patrick.net

Policymakers speak of affecting the terms of trade by manipulating the money, but they do not realize that their money has become vulnerable to the terms of trade. Modern macro and micro modeling biases preclude economists from seeing this full impact.

Smoot-Hawley and Bank Crises

In 1976 monetarist Allan Meltzer noted, “Given the size of the decline in food exports and in agricultural prices, it is not surprising that many of the U.S. banks that failed in 1930 and in 1931 were in agricultural regions.” Meltzer’s observation indicates that misguided trade policy may have triggered the bank failures and resulting monetary collapse in a significant way. We believe Meltzer’s insight gives us a better understanding of the Great Depression.

The most widely accepted theory for the beginning of the Great Depression is the monetarist narrative, which has the collapsing banking system as the prime causal factor. The empirical evidence suggests that a disguised monetary inflation throughout the 1920s was followed abruptly by an open and severe deflation following 1929. The appreciable financial disintegration and deflation caused by over 10,000 bank failures and an implosion of the inverted credit pyramid certainly had very real negative economic effects.

The thesis that a negative trade shock can impact monetary policy fits these empirical puzzle pieces together. The tariff not only closed off the U.S. export market to farmers, it also left a vast volume of heterogeneous and specific capital goods used in agricultural production idle and suddenly worthless. Empty silos and buildings, rusting tools and machinery, and unused acreage—all in particular geographical regions—led to severe liquidations and farm foreclosures in the states experiencing the first banking crisis, with the vast bulk of failures involving small state-chartered rural banks.

Economic historian Eugene White, who examined individual bank balance-sheet data, identifies the agricultural distress in the Midwestern states as a central reason for the pattern of failures. The Smoot-Hawley tariff was a direct factor in both the pattern of failures and their geographic location.

Microeconomic Connections

Here is where the Austrian business cycle model can aid our understanding of the crisis. The monetary theory of capital malinvestment arises from relative price distortions and heterogeneous capital. Both points are by and large absent from most macro modeling of business cycles. These microeconomic connections are, however, fundamental. Disguised inflation in the 1920s probably created a constellation of malinvestments in need of liquidation, meaning that by 1929 a business recession was likely inevitable. However, an extraordinary tariff war brought world trade to a screeching halt. The tariff created additional malinvestment in a capital structure already in need of market readjustments. Both prior monetary inflation and restrictive trade policy led to and exacerbated the economic downturn. They are not mutually exclusive alternatives.

Misguided public policies, such as state-run deposit insurance and branch-banking restrictions, created a banking system vulnerable to pervasive failures caused by adverse trade shocks. The moral-hazard problems associated with inaccurate risk-pricing—and the fragility of the system due to restrictions on geographical risk diversification—would prove fatal. At the same time that intervention was leading rural banks to commit capital to riskier loan portfolios, intervention was exposing them to additional risk. When unexpected changes in regional economic conditions arise from arbitrary interventions in the free-trade system, undiversified banks will fail in large numbers. Smoot-Hawley, one of the most massive tariffs in American history, destroyed an enormous portion of the vulnerable capital structure. The resultant contagion, bank runs, and failures that followed show that trade policy can affect monetary conditions.

Central Bank Illusion

Whether the Federal Reserve could have stopped the contagion and subsequent bank failures misses the main economic point. Central-banking advocates sell an illusion of monetary stability, when in reality the system is wide open to adverse shocks and therefore is highly unstable over the long run. A central bank can easily overexpand or overcontract the stock of money and credit. This is best illustrated by the contrast of the Federal Reserve System to its freer Canadian counterpart. Canada did not have antibranching regulations, socialized deposit insurance, or a central bank. This is significant because over 30 percent of Canada’s GNP originated in foreign trade. Smoot-Hawley escalated tariff barriers between Canada and the United States, yet Canada did not experience any bank failures or bank runs, and its money supply declined by only 13 percent (versus 29 percent in America).

There is every reason to believe that a free-banking system most likely would have prevented the disguised inflation of the 1920s and averted the geographical vulnerabilities along with the open secondary deflation characteristic of the 1930s. After World War I many countries tragically established central banks under the illusion that monopoly and central planning in money would lead to economic stability. History has rendered its verdict on central planning: Whether it be shoes, screws, or money, it always fails.

All of which brings us to today. While “welfare-warfare” states throughout the world are running huge fiscal deficits, their central banks are recklessly monetizing massive quantities of debt (inflation). Extraordinary volatility now characterizes financial markets amidst a worsening sovereign debt crisis. Major financial institutions throughout the world hold mountainous portfolios of worthless assets that government policy has steered them into holding. Defaults threaten to destroy the world monetary systems in spite of all the short-run political machinations of prime ministers and central-bank leaders. And in these dangerous waters, what do we hear from the politicians, many already with their hands red? Trade protectionism!

