Friday, February 13, 2009

A Good History Lesson...

The Economist has a good piece on a view back at Irving Fisher's contribution to understanding depression economics. In particular is the quote:

Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.

Amazing that he was talking about this in 1933. A previous post talks about inflation fears, which are relevant, but deflation is also a problem. Greg Mankiw, however, believes that we are getting past the deflation portion of the cycle (at least that bond signals suggest an end to deflationary fears). This seems to be borne out in the gold price data in the inflation post. In mid-2008 when deflation fears were at their highest, gold dropped substantially, but has since returned supporting Dr. Mankiw's argument.