imply that the average output multiplier lies below unity.

Is that tax cuts for the rich vs. any kind of government spending, or what? If you can prove it with a cite I'd be enriched.
Here is the link to the paper elsa.berkeley.edu/~cromer/RomerDraft307.pdf PDF
Here is their conclusion:
Figure 4 summarizes the estimates by showing the implied effect of a tax increase of one percent
of GDP on the path of real GDP (in logs), together with the one-standard-error bands. The effect is
steadily down, first slowly and then more rapidly, finally leveling off after ten quarters. The estimated
maximum impact is a fall in output of 3.0 percent. This estimate is overwhelmingly significant (t = –3.5).
The two-standard-error confidence interval is (–4.7%,–1.3%). In short, tax increases appear to have a
very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax
changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large
and persistent positive output effects.13

[Voyager]

Are you seriously suggesting that when the market falls 60%, then nearly 3 years later is still down 15% or so from its high, that rich people will do better than in non-recessionary times when the market averages an increase of 10% per year?

Evidence please.

Not better absolutely - there are clearly unrealized losses. But definitely better relative to others. A billionaire losing $50 million of his portfolio is less affected than the poor schmuck who loses his job due to the recession, or versus people losing hours or taking pay cuts or paying more for insurance with no increase in pay.

I've lost a bunch of theoretical money, and it has no impact. In fact, the recession has been good in that I could get home renovations done more cheaply. I lost a ton of theoretical money on options in the dot com bust. No real harm done except for the dents left when I kicked myself in the ass for being so stupid.

[Voyager]

America is in so much debt that it will eventually either have to raise taxes, cut spending, or become Greece. Everyone who can read the newspapers knows this.

Oddly enough, the market doesn't, as evidenced by the very low interest rates on government debt.

[Try2B Comprehensive]

America is in so much debt that it will eventually either have to raise taxes, cut spending, or become Greece. Everyone who can read the newspapers knows this.
This is not true in the least. Greece has fallen into a financial black hole- it is unable to service its debt, meaning it does not pull in enough revenue to pay the interest on its debt. I'm not sure what tells a country, "you're screwed" more than that. Compare that to America's situation, from here (http://macromon.wordpress.com/2011/10/18/u-s-public-debt-going-greek/):
The chart may surprise many given the huge run up in the U.S. federal debt over the past 10 years. The data show that the total public debt stock has increased from $5.7 trillion on September 30, 2000 to $14.8 trillion on September 30, 2011.

The net interest cost to service the debt, however, has fallen as a percent of GDP due to the sharp drop in the average interest rate paid on the debt, which fell from 6.63% in 2000 to 2.886% on September 30, 2011.
Just look at their chart of debt interest as a percentage of GDP (http://macromon.files.wordpress.com/2011/10/us-as-greece.jpg). For us, it is at a 3 decades low.

*Our situation has nothing in common with Greece's*

We can continue borrowing as we have for years and years without coming close to Greece's troubles. That is not to say that debt is not a problem at all, but to compare us to Greece is uttlerly misleading.

Thus those who are supposed to be stimulated with the government are expecting to either have the spending cut off or their taxes raised. In an environment where expectations are that any spending boost will either be temporary or offset by tax hikes the multiplier is likely to be below one. See the Ramey paper from July 12, Does Government Spending Stimulate Private Activity?
Whether it is spending cuts or tax increases, both would be a result of the Republican candidates' plans, and not the Democrats'. Let's take a quick look at them.
First of all, Cain's plan is simply moronic (http://www.buzzfeed.com/jpmoore/this-chart-shows-the-crazy-effects-of-herman-cain). It raises taxes of the bottom 80% of taxpayers and gives staggering tax cuts to the super wealthy. If you want to characterize this as a 'valid school of thought', be my guest, I will be over here laughing at you. No revenue is the answer to the deficit 'crisis'? Really? Ha. Ha. Ha.

Here is another simple chart expressing the results of Rick Perry's tax plan (http://talkingpointsmemo.com/images/RickPerryTaxPlan.jpg). In short, it puts the 'regressive' in 'regressive taxation'. Massive tax cuts for millionaires? Really? Please explain to me how this is supposed to bring revenue in line with expenses. It isn't as bad as Cain's comedy, but if you want to make our economy resemble Greece's your only chance is to destroy revenue, and maybe Perry is your man.

And then there is Romney's plan. From here (http://www.thefiscaltimes.com/Columns/2011/10/28/GOP-Tax-Plans-Who-Wins-Who-Loses.aspx#page1):
Romney’s plan extends the Bush-era tax cuts, preserving today’s top marginal income tax rate of 35% rather than allowing it to jump up to 39.6% next year. It scraps the estate tax. And for taxpayers earning less than $200,000 a year, there would be no taxes on capital gains, dividends, and interest. The plan would also lower the corporate tax to 25%.
Aspects of Romney's plan may be debatable, but in a nutshell it puts the cart before the horse, or rather the revenue-slashing before the debt reduction. We need jobs for growth, we are not going over a debt cliff, and history shows that a windfall for the wealthy does not grow the economy.

Thanks for the link, puddeglum. Lately I don't have time to even log on to the 'dope every day, let alone plow though a 68-page paper about taxes. I have some time today and will read as much as I can, and have bookmarked it for future self-ignorance fighting, thanks. But consider this from the abstract:

We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment.
I've already pointed to the fact that businesses are sitting on $2 trillion, and not investing it. This is after 10 years of Bush tax cuts. Clearly the tax cuts did not produce the predicted investment, but rather a mountain of cash for corporations to hoard. And I've pointed out the low low treasury interest rates- investors aren't investing in business, they are buying bonds. That's great considering the government needs to borrow money, but by itself it isn't stimulating anything as long as the government is barred from common-sense usage of this borrowed money.

I'm sorry, but the conclusion of the paper is in contradiction of other data. From the link I already posted (http://motherjones.com/politics/2011/10/charts-economic-myths-jobs-deficit-taxes)do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country's growth rate since then. His conclusion? There's virtually no correlation. Recent US history backs this up too.
just go ahead and scroll down and look at the data yourself. Cutting taxes has not resulted in an acceleration of growth. All it has accomplished is a huge increase in debts. (again, I admit I have to read the rest of your link, but clearly there is a contradiction)


I don't think I gave a proper response to Yorick. No, I don't think the Republican candidates really believe what they are saying. How can we trust the sincerity of a party that engages in so much Orwellian doublespeak? Instead of invasion we get 'liberation'. They aren't rich, they're 'job creators'! It isn't health care, they are 'death panels'. I'm sure we could think of a long list of examples. Look, clearly the GOP's plan is to give a windfall to the wealthy at the expense of everyone else. Romney's plan, with it's balanced budget amendment, is clearly intended to slash revenue while tying the hands of government such that Social Security and Medicare get slashed. While laying off thousands of teachers, firefighters, firemen &etc. And their strategy is to get elected is to fill the media with enough bullshit that the proles (http://www.newspeakdictionary.com/ns-dict.html#prole) are confused into voting for them. They aren't sincere, they're lying.

You want another Depression? My link shows that actual business leaders cite lack of demand as their top concern, not taxes. What happens to demand when everyone is cut off from the Social Security benefits they spent their lives paying for? When thousands lose their jobs? When there are no cops or firefighters? msmith says it is simply a matter of valid, competing schools of thought. Do you mind identifying them for us?

Anyway, I could be wrong. I hope my tone isn't insulting, I don't mean to be. I am not a partisan- some of my position I consider to be conservative- and am perfectly willing to listen to and be instructed by conservatives if they have the best point. I think the GOP candidates plans are disastrously bad though and can't see how anyone would support them, unless they are either fooled or in a position to benefit from another depression.