I recently heard a quote from the Fed Chairman in FDR's time(I forget his name now) claiming that one of the reasons for the Great Depression was income inequality. He likened it to a poker game in which a few players start accumulating most of the chips and the other players have to borrow to stay in the game. Eventually the credit runs dry(just like in current events) and the whole system collapses. Is any of this true?
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No, because in poker you win chips from other people, in trade you benefit other people and they benefit you, both creating new chips (wealth).
So that explanation is just kindergarden silly.
Okay, I feel dumb, that was pretty obvious.
I would say that he is right if 80% of the population of a country only makes enough money to afford food and shelter then all other industries will collapse since there would be no demand for them since no one has money for anything other than necessities. The other 20% who would be making most of the money could not fill the void since they would have to buy incredible amounts of goods to offset the productive members of society who do not make enough money to buy things other than necessities. If wealth creation is distributed in a very imbalanced manner it is an untenable position since it will result in overproduction and lead to layoffs unless there is a source of money other than employment such as credit. Credit creates a new problem since it is not free and therefore equals a trade of future productivity for money plus interest which eventually equals a lower wage if it is used for consumption and not as an investment. The ever growing supply and demand for credit is a result of this imbalance and basically equates to people borrowing money that fills the imbalance between how much they earn and how much they produce. The roaring twenties parallel the last 10 years in many ways one of which is the loosening of credit since productivity gains and wage increases did not track the only way many companies could sell goods was on credit today that is paralleled with bank loans and credit cards. The roaring twenties also saw huge gaps between the incomes of company owners and the average worker much like the widening gap between CEO's and the average worker that has occured over the last 40 years. To me this seems like one of the causative factors of the great depression. A poker game is a bad analogy since there is not really an exchange of goods or creation of anything but in the simplest sense if one person has all the chips the game is over and if new chips are allowed but that person gets 90% of the new chips it will continue only as long as the other players are willing to go further into debt through loans since the odds are drastically stacked against them.
slider123456: I would say that he is right if 80% of the population of a country only makes enough money to afford food and shelter then all other industries will collapse since there would be no demand for them since no one has money for anything other than necessities. The other 20% who would be making most of the money could not fill the void since they would have to buy incredible amounts of goods to offset the productive members of society who do not make enough money to buy things other than necessities. If wealth creation is distributed in a very imbalanced manner it is an untenable position since it will result in overproduction and lead to layoffs unless there is a source of money other than employment such as credit. Credit creates a new problem since it is not free and therefore equals a trade of future productivity for money plus interest which eventually equals a lower wage if it is used for consumption and not as an investment. The ever growing supply and demand for credit is a result of this imbalance and basically equates to people borrowing money that fills the imbalance between how much they earn and how much they produce. The roaring twenties parallel the last 10 years in many ways one of which is the loosening of credit since productivity gains and wage increases did not track the only way many companies could sell goods was on credit today that is paralleled with bank loans and credit cards. The roaring twenties also saw huge gaps between the incomes of company owners and the average worker much like the widening gap between CEO's and the average worker that has occured over the last 40 years. To me this seems like one of the causative factors of the great depression. A poker game is a bad analogy since there is not really an exchange of goods or creation of anything but in the simplest sense if one person has all the chips the game is over and if new chips are allowed but that person gets 90% of the new chips it will continue only as long as the other players are willing to go further into debt through loans since the odds are drastically stacked against them.
I do not understand. First, you say that if 80 percent of a country makes only enough money to afford food and shelter, then all other industries would collapse due to lack of demand. Then you say that a severe imbalance in wealth creation leads to overproduction. Please explain.
Overproduction and lack of demand are 2 sides of the same coin. Taken to an extreme if a large percentage of people made a good or provided a service that is worth $200 but the total wages given added up to $20 for everyone that created it then they would only be able to buy 1 out of 10 of the products they created. The remaining small percentage of people making the profit would need to buy the surplus (from each other) in order for there not to be overproduction with inventory sitting on shelves resulting in lay-offs. Since there is a ever widening divergence between money earned and money spent as income goes up this does not happen. The low earning employees borrowing money to buy those products are essentially paying for their own job even if the product comes from another company since someone from that company would be borrowing to be able to afford their companies product. This continual debt to balance what is not spent by the high income earners cannot go on forever and essentially results in lower income for employees because of having to pay to borrow the money for consumption purposes this eventually results in recessions/depression or inflation/hyperinflation depending on the strategy used to overcome the imbalance. With helicopter money (stimulus packages) loose credit inflation/hyperinflation results with a tightening of the monetary system recessions/depressions result. This extreme amount of unequal wealth distribution is not the case today but it is a gradual imbalance that increases over time leading to economic hardship which has happened to every country in the world at one point in time or another regardless of there monetary system.
I do not understand how you conclude that overproduction AND lack of demand will keep prices high. If excess inventories do exist, why would producers not slash prices to eliminate the surplus? I believe that you are making the classic Keynesian mistake of looking only at the demand side of the equation.