When political agents denounce China on trade and demand an appreciation of its currency, it is the functional equivalent of placing a tariff on each and every Chinese export. This type of protectionist saber-rattling risks igniting not only a destructive international trade war but also, with the economy in the aftermath of a colossal bubble and the world’s banker growing restless with its hoard of depreciating IOUs, vastly more damage than the world is prepared to handle. Have we learned nothing from the past?

https://fee.org/articles/the-smoot-hawley-tariff-and-the-great-depression/#0

indigenous says

Not that you will read this...

Nope... Austrian Economics propaganda.

We've been over this ground so many time on this board, it's boring.

Time to find new topics to worry unto boredom.

Did you read it?

Nope. Like I said, we've been over this ground. It's like reading Tankies trying to dismiss the entire Purge Narrative as a Trotskyite-Capitalist plot.

indigenous says

Did you read it?

please create your own thread

Indigenous you did a Dan.

Please don't do that again.

T L Lipsovich says

It's like reading Tankies trying to dismiss the entire Purge Narrative as a Trotskyite-Capitalist plot.

How would you know?

Fucking White Male says

Indigenous you did a Dan.

Wut?

TLips finds it more interesting to argue against whatever he imagines your point of view is. Especially if sharing your point of view involves asking him to read something.

I've seen enough of TLips comments over the past year to know that the thing he likes the most about Trump is his hopes that Trump implements extremely protectionist polices and the fantasy that Trump is somehow going to undue several decades of globalism.

I guess you mean the extensive cut and paste?

Fair enough.

The Wogster and I went though this a while back but I have since read this and similiar.

Lips thinks it is boring, which translates that he doesn't want to consider any thing that conflicts with the dogma he subscribes to.

marcus says

Especially if sharing your point of view involves asking him to read something.

Ironically that is what Lips is NOT doing.

Did you read it?

Indigenous, get off this thread dude. You are hijacking it with you usual crap. Find one of the many threads we debated before and post there.

marcus says

I've seen enough of TLips comments over the past year to know that the thing he likes the most about Trump is his hopes that Trump implements extremely protectionist polices and the fantasy that Trump is somehow going to undue several decades of globalism.

Also a bit of a hijack.

Bypassing the fact you had me on ignore for at least a year, triggered shortly after I asked you to explain why Public School Teachers don't Compete Globally with the millions of willing immigrants and potential H1-B holders willing to do twice the work for half the price. Public School teachers are fine with outsourcing millions of good paying manufacturing jobs though, and doing teenagers out of college savings by employing off-the-books immigrant landscapers for their McMansion

I'll be happy to take up this gauntlet in another thread.

@Patrick, can we get a thread cleansing for this one?

T L Lipsovich says

Patrick, can we get a thread cleansing for this one?

What is a thread cleansing?

T L Lipsovich says

Find one of the many threads we debated before and post there.

We haven't as you say debated many time before...

T L Lipsovich says

Bypassing the fact you had me on ignore for at least a year, triggered shortly after I asked you to explain why Public School Teachers don't Compete Globally with the millions of willing immigrants and potential H1-B holders willing to do twice the work for half the price. Public School teachers are fine with outsourcing millions of good paying manufacturing jobs though, and doing teenagers out of college savings by employing off-the-books immigrant landscapers for their McMansion

It probably was something equally dishonest that you claimed my position to be, but I think you are adding a lot to it here.

rando says

What is a thread cleansing?

Can we dump indigenous' long somewhat Off-Topic copypasta from Mises or wherever into another thread? I wanted to keep this thread as a "Trump Promise Fulfillment" thread, and not have several long posts in a row going off on Great Depression history.

marcus says

It probably was something equally dishonest that you claimed my position to be, but I think you are adding a lot to it here.

I just think that if you're for globalization, you should be for it for everybody and not exempt your profession. After all, a globalized world needs Filipina, Bangladeshi, Kenyan teachers for American kids, not just American teachers.

Certainly California could use 100,000 H1-B educators, no?

indigenous says

We haven't as you say debated many time before...

https://patrick.net/?p=1279292&page=1
https://patrick.net/Is+Capitalism+Killing+Our+Morals+and+Economy%3F

https://patrick.net/The+establishment+paying+lip+service+to+the+problem

Especially:
https://patrick.net/?p=1279292&c=1184512#comment-1184512

and

https://patrick.net/?p=1224261&c=958876#comment-958876

and

/?p=1215036&c=853949#comment-853949

That's where all the links get automatically channeled here...

https://patrick.net/1293879/tired-of-politics-sexy-picture-thread

rando says

T L Lipsovich says

Patrick, can we get a thread cleansing for this one?

What is a thread cleansing?

T L Lipsovich says

Public School teachers are fine with outsourcing millions of good paying manufacturing jobs though, and doing teenagers out of college savings by employing off-the-books immigrant landscapers for their McMansion

That and there are many into just doing teenagers

Not the first time that Trump has pulled out. At least according to the Russian tapes.

