The New Depression: The Breakdown of the Paper Money Economy (Richard, 2012)

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  • Federal Reserve Act specified that the banks must hold reserves in their own vault or deposits at Federal Reserve
  • Capital Adequacy Ratio (CAR) not liquid assets but bookkeeping of assets and liability
  • MV = PT = GDP
    M = Money (the average amount of money in circulation in the community during the year)
    V = Velocity (the average rate of turnover of money)
    P = Price level (the weighted average of all prices)
    T = Trade (the volume of trade)
  • CV = PT
    C = Total credit market debt
    V = Velocity (the average rate of turnover of money)
    P = Price level (the weighted average of all prices)
    T = Trade (the volume of trade)
  • Unemployment ≠ Underemployment
  • Business cycles - The problem and its settings:
    The weather. Weather patterns and sunspots are held to affect agricultural prices and, thereby, the broader economy.
    Uncertainty. The business community tends to misjudge future demand and overproduced or underproduced as a result. The need to adjust output to actual demand then sets off the cycle.
    The Emotional Factor in Business Decisions. Mood swings within the business community between excessive optimism and excessive pessimism is thought responsible for the booms and busts of investment.
    Innovation, Promotion, Progress. This theory states that innovations and waves of innovations cause changes in both the supply and demand for products to which the economy must adjust.
    The Process of Saving and Investments. One version of this theory blames the business cycle on a scarcity of capital, while another attribute it to oversaving.
    Construction Work. This theory contends that booms and depressions originate in the construction industry and spread out to the rest of the economy.
    General Overproduction. Investment by the business community sets off a period of prosperity, but then carries on for too long until there is excess production that can’t be sold. At that point, investment is reduced, resulting in the depression.
    Banking Operations. Credit expansion causes the boom, but the boom goes into reverse when credit ceases to expand.
    Production and the Flow of Money Incomes. Production expands faster than wages, eventually leading to unsold goods, falling prices and depression.
    The Role Played by Profit-Making. “The distinguishing characteristic of the(se) theories… is that they represent the alternatives of prosperity and depression as arising from profit-making itself”
  • Post-boom deflationary spiral:
    Debt liquidation leads to distress selling
    Contraction of deposit currency, bank loans paid off, circulation slow down
    Fall in level prices = swelling of the dollar
    Fall in net worth of business = increase bankruptcies
    Fall in profit
    Reduction in output = unemployment
    Pessimism and loss of confidence
    Hoarding and slow down still more the velocity of circulation
  • Complicated disturbance and the fall of money
  • Fin de la siecle NASDAQ bubble = 2000 dot com bubble


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