How to Cause a Depression, in One Easy Lesson

There is a passage in the I Ching that states that, when mountains grow too high, they collapse. Confucius, in a commentary on this passage, interpreted it to mean that when too much wealth and power are concentrated at the top, societies collapse.

Now, here's a fact that I think more people should think about: The disparity of income between the rich and poor in this country reached an all time high just before the Great Depression. The depression kind of corrected that, until Reaganomics reared its ugly head. Then, in thirty years, we again reached a new high in disparity of income- right before the Bush near-depression of last year. Coincidence?

So, here's the story. We all know how the "free market" is supposed to work on the law of supply and demand. The price that something will fetch is supposedly determined by some sort of intrinsic worth. Now, when a more or less healthy distribution of wealth exists, this works fairly well, as long as crooks aren't running the government (that's a tale for another time.) This is, basically, because ordinary people have to spend most of what they earn in order to support themselves and their families. They must purchase goods and services, and thus they support a healthy economy.

When, on the other hand, you tip the board so the money all runs into the rich people's pockets, something different happens. A rich person may make a hundred times as much as a poor person, but he doesn't need a hundred cars, or a hundred refrigerators, or even a hundred vacations. Sure, he can buy cars and vacations that are a lot more expensive, but he is still left with a lot of money. And what does he do with it? He tries to invest it.

It used to be thought that the investment economy worked something like this: A business needs money to expand, or to finance its production. So it issues stock which people buy, and then it uses the money to grow, thus generating value. That works pretty well when there is a rough parity between what businesses need and what people have to invest. The price of stocks and bonds, or of real property, etc. is based on a common perception of their future earning potential, and thus the demand for these things is based on something real, and everything functions pretty well.

Now, what happens when we give the rich more money than they can successfully invest? Now the law of supply and demand turns on them. Now, it is the stocks and bonds and properties that are in short supply, and what there is too much of is money to invest. So rich people are now chasing after insufficient investments, and consequently, by that immutable economic law, the investments become more and more expensive, and their money becomes more and more worthless. The "value" of these things is now detached from their earning potential, and is driven through the roof by the excess of money in the hands of the rich. This is what a bubble is, and it accounts, for example, for how internet companies with no visible source of income were trading in the nineties for a hundred or more times their earnings. People had to put their money somewhere, and that's what there was.

This also accounts for the colossal real estate bubble which we have seen so recently. Few people are aware that a similar bubble occurred in the United States in the nineteen twenties, fuelled by the cash produced by vast Republican tax cuts for the rich, and the typical Republican attitude of letting businesses do whatever they pleased.

Well, the real estate bubble collapsed in 1927, causing immense losses; it also drove the rich people's money out of the real estate market, and into stocks, bidding their value up until the inevitable happened in 1929.

Yes, that's what happened last year too. Luckily, this time we didn't have to wait two and a half years for Democrats to take power and fix the mess that the Republicans (again) caused, so we narrowly averted another depression. Anyway, it's time we learned our lesson. Letting the rich have too much money is a ticket to economic collapse. It took the Republicans seventy years or so to con the American people into letting them plunder our economy into disaster. How long do you think it will be before they are able to do it again?

Comments

Poll P. said…
Very clear and relevant. It's hard for the average person to comprehend how rich the realy rich are. So our first reaction is the be angry at anyone who rails against the rich--we all hope to be rich some day. But what you're talking about, I think, are people with billions...yes?
mastercynic said…
How long? Months.
Derek said…
"Coincidence?"

For the years leading up to the great depression, there was a practice of economic nationalism through subsidies and mandates. Intense government control and regulation of the markets caused other countries to practice similar economic policies, leading to less trade.

Fast forward to the late 90s and we have the government heavily regulating lending and housing industries. Not only did the government impose restrictions on lenders, the FORCED banks to give bad loans. Those are the loans you say they gave out because they are greedy (which means you assume they nothing about running a business as it didn't make them money, it destroyed their companies).

" on the other hand, you tip the board so the money all runs into the rich people's pockets"

You think it is a zero-sum game? Apparently you have never taken an Econ course.

"He tries to invest it."

Which stimulates economic growth and creates jobs.

"the investments become more and more expensive, and their money becomes more and more worthless."

Lol not even close. Their investments increase in worth, their money has the same worth (except for when inflation is taken into account. You know, that thing keynesian economics idiots like Obama love).

"This also accounts for the colossal real estate bubble which we have seen so recently"

Or it was the government forcing bad loans as well as the Fed keeping the interest rate below its market approved level. You know that your whole theory says over investment is bad, which is what artificially lowering the interest rate does.

"Luckily, this time we didn't have to wait two and a half years for Democrats to take power and fix the mess that the Republicans (again) caused"

Democrats were in power before the recession.
Green Eagle said…
Derek, you are both stupid and ignorant. You also lie with utter abandon.

Your comments reveal an utter lack of knowledge about either the great depression or what led up to our recent experiences. You have nothing to contribute to this discussion but right wing cant, and I must say that I do not appreciate the waste of my time involved in dealing with your lies.
Derek said…
"Derek, you are both stupid and ignorant. You also lie with utter abandon.

Your comments reveal an utter lack of knowledge about either the great depression or what led up to our recent experiences. You have nothing to contribute to this discussion but right wing cant, and I must say that I do not appreciate the waste of my time involved in dealing with your lies."

Translation: Ad hominem because I have nothing to back up my claims.

You've heard of the GATT, why do you think they implemented it?

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