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“The danger is not that a particular class is unfit to govern. Every class is unfit to govern.”     Lord Acton

October 8, 2008

No Repeat Of The 1930s Here!

by Brad Warbiany

Yep… Worried of a liquidity crunch similar to that in the early 1930s, there’s been quite a bit of movement in the last week. Starting with last Friday’s $700B Treasury bailout of toxic debt, followed by yesterday’s $900B+ short-term lending backstop, markets still weren’t assuaged.

So what happened? A big drop from the Fed in short-term interest rates, to nearly the lowest levels since 2003. And this isn’t just an American move, this is worldwide:

The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of one another. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there.

The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous.

So don’t worry. We’re not going to have a depression caused by lack of liquidity. We’ll have all the problems attendant with too much liquidity instead.

Want an example? As I’ve pointed out before, the unwinding of leverage is an inherently deflationary process. Gold, in its retreat from highs during July as that credit crunch started setting in, dropped from a high very near $1000/ounce to about $840 an ounce late last week. With the news of the bailout, the short-term lending program, and the rate cuts, it has since rocketed back up over $900. I have a feeling it’s headed farther up in the very near term.

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3 Comments

  1. Brad,

    Great. A hyperinflationary depression.

    Weimer Germany instead of Hoover’s America.

    Yea, that worked out well.

    Comment by Doug Mataconis — October 8, 2008 @ 12:53 pm
  2. The gold comparison is fairly obvious, but why is Platinum still at 50% it’s max a few months ago? It’s holding around $1000 vs the $2000 in july. Does it have to do with the automakers not making enough cars?

    I’m curious as to why Pt isn’t jumping.

    Pt from kitco.com http://www.kitco.com/charts/liveplatinum.html

    Comment by Paul — October 8, 2008 @ 4:09 pm
  3. [...] The New New Paulson Plan: You’ve got to fight, fight, fight! for that pooling equilibrium, No Repeat Of The 1930s Here!, What’s the Opposite of Leadership?, Bush, Paulson Set To Unveil Details Of Bank Nationalization [...]

    Pingback by The Anti-Democratic Nature of US Capitalism Is Being Exposed | Prose Before Hos — October 14, 2008 @ 10:27 am

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