Friday, December 7, 2012

The 1930's Fiscal Cliff: Addendum

Below is a video of Steve Keen talking about the relationship between the Great Depression and Great Recession era levels of government and private debt.  He goes into some detail about the relationship between the 1937 fiscal cliff and the fiscal cliff now.  However, he doesn't give much corollary information like interest rates or gold reserves.
 
1930's Upheaval
In 1933, by presidential decree, the hoarding of gold was made illegal.  In 1934, the Federal Reserve transferred its gold holdings to the treasury while removing National Bank Notes from circulation, and the gold convertibility of the dollar was set at $35 per ounce.
National Bank Notes (blue), and Treasury and Federal Reserve gold holdings (red).
Below are two graphs showing my interpretive correlation between interest rates and unemployment.  First, from the end of the recession in 1933 to the end of the next recession in 1938 using short-term government interest rates.  Second, from the end of the most recent recession to present using Fed Funds (the major driver behind short-term government interest rates).  I feel the correlations in the first graph are stronger than in the second graph.
Short-term government interest rates (blue) and unemployment (red).
Fed Funds rate (blue) and unemployment (red).  I think the correlation here is a bit more suspect than in the previous graph.
Short-term rates in the 1930s were almost as low as they are today.  And I see as least two cases of when interest rates significantly rose and caused a positive change in unemployment later on.  I think that will happen again when the Fed raises rates in 2015. 
 
I am conflicted about saying there is a strong correlation between the current fiscal cliff and the 1930s fiscal cliff.  I think there were more factors which influenced the 1937 recession than just a change in government debt.
 
I agree with Keen that there are bigger issues than government debt.  He is also correct in pointing out the relationship between changes in the economy (unemployment) and changes in government debt, and that it is not government debt that necessarily caused the Great Recession.
Something I posted about earlier in regards to LIBOR.  Since the Fed Funds is such a stronger mover of other interest rates it seems somewhat logical that a swing in the Fed Funds will again have an impact on mortgage delinquencies.
Fed Funds (blue) and unemployment (red) during the Great Recession.
Percent year-over-year change in federal debt (blue) and the unemployment rate (red).
 


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