Introduction:
The following series of notes represent the outcome
from dialogue had with respect to the theoretical economic frameworks. This is
important to understand because how we think about economic systems – which all
are inherently complex – will help us forecast where it is heading. In other
words, having proper perspective of the way things should be and the way they
are now helps us frame the present circumstances in such a way that we can
understand (or at the very least try).
The following perspective is merely a point of view and
do not claim to be perfect. My goal is that it will be taken as a means to
stimulate dialogue and thought.
Topic 1. If
a fixed-money system limits the boom-bust cycle, why did the more fixed-money
systems of the pre-Fed era have so many more booms, busts, panics, and
depressions?
Three points on this question:
- First, all man-made systems are imperfect, so no
man-made system will prevent “boom, busts, panics, and depressions” from
occurring.
- Second, without going into the rabbit hole of
precisely defining each term, yes, the pre-Fed era had “boom, bust, panics, and
depressions.” But to say that there were more or less, masks some important
distinctions: pre-FED, “booms, busts, panics, and depressions” were for the
most part parochial, both in location and/or markets (e.g. the railroad
investment mania of the 19th century had little impact on the
average person and impacted mostly the investor class). It is not the number of
“booms, busts, panics, and depressions” that is germane, what is important is
their magnitude. Read economic historian Charles Kindleberger’s Manias, Panics,
and Crashes. His classic book goes through the history of manias, panics, and
crashes, and then lists the top 10. If my memory serves me right, 8 out of the
10 crashes occurred post Fed era. At the time the book was written, the crash
of 2008 had not happen, and most certainly that one would have made the list.
Let’s put aside the 2020 crash due to the lockdown, as that was a very unique
event in human history, what becomes apparent is that each successive crisis
post-Fed era are more pronounced and impact is broader (aka contagion risk).
- Third, as briefly mentioned in my second point, a fixed-money
system would limit the boom-bust cycle, but mainly in the context its broad
economic impact. I do not know the exact number of boom-busts in the pre-Fed
era, but what I am certain is that you will rarely see a boom-bust, say, in the
likes of the ‘Great Depression’ or ‘Great Recession’. What you will find in the
pre-Fed era are many localized issues (e.g., bank runs in the specific regions;
or investment crashes that would impact the money centers without much impact
to the broader population, etc.).