The differences in wealth had nothing to do with the Depression. In a market economy, produces always have an incentive to sell higher ammounts of product to reduce the per unit fixed costs. So produces always have incentive to get as many customers as possible including the poor. Think Walmart???? Furthermore producers want to protect their market share and keep their customers. They are very sensitive to new competitors taking even the low paying customers as they can use profits from these businesses to compete for higher paying customers. Think Kohls or Old Navy????
What really caused the Depression are things that disrupt the ability of willing suppliers and customers to perform mutually beneficial exchanges. These include in no particular order:
1. Tariffs protecting domestic suppliers from foreign competition.
2. Artifically creating credit and money causing malinvestments that fail to satisfy consumer preferences and must be liquidated to free up assets to better satisfy consumer demand.
3. Regulations that increase costs like rules that bias unions over employeers.
4. Regulations that restrict supply to keep prices high like farm price supports and what not.
China can arguably be said to be a country where still a majority of its population still works for food and shelter. And little by little (or a lot by a lot) it is growing, little by little the Chinese consumer is buying all sorts of other kinds of goods, even imported. Remember that sustainable growth may become exponential.
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I do not think prices will stay high but the problem has less to do with high prices than the cost of goods relative to wages. If a country does not buy what they produce there will be an oversupply. Credit and trade surpluses fill the void creating an equilibrium as long as they are present putting enough money into an economy that most products are sold. Once credit and trade surpluses are not there the only solution is helicopter money or deflation. Deflation and quickly rising unemployment coincide since deflation generally equals negative profits this is the oversupply part of the cycle where companies scramble to stop losses. The problem is cutting prices in half and laying off half the employees cuts the average wages in half and therefore does not solve the problem of average wage per person to average cost per product. In dire circumstances the only way to restart the economy is to dump large sums of money into the economy by some means such as the massive infrastructure works that occurred after the Great Depression.
The only reason China is growing is because they have massive exports. If their borders were closed there is no way they would grow as fast as they are without either easy credit or higher wages since if they could only afford food and shelter there would be very little demand for any product other than food and shelter. I do not know about China but in 1st world countries %10-%15 of the population can supply food and shelter for everyone this would result in a very high rate of unemployment and not the growth that China is displaying.
billott1: The differences in wealth had nothing to do with the Depression. In a market economy, produces always have an incentive to sell higher ammounts of product to reduce the per unit fixed costs. So produces always have incentive to get as many customers as possible including the poor. Think Walmart???? Furthermore producers want to protect their market share and keep their customers. They are very sensitive to new competitors taking even the low paying customers as they can use profits from these businesses to compete for higher paying customers. Think Kohls or Old Navy???? What really caused the Depression are things that disrupt the ability of willing suppliers and customers to perform mutually beneficial exchanges. These include in no particular order: 1. Tariffs protecting domestic suppliers from foreign competition. 2. Artifically creating credit and money causing malinvestments that fail to satisfy consumer preferences and must be liquidated to free up assets to better satisfy consumer demand. 3. Regulations that increase costs like rules that bias unions over employeers. 4. Regulations that restrict supply to keep prices high like farm price supports and what not.
While I agree with most of your response, is it really true about #3. I know full well that regulation increases the cost of doing business but was unions really that big of an issue back then?
slider123456:The only reason China is growing is because they have massive exports. If their borders were closed there is no way they would grow as fast as they are without either easy credit or higher wages since if they could only afford food and shelter there would be very little demand for any product other than food and shelter. I do not know about China but in 1st world countries %10-%15 of the population can supply food and shelter for everyone this would result in a very high rate of unemployment and not the growth that China is displaying.
Aren't you just giving an example of the law of association. Of course China gets richer with trade, evryone gets richer with trade. A solitary man growing all his own food and building his own shelter would be very poor. The more people he trades with the more division of labor there is and the more wealth that is created. China would not be growing as fast as it is now but it couldn't be called a 'depression.' Wouldn't it just be called poverty?
The planet is a closed system and can create wealth without having to trade with another planet. While diversity definitely helps to create wealth and prosperity through the different efficiencies it creates I am only pointing out that if the entire planet was run like China there would be no demand for diversity just food and shelter. Division of labor should be a tool used to create efficiency, diversity and prosperity not poverty. The only way to compete with a company that works long hours and consumes nothing in wages therefore creating cheap products is to work longer hours and consume even less this will only serve to spread poverty not prosperity. The only reason China is not in a depression is because of there massive exports if those were to stop a depression (barring massive credit or higher wages) would not be far behind. This is basically a house of cards based on the debt of foreign countries propping up China where ironically alot of the credit comes from. This does not seem like a very efficient system and would make much more sense if the credit remained in their own country as higher wages and possibly credit given to there citizens instead of being lent to another country so they can buy the goods they produce and they can then give more loans.
China could very easily let its currency float and instantly gain in value. That would increase overnight the real wages of their workers and they would be able to consume more & get away from poverty. Overnight. And besides they deserve it after so many years of hard labor. But the Communist Party won't let that happen...
It is interesting that it is exactly the opposite case of countries in the Americas (USA included) which love having overvalued currencies, the exact opposite situation. Is this cultural?
Even if this silly theory were true, the Fed is one of the biggest reasons why buisness is able to grow larger than they would in a free market.
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