Booms & Depressions: Some First Principles Paperback – July 8, 2010
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About the Author
- Publisher : CreateSpace Independent Publishing Platform (July 8, 2010)
- Language : English
- Paperback : 260 pages
- ISBN-10 : 1453697640
- ISBN-13 : 978-1453697641
- Item Weight : 1.01 pounds
- Dimensions : 6 x 0.65 x 9 inches
Best Sellers Rank:
#1,109,546 in Books (See Top 100 in Books)
- #896 in Money & Monetary Policy (Books)
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Most people think governments create our money but this is not how it works, though Fisher advocates restoration of the money issuing function to governments as an essential part of his solution. Modern money is created by private banks as accounting entries. When a bank makes a loan it does so by adding a deposit to the borrower's account balance. Bank account balances function as "money", and almost all of our money today is nothing other than these numbers in computers. In Fisher's era the entries were handwritten or typed and the "money" was transferred by checks drawn on these deposit balances, or by converting part of your deposit balance to "cash" at the teller's window. Banks create our money supply by making deposits, and all deposits are offset by repayment obligations, "debts", on bank balance sheets.
During the irrational exuberance preceding a crash, borrowers are anxious to take out loans to purchase "can't lose" investments like stocks in the 1920s or real estate in the 2000s; and bankers are happy to accommodate them by creating loans because banks earn their money by charging interest on loans. Bank loans increase the money supply and in the runup phase banks are creating more money than the economy can absorb at current prices so we get asset price inflation in stocks or real estate or whatever is the 'hot' asset class. Eventually prices get so high that buyers experience sticker shock or seriously exceed their repayment ability and stop borrowing money and stop buying. When the loans-driven upward pressure on prices stops the prices flatten then start falling as borrowers try to "cash out" at high prices so they can repay their loans for fear of getting stuck owing big money on an "underwater" investment. Greed turns to fear, buying pressure turns to selling pressure, and asset prices are driven down. Loan defaults and repayments reduce the money supply, and this is the "debt deflation" Fisher is writing about in his "Debt-Deflation Theory of Great Depressions", which is also the thesis of his "Booms and Depressions" book. Debt expansion inflates the boom, debt deflation drives toward depression.
Fisher's writing is entertaining and historically interesting and he is able to explain his subject, money, clearly so that you don't have to be a macroeconomist to understand the money system that he is accurately describing. Our bank-debt money system hasn't changed since Fisher's time. Anyone who wants to understand money should read some Fisher.
The material in this work is not limited to a study of the early Great Depression but also includes an analysis of the general cyclical pattern seen since the Industrial Revolution. His groundbreaking work on monetarism provides the basis for his nine critical events in debt-deflation:
1) Debt liquidation and distress selling.
2) Contraction of the money supply as bank loans are paid off.
3) A fall in the level of asset prices.
4) A still greater fall in the net worth of businesses, precipitating bankruptcies.
5) A fall in profits.
6) A reduction in output, in trade, and in employment.
7) Pessimism and loss of confidence.
8) Hoarding of money.
9) A fall in nominal interest rates and a rise in deflation-adjusted interest rates.
All, of course, resulting in the near total collapse of the world economy. His theory directly links Marx and Keynes to Minsky and Keen, and their opposition to the Neo-classical synthesis. While Fisher clearly - like the Hoover administration - underestimated the Herculean task of the recovery he did recognize many of the key institutions requiring funding and establishment for success.
The book is both a great historical document and a compelling economic text still at the center of the field.