The Peak production of Silver/Gold has passed us by. Hurry hoard that silverware.

Hat tip to Roger Nusbaum. As you can see I had added Roger to my Blogroll.
Recently Roger was talking about gold and of course he takes a joke well when I said that peak gold production had already passed us by and that we should hoard some gold. Along that same thread, today I wanted to talk about some of the issues that Roger brought up in the above link.

So with no further ado, the question I want to try and answer is:

The idea behind this numberless assertion is that silver gets consumed where gold does not.

One link that agrees with that conclusion is Financial Sense Online.

A little information about silver:

Demand for silver is built on three main pillars; industrial and decorative uses, photography and jewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption.

While the article is very interesting on the various uses of silver that either is not recoverable or is lost by a percentage in the process, but I disagree with the last sentence of "There is no substitute for silver." Being an economist, we always assume that there are substitutes for nearly everything. It is only a matter of price or value that a substitute will cost. Other than industrial uses and health uses, I would say all have easy substitutes right now.

One way societies have adjusted the consumption of both silver and gold was the transition from metal currencies to paper (25 percent linen and 75 percent cotton). At the Silver Stock Report it states:

Silver is cheap because silver is not being used as money anywhere in the world. Reduced demand for silver money causes a reduced price. This trend has taken over 100 years to fully develop.

The second trend is the age of electronics that began at the end of World War II, and has now lasted 60 years. Annual consumption of silver exploded upwards, about 10 times greater than before, and an average person in a first world nation consumes seven tenths of an ounce of silver per year. This has resulted in the consumption of about 90% of all the silver in the world, during a time when the world was reducing demand for silver as money.

The third trend is the abnormally large growth, in every nation of the world, of paper money not backed by any precious metal.

Yes I don't believe the conspiracy theories and that the system is built on fraud, but it had some points about the transition mentioned above.

And this should be interesting for investors if true:

Current monetary demand for silver is zero. Investment demand stands at a tiny 25 million oz. per year, out of 600 to 700 million oz. produced per year. I believe that a single billionaire could push up the price of silver to well over $25/oz. with less than $1 billion dollars of buying power.

In contrast, today, M3 www.federalreserve.gov/releases/h6/Current/ is 9567 billion. Divided by $422/oz., that paper should be worth 22 billion oz. of gold. The gold value is shrinking!

As you all should be aware, what value is a paper bond paying 5% if inflation is at 10% per year? It's a guaranteed loss of 5% per year! The government lies about inflation rates!

I want to do a post on M3, but for now let me say that inflation is not affected by M3 or to a lesser degree M2. M1 that is the transaction demand for money, meaning that consumers only want to hold the amount of M1 that will be used for expected purchases.

For example, I calculated in the original essay that at current production and consumption rates for the year 2000, we had only enough ore remaining to supply mining operations for another 16 years. With updated numbers, that number has dropped to near 13 years. If those numbers do not impress you, I think they should. Why you ask? When any scarce resource runs out or runs low many things happen. First of all the price of the resource rises (sometimes exponentially). Everyone scrambles to find new sources for the resource or substitutes for the resource. Almost surely, any new sources of the resource are harder to obtain and certainly more costly due to many factors too numerous to discuss here. In the case of gold, there are few substitutes and the ones available will also skyrocket in price. So, that is why all of us should be interested in this situation.

Yes some of the effects he talks about is true, but more than likely the market will adjust by the fact that the needs for gold will go down. As the price goes up then less gold will be demanded. Central banks can also sell to the market and if the price skyrockets I will melt my gold ring!

I will briefly update the supply/demand numbers that are used to determine the 13-year life of existing ores. In the U.S. Geological Survey report on gold in 2002, they have the following to say on the above ground gold supply. "Of an estimated 140,000 tons of gold ever mined (Worldwide), about 15% is thought to have been lost, used in dissipative industrial uses, or otherwise unrecoverable or unaccounted for. Of the remaining 120,000 tons, an estimated 33,000 tons is in official stocks held by central banks and about 87,000 tons is privately held as coin, bullion, and jewelry." It is the 33,000 tons of central bank gold that has helped create a problem. On first glance, having 33,000 tons of gold sitting in central bank vaults, approximately 24% of all the gold mined from the dawn of civilization, appears like a great overhang of supply to the present market.

I will assume the numbers are close enough.

We now need to review the recent supply/demand numbers for gold. Turning to the USGS official publications, we find they list worldwide mine production for gold at 2,550 tons in 2000, and 2,530 tons in 2001. The average for these two years is 2,540 tons, so we will use this figure in our analysis. On the demand side, according to the WGC's latest publication, the 2000 usage was 3,794 tons and 2001 3732 tons. We should note that the WGC states in the literature that these numbers are not complete; because they only include statistics from countries they feel have reliable numbers. An estimate for the total world demand would be at least 10% higher than these numbers. In this analysis, we will use a conservative number for world usage of 3,760 tons; fully realizing this figure is probably low by several hundred tons. When we compare these numbers, 2,540 tons of supply and 3,760 tons of demand, we come up with a deficit of 1,220 tons annually (Other sources project this deficit to be much larger and we will discuss that aspect later). This deficit has been covered from central bank holdings.

These numbers seem like they are real enough for analysis.

How much gold remains unmined in the crust of the earth for future mining operations? For this number we go again to the USGS. Their most recent official publication states that there remains only 50,000 tons of gold available for future recovery (see Note 1 below). This should turn on a light bulb in our consciousness. Let's examine why!

We previously mentioned that from the dawn of civilization only 140,000 tons of gold has been mined. Of this amount, only about 120,000 tons remain. We just learned that from now until the end of time we have only 50,000 more tons of gold available. That is a frightening revelation. We are consuming gold at the rate of 3,760 tons per year. That means we only have about 13 years of gold available until we run out of gold to mine (that number was 16 in my original essay).

So only 13 short years more of gold!

For a more reliable and current place for information on gold World Gold
Council. Nearly 88% of gold use is for jewelry/investments that could use alternatives or reduced consumption. But the 12% is still considered consumption for industrial and dental that is not recoverable.

The Daily Kos articles (Silver ETF Denied by the SEC - Shortage Confirmed and Gold hits New ALL-TIME HIGH €352 per oz had little value except to state that there are naked short positions in the market. And my supervisor has said that there are naked short sells in the stock markets. But I can not say too much about this.

From the US Commodity Futures Trading Commission, which has some responses about short selling.

Tangible usable assets (commodities) will always have some value. My last point I would like to make is that any market that has some violatility can earn money but over the long run commodities tend to stay the same price or increase less than inflation.

Environmental Scientist: Dr. Paul Ehrlich
Perhaps Ehrlich's best known blunder is a 1980 bet he made with University of Maryland economist Julian Simon. Dr. Simon, who believes that human ingenuity holds the answers to population growth problems, asserted that if Ehrlich were correct and the world truly was heading toward an era of scarcity, then the price of various commodities would rise over time. Simon predicted that prices would fall instead and challenged Ehrlich to pick any commodity and any future date to illustrate his point. Ehrlich accepted the challenge: In October 1980, he purchased $1,000 worth of five metals ($200 each) -- tin, tungsten, copper, nickel and chrome. Ehrlich bet that if the combined value of all five metals he purchased was higher in 1990, Simon would have to pay him the difference. If the prices turned out to be lower, Ehrlich would pay Simon the difference. Ten years later, Ehrlich sent Simon a check for $576 -- all five metals had fallen in price.

So unlike equities that over time tend to earn 10-12% per year commodities tend to earn 0% or negative rates of return.

PS: From Rogers comments "Something I read said that demand from photography is is waning because of digital cameras. I can't cite numbers but it makes intuitive sense."

As the world’s technology advances, the consumption of silver advances. Today photography consumes most of the silver, tomorrow it will be electronics and other new technologies that may rival photography in their demand. Two areas that have recently been reported are superconductivity and the use of silver as a replacement for arsenic as a wood preservative.Reflecting on Silver

And be sure to check out these sites:
The Silver Story
Despite digital photos, silver is looking good
As far a silver for photography, it does not look like the demand will decrease at least by much. But with human ingenuity we have little to worry about in the long run. Sorry for such a vague answer.
Now I will admit that on a micro level that silver consumption is outpacing gold, but on a macroeconomic level I still hold that silver will not even beat inflation for the next 10 to 20 years or ever on the long term basis.


Links:
Dr. Paul Ehrlich

Uses of Silver

M3? and Silver Conspiracy

Daily Kos???

GOLD OUTLOOK from 2000 to 2020 - REVISED

Silver Could Have Even More Upside Potential Than Gold

Genocide and the West./Lancet

I want to make one observation at this time. This endeavor for writing a blog has been more of a challenge than I originally thought. But any venture that challenges yourself must be worthwhile.

This challenge has been to write distinctly and to explain my position that is easy to understand and grasp the concepts. Many blogs either put one line comments, so it is just like republishing the links. Others go into such detail that you get lost in the direction of what the author wants to say. Today I want to look at two posts by "Lenin". He likes to put a plethora of links to prove how smart he is. But again this is overload for a reader to expect to read 25 documents to understand what the author is trying to say.

The link above is the first article I want to discuss.

And about him we could say that he presided over a regime which killed or disappeared, on a widely circulated estimate by Human Rights Watch, up to 300,000 people over 24 years.

Although I think that numbers are often inflated to make your case more palatable, in this case the 300,000 does not include the unnecessary wars that Saddam instigated, killing over 1 million.

As of October 2004, 100,000 on a conservative estimate.
...
And the escalation in air strikes which are taking a toll on civilians, the torture, the deployment of death squads with cordless drills. Perhaps, now, as many as 500,000 dead.

The first sentence is the first mention of the Lancet report(unamed), but puts in "conservative estimate" that is not only false but does not explain about "excessive deaths" vs deaths from violent actions. Which then he implies (by links) the deaths are from air strikes, and give no proof of the 500,000 deaths. Iraqi Body Count post by me shows that yes at the beginning of the war, deaths by air strikes was quit high but as a percentage of deaths is continually going down. The last I saw it showed 38 deaths by insurgents to every 1/2 death by the coalition.

The sanctions were therefore imposed with some foreknowledge of their likely effects. In 1995, researchers for the FAO wrote that as a result of the application of sanctions, 576,000 children had died. It was shortly after this, on CBS's 60 Minutes programme, that Madeleine Albright made her cold statement that "the price, we think, is worth it". This figure may in fact have been an overestimate at the time, but the reaction bears examination: Albright showed no surprise at the figures, and in fact managed to make a rather rapid accommodation to the apparent scale of catastrophe. Subsequent studies by Richard Garfield suggested that between 1990 and 1998, a total of 227,000 Iraqi children perished as a result of the sanctions. Combining his research with that by Mohammed Ali and Iqbal Shah for the Lancet, he calculated that as of 2000, the figure was 350,000 excess deaths among children under five years old. This was a remarkable infanticide. As Garfield