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U.S. Market Crisis: Panic or depression?

Posted April 1, 2008

“There appear to be two types of depression, one of which is much stronger and longer lasting than the other. Panics, like those of 1907 or 1987, are steep, but relatively brief; great depressions can last for a decade or more.” — Lord William Rees-Mogg

by Lord William Rees-Mogg, Whiskey & Gunpowder

Baltimore – (TFN): Irving Fisher was probably the greatest American economist, both in terms of the development of economic theory and as a teacher. In 1933, having himself misread the early stages of the Great Depression — and virtually bankrupted himself by ill-judged speculation — Fisher published one of his most important works. It is often referred to by its title, “The Debt-Deflation Theory of Great Depressions,” but is, I suspect, less often read by practicing economists. However, one can be sure that it has had considerable influence on what might be called the “economic philosophy” of the members of the Federal Reserve Board.

The peculiarity of the Great Depression of 1929-33 was that the American economy proved not to be self-stabilizing, although some other major economies of the period, including the British, did recover spontaneously in the early 1930s. Indeed, for Britain, the 1930s, with industrial expansion in automobiles and extensive building of houses, was a record decade.

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However, recovery in the United States was later and weaker. When one compares Franklin Roosevelt’s first term, from 1933-37, the performance of the U.S. New Deal was not as good as that of Germany, rearming under Hitler, or of the United Kingdom, building cars and houses under Stanley Baldwin and Neville Chamberlain.

This is important, because there appear to be two types of depression, one of which is much stronger and longer lasting than the other. Panics, like those of 1907 or 1987, are steep, but relatively brief; great depressions can last for a decade or more. As Irving Fisher observed — prematurely — “The Depression out of which we are now (I trust) emerging is an example of a debt-deflation depression of the most serious sort.” Read on to learn what induces a depression or a panic and which one the U.S. just entered.

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