Archive for June 2009


Did the Great Depression and WWII have the same cause?

I got a very good question from saifedean, and thought my answer might be worth a separate post.  He asked:

I am, however, surprised that you, of all people, think that Harding’s handling of the 1921 depression was good. According to your Monetarist rule-book, shouldn’t Harding have expanded the money supply to fight the depression? Yet he didn’t. And there was a fast recovery.

Doesn’t that make you doubt the veracity of the monetarist view? Doesn’t that support more the Austrian deflationist liquidationist view?

This is a very good question.  And although I can and will answer the question, my answer will raise deeper questions that may undercut part of my Great Depression story.  But that will be for you guys to decide.  Your views may influence how I revise my Depression manuscript.

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Don’t know how to end deflation? Ask a medieval king.

I may not post much for the next week, but if you are interested you can tune in to my debate with Lee Ohanian at

I just posted my first column, and three more are planned.  Professor Ohanian will also provide three responses.  I should mention that I was restricted a bit by the format.  I did slightly run over the 500 word limit, but I was also asked to take the side that “deflation is a currently a bigger risk than inflation.”  As you may know, I am more worried about prices rising at too slow a rate than too high a rate.  However I also think that outright deflation is less likely than “disinflation.”  In any case I don’t have much fear of high inflation, so I decided to take the “deflation” side of the debate.  It also needed to be written at a level for the average educated reader, not economists, so it wasn’t always possible to quickly sketch out these subtle distinctions.  In any case I did the best I could under those constraints, and will have two more shots.  There is much more I would have liked to say (and have said throughout this blog.)

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Don’t trust historians

Let me say first that I like history.  I think historians have a lot of interesting things to say and I don’t think historians should be economists.  But . . .

I  It depends on the definition of “great.”

Go to the following link and scroll down to the Ranking of presidents by historians in a 1996 poll.  Wilson is ranked 6th whereas his successor Harding is ranked 41st.  That’s 41st out of 41 presidents when the poll was conducted.  Where does one even start?

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Is anyone at the Fed watching the TIPS? *****Update 6/24/09*****

I just wanted to let you guys know that I am having increasing problems with computer viruses.  Some of you have noticed span in the RSS Google reader.  I have also lost my links information, and now I have lost my ability to write new posts.  The reason for my “Drudge-like” attention-getting update is that since I can’t post anything new, my only way to contact you is by amending existing posts.  I have been working on a new post, one of my “grouchy” ones, but can’t post it yet.  Instead I’ll complain about today’s Fed action, or should I say lack of action.  The S&P fell about 8 points right after the 2:15 announcement.  The 5-year TIPS spread is now back down to 1.42%.  Where’s that hyperinflation everyone on the right keeps promising us?  And by the way, where’s that global warming Al Gore promises?  I’m not comfortable unless it’s at least 85, and it’s been in the 60s in Boston this summer.

Seriously, I have no reason to doubt the science on CO2 and global warming, but the real action is in the economics of global warming.  The new Journal of Economic Perspectives has 3 interesting pieces on the subject.  One thing I took away is that the apocalyptic visions being made of extreme global warming just won’t happen.  I predict a maximum of 2 more degrees centigrade.  Geoengineering is for real.  I’d like to know more about how serious the problem of ocean acidification from CO2 really is—it could become a key issue.  And also more research on the possibilities for technologies that remove CO2 from the air at remote locations where it can be buried.  My hunch is that we’ll try to create clouds from sea water at higher latitudes if temps threaten to rise more than 2 degrees, and then work on a technology to remove CO2 already emitted in the second half of the 21th century (to deal with the ocean acidification problem.)  If I am right, that’s tilts the argument away from Stern’s more ambitious agenda, toward Nordhaus’s less costly approach to the problem.

BTW, I’m told that tomorrow morning my debate with Lee Ohanian (on the issue of deflation/inflation) will begin on  It will be a three part debate.  Sorry for all the problems here, and thanks to those who have stayed around despite the problems.  I think Austrian economists may like the next post.

Let’s take a look at inflation expectations since the stock market (and TIPS spreads) hit a low in early March:

Date    5 year TIPS yields   5 year T-bond yield   TIPS spread    S&P 500

3/9/09         1.52%                       1.90%                 0.38%           676.53

4/1/09         0.93%                       1.65%                 0.72%           811.08

5/1/09         1.24%                       2.03%                 0.79%           877.52

6/1/09         1.02%                       2.55%                 1.53%           942.87

6/10/09       1.08%                       2.93%                 1.85%           939.15

6/19/09       1.23%                       2.80%                 1.57%           921.23

6/22/09       1.23%                       2.70%                 1.47%           893.04

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From around the blogosphere

1.  JimP sent me this link showing that I am not the only one who thinks tight money is the cause of our current predicament:

Tim Congdon – a hard-money Friedmanite from International Monetary Research – says the Fed is still not easing enough, perhaps because it is spooked by so much criticism or faces a mutiny by its own hawks. “If Ben Bernanke and his officials are listening to this sort of stuff and taking it seriously, they are making the same mistake as the Fed in the early 1930s,” he said. The US “output gap” is near 7pc. That is a powerful lid on inflation.

The sin has been to let M2 money growth wither since January, to let bank lending contract at a 5pc annual rate, and to let 10-year bond yields rise to nearly 4pc. The Fed pays lip service to the Friedman-Schwartz theory of the Depression, but has not digested the lesson.

Mr Congdon’s prescription is what Britain did in 1931 and 1992: monetary stimulus à l’outrance (today: bond purchases), offset by spending cuts. This mix – easy money/tight fiscal – would halt debt deflation without ruining the public finances of the US, Britain, and Europe in the way that Keynesian schemes ruined Japan. “The markets would rocket,” he said.

My doppelganger.  BTW, those of you who think I’m an inflation dove should note that Tim Congdon is described as a “hard money” guy.

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