A few related stories...

http://www.cnbc.com/2017/01/22/japans-suga-says-a-window-exists-to-for-a-tpp-trade-pact-with-the-us-despite-trumps-no.html

http://www.radionz.co.nz/news/political/322880/'plan-b'-tpp-on-the-cards-pm

http://the-japan-news.com/news/article/0003475531

T L Lipsovich says

indigenous says

We haven't as you say debated many time before...

https://patrick.net/?p=1279292&page=1

https://patrick.net/Is+Capitalism+Killing+Our+Morals+and+Economy%3F

https://patrick.net/The+establishment+paying+lip+service+to+the+problem

Especially:

https://patrick.net/?p=1279292&c=1184512#comment-1184512

and

https://patrick.net/?p=1224261&c=958876#comment-958876

and

https://www.p...

Ok Lips I will check this out tommorow, I will give it due diligence.

T L Lipsovich says

Bypassing the fact you had me on ignore for at least a year, triggered shortly after I asked you to explain why Public School Teachers don't Compete Globally with the millions of willing immigrants and potential H1-B holders willing to do twice the work for half the price. P

That's an accomplishment, a whole year. I'm jealous, I only got about 10 days or so.

I know several h1-b math and science teachers teaching in the metro Atlanta area teaching at shitty schools that other teachers don't want to go to.

T L Lipsovich says

rando says

What is a thread cleansing?

Can we dump indigenous' long somewhat Off-Topic copypasta from Mises or wherever into another thread? I wanted to keep this thread as a "Trump Promise Fulfillment" thread, and not have several long posts in a row going off on Great Depression history.

marcus says

It probably was something equally dishonest that you claimed my position to be, but I think you are adding a lot to it here.

I just think that if you're for globalization, you should be for it for everybody and not exempt your profession. After all, a globalized world needs Filipina, Bangladeshi, Kenyan teachers for American kids, not just American teachers.

Certainly California could use 100,000 H1-B educators, no?

Thou doth protest too much, on a Free Speech forum.

Nary a peep when Ironman polluted the Inauguration thread.

MMR says

T L Lipsovich says

Bypassing the fact you had me on ignore for at least a year, triggered shortly after I asked you to explain why Public School Teachers don't Compete Globally with the millions of willing immigrants and potential H1-B holders willing to do twice the work for half the price. P

That's an accomplishment, a whole year. I'm jealous, I only got about 10 days or so.

I know several h1-b math and science teachers teaching in the metro Atlanta area teaching at shitty schools that other teachers don't want to go to.

I guess someone has to make an effort at teaching the next generation of drug dealers. They gotta have math skills or they'll never learn to cut the crack to the correct percentage.

T L Lipsovich says

Also a bit of a hijack.

That's true.

Should there be a limit on the number of comments in a row by the same person?

rando says

Should there be a limit on the number of comments in a row by the same person?

Hmm, don't know Patrick. Wish there was a way for a thread creator to tag posts as "off-topic", but that might create extra admin duties. Maybe some purgatory catch-all for off-topic posts of the day/week?

rando says

Should there be a limit on the number of comments in a row by the same person?

On the Wogster yes, on me no

The reason it happened was there is now a limit on the size of the post, in the past that would have been one or maybe two posts.

You see Pat there are always unintended consequences.

If it was me I wouldn't worry about it unless it keeps happening especially if it someone that I don't like.

http://yournewswire.com/trump-captures-isis-leader/

And on the third day, Trump's military destroyed most of ISIS and captured their leader.
More progress than Obama has made in three years.
Same military, different Commander in Chief!
Obviously Obama was a ISIL plant, encouraging the enemy, supplying them, allowing them to prosper, commit unspeakable acts against minorities in the region including thousands of Christians, and withholding support for the Kurds who battled them.
Obama is SUCH A TRAITOR! May he rot in Hell!

Ironman says

That's what happens when the adults step in to take care of the "JV" team.

You beat me to it, I get that Trump knows how to get stuff done, and Obama...

how about one of those accordion things..more than 10 lines and the post gets truncated, but can be opened in full with a link at the bottom of the post.

rando says

T L Lipsovich says

Also a bit of a hijack.

That's true.

Should there be a limit on the number of comments in a row by the same person?

Macropodia says

how about one of those accordion things..more than 10 lines and the post gets truncated, but can be opened in full with a link at the bottom of the post.

hey, that's a great idea! not too hard to do with a bit of css.

thanks for suggesting it. now it's on my list, but first i have to finish getting my hot-backup strategy going in case the site gets threatened with takedown again.

Weird shit going on when you try to look up Al Baghdadi right now!

bump for more promise fulfillment action.

Expected Today:

Penalties for Sanctuary Cities - to be signed
Construction of the Border Wall - to be signed

Still being hashed out:
Halt on Visas for Syrians, Yemen, Sudan, etc. - expected to be signed soon
Cutting the Rapefugee Programs - on the table, not sure if wording finalized yet

http://www.reuters.com/article/us-usa-trump-immigration-idUSKBN1591HP?il=0