Thursday, March 3, 2011

Depressions causes

Sticky prices and wages? Money? Necessary but not sufficient. Prices and wages are sticky and this causes adjustment problems during depressions, so lowering them will help, right? Yes and no. It helps to lower their real costs, not their nominal costs. Lowering their nominal costs can even make things worse as it boosts deflationary expectations and increase debt deflation. Nor would the result be equilibrium if they were perfectly flexible, but wild swings between self fulfilling deepest despair and exuberant euphoria. Sticky prices dampen reactions to fluctuations. A monetary depression can't occur without money but not many would wish to ban it to prevent them.

Depressions are examples of flee goods, seek money. The increase in money demand comes at the expense of the economy. Instead of being spent on consumption or investment, it is hoarded as fear grips the economy. Fear of risk and loss. Enlarged perceptions of risk and diminished expectations of gain. Not until they are assuaged or countered, not until those demands are satisfied can growth resume. In part the hoarding is thwarted by unemployment, forcibly turning savers into spenders. In part people doing what they must to survive. In part austerity fatigue. In main by the monetary authority persuading it has the power and the will to reverse it by providing the money needed.