Transcript Booms and Busts - economyandsociety2012

Booms and Busts: The
Economic Cycle in Action
Marcus D. Niski
Booms and Busts…
As we have already observed, the economies
of all countries are subject to what is known
as cyclical affects or affects which influence
their economic cycle in terms of both what is
known as short run and long run factors…
Booms:
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An economic boom is characteristics by a range of
economic factors in the cycle such as:
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High levels of investment
High levels of employment
High levels of demand
High levels of spending
Buoyant share prices
Psychological optimism regarding employment,
spending and the general health of the economy
 Strong housing prices
Busts:
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Characteristically, busts are an opposite trended of
the reverse factors – also characterised by
pessimisms in general terms about the state of the
economy and d it short-medium term future.
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Busts are known as a period of recession in the
economy where growth is slow and the prevailing
economic data suggest what economists in the
media often refer to as ‘sluggish’ behaviour.
Depressions: a severe economic downturn

Depressions are technical extended long running
periods of downturn in the economy that are
characterised by three quarters of negative growth
in the economy.

Depressions often result in massive social and
economic
instability
and
have
profound
consequences for any society as they impact at the
every level of the economy and society.
The Great Depression of the
1930s
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The Great Depression
The Great Depression was a severe worldwide
economic depression in the decade preceding
World War II.
The timing of the Great Depression varied across
nations, but in most countries it started in about
1929 and lasted until the late 1930s or early 1940s.
It was the longest, most widespread, and deepest
depression of the 20th century, and is used in the
21st century as an example of how far the world's
economy can decline in global terms…
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The depression originated in the U.S with the famous CRASH
on Wall Street., starting with the stock market crash but quickly
spreading to almost every country in the world.
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The Great Depression had devastating effects in virtually every
country, rich and poor. Personal income, tax revenue, profits
and prices dropped, and international trade plunged.
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Before we move on to further analysis, let’s
pause for a moment a look at what happens
when a market collapses and what sort of
factors might be at work.
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Let’s look at the so-called tech wreck of the
early 2000’s as an example. The
technological ‘bubble’ that followed on from
rapid investment in the Internet in the late
1990s and early 2000’s is an excellent
example of what happens when a market
crashes and the sorts of economic and
psychological factors that are involved.
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Like many bubbles before it, the tech
wreck is a good example of a
sometimes highly predictable crash.
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Indeed, the tech wreck was brought
about by a number of factors including:
– Inflated prices based on paper values rather than real
values (asset v price bubbles)
– Investor over confidence
- Elements of corruption/ manipulation of the business
model
– Psychological bull run behavior
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Consequently the market crashes due to:
– Prices plummeting for stocks based on a
correction to the above as both the perceived
and real re-evaluations took place
– Mass selling behavior
– Loss of confidence in the sector by investors
- Exposure of poor real values to perceived
values
- Businesses in the sector not making
anticipated profits
– Panic through the market
So let’s move back to the Great Depression…
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Economic historians most often attribute the start of the Great
Depression to the sudden and total collapse of US stock market
prices on October 29, 1929, known as Black Tuesday.
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However, SOME DISPUTE EVEN TODAY THAT THE CRASH
WAS A SYMPTOM RATHER THAN A CAUSE OF THE GREAT
DEPRESSION.
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Even after the Wall Street Crash of 1929, some optimism
persisted for some time;
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John D. Rockefeller said that: "These are days when many are
discouraged. In the 93 years of my life, depressions have come
and gone. Prosperity has always returned and will again."
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The stock market turned upward in early 1930,
returning to early 1929 levels by April, though still
almost 30% below the peak of September 1929.
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Together, government and business actually spent
more in the first half of 1930 than in the
corresponding period of the previous year.
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But consumers, many of whom had suffered severe
losses in the stock market the previous year, cut
back their expenditures by ten percent, and a severe
drought ravaged the agricultural heartland of the
USA beginning in the summer of 1930.
By the mid 1930s interest rates had dropped to
low levels and consumer investment and
spending were both depressed.
Conditions in the farming sector also declined
and commodity prices declined.
Protectionist tariff polices ensued and the US
government moved to instituted the SmootHawley Tariff Act aimed at protecting US trade
against the actions of its competitors.
• Some economists argued that this in fact help to
exacerbate the situation because it further slowed
down US international trade, which in turn, affected
US stocks of gold that further aggravated the crisis
rather than alleviated it
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By 1930 a steady decline in the world economy
in that would reach the bottom by 1933….
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“25 percent of all workers and 37 percent of all
nonfarm workers were completely out of work.” (Great
Depression, by Gene Smiley, The Concise
Encyclopedia of Economics)
By 1939, in fact, the world would be at war with
Hitler’s Germany invading Poland. Ironically , a
war economy would help to repair the damage
done to the US economy eventually leading it to
becoming an economic engine of growth by the
1950s with the re-construction of Japan playing
an important role in this process.
Causes of the Great
Depression
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“What caused the Depression? This question is
a difficult one, but answering it is important if we
are to draw the right lessons from the
experience for economic policy. Solving the
puzzle of the Depression is also crucial to the
field of economics itself because of the light the
solution would shed on our basic understanding
of how the economy works...”
Current US Federal Reserve Bank Governor Ben S. Bernanke, At the H.
Parker Willis Lecture in Economic Policy, Washington and Lee University,
Lexington, Virginia, March 2, 2004 in a speech entitled– Money, Gold, and
the Great Depression
Causes of the Great
Depression
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“During the first decades after the Depression, most
economists looked to developments on the real side of
the economy for explanations, rather than to monetary
factors.
Some argued, for example, that overinvestment and
overbuilding had taken place during the ebullient 1920s,
leading to a crash when the returns on those
investments proved to be less than expected. Another
once-popular theory was that a chronic problem of
"under-consumption"--the inability of households to
purchase enough goods and services to utilize the
economy's productive capacity--had precipitated the
slump.” (ibid)
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“The slowdown in economic activity, together
with high interest rates, was in all likelihood the
most important source of the stock market crash
that followed in October.
In other words, the market crash, rather than
being the cause of the Depression, as popular
legend has it, was in fact largely the result of an
economic slowdown and the inappropriate
monetary policies that preceded it.
Of course, the stock market crash only
worsened the economic situation, hurting
consumer and business confidence and
contributing to a still deeper downturn in 1930.”
(ibid)
Time Line to The Great
Depression…
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1929
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U.S. decline in industrial production
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August: The recession begins, two months before the crash. Production
falls by 20%.
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October 24: Stock market crash begins.
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October 25: Brief surge on the market.
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October 29: 'Black Tuesday'. U.S. Stock market collapse.
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Decline in the commodity prices.
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The stock market crash had little substantive effect on the
recession because only 16% of the population was involved in the
market, and only 10% of wealth was lost. However, the crash
created uncertainly in people’s minds about the future of the
economy. This distrust in future income reduced consumption
expenditure. As demand for commodities decreased, so did their
prices.[1]
1930
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February: Federal Reserve cuts interest rates from 6% to 4%
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June 17: Smoot-Hawley Tariff Act passed.
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September - December: First U.S. bank failures
1931
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May: Creditanstalt, Austria's premier bank, goes insolvent.
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May-June: Second U.S. bank failures / Change in people's
expectation of the economy
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If people expect the deflation to continue, they anticipate that prices
will be even lower in the future than they are now. They hold off on
purchases to take advantage of the expected lower prices. They are
reluctant to borrow at any nominal interest rate because they will
have to pay back the loan in dollars that are worth more when prices
are lower than they are now. In short, the real interest rate rises
above the nominal rate (Temin 56).
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July: Germany banking crisis
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September 21: Britain goes off the gold standard.
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September - October: Substantial amount of dollar assets are
converted to gold in the US
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September - December: Fed increases interest rates
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Fed wanted to stabilize the dollar without going off the gold
standard. As a result, production continued to plummet and the
depression intensified.
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November - Summer 1932: Foreign trade restrictions / Imperial
Preference
1932
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April - June: Government conducted open market transactions to increase
money supply.
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July: The Government discontinued open market operations.
1933
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Franklin D. Roosevelt elected President.
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US goes off the gold standard.
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US goes on silver standard.
The Great Crash of 1929
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http://www.youtube.com/watch?v=RJpLMv
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