Great Depression? Great Flood.

In response to The liquidity trap. Commentary: Financial engineering seems worse than the alternative by Jim Anderson - Dec 4, 2008

el000:
Liquidity trap of course exists, but in 30s one factor was absent, which is present today: huge amounts of live money pumped into the banks instead of bad debt and bad securities.

As such, they replace invetment tools in banks and hang there as investment (makes sense in deflation) but early or later banks will need to make these money grow, not just sit there in piles, and with financial market solutions shut down, what direction will they go?

For now, these money are hanging in investment mode like a dark cloud in the sky full of water. But any point of condensation or triggering event and the drought is over and they will start to rain on real economy, and then inflation will start. Not fun either, but the deflationary state of the economy is simply not stable this time.

Deflation during Great Depression was like drought resulted from no rain. With those clouds of money in our economy sky we are heading to the Great Flood instead. Of course, not today. A very good (and very interesting) question is when?

el000:

Translated to polite language, what you say means that trickle down economy (money flowing from rich to poor) does not work. Yes, I completely agree with you on that. Rich getting richer does not make economy work, otherwise there would be no 19th century overproduction crisises.

Giving money to banks is essentially making rich richer (as you said "BILLIONS FOR THE THIEVES, NO QUESTIONS ASK"). Now "thieves" have tons of greenbacks and sitting on them because deflation makes it sensible and liquidity trap is in place, Great Depression seems inevitable.

But consider such scenario: Obama tries to press on China to free Tibet and pushes Georgia into NATO. China and Russia are pissed off and sell a lot of greenbacks on international markets. Dollar plunges, because they still have tons of them. Your rich "thieves" scurry to save their money and selling dollars for euros, yens, franks, yuans, rubles... making dollar plunge even deeper and making it irreversible. With exchange rate crushed everything imported (that is nearly everything in your local Wal-Mart and gasoline) becomes more expensive. That's called inflation. At the same time our export becomes less expensive and more competitive. It will begin to make sense to produce here and export out there. Depending on how much dollar will fall, we may become destination for outsourcing instead of China. Especially, if we fix our education to continue having great workforce.

And "Free Tibet"/Georgia with panic on ForEx is just one scenario, there is a lot of other potential triggers around.

Of course, free market style as descibed here, it will really hurt too, and trickle-UP elements like infrastructure works or direct cheap credits from the government bypassing banks would soften it a lot. In the end, I am not saying that what's coming is better than Great Depression (although it could be, only complete idiots would not learn in a hundred years), I only say that the Great Depression scenario is not stable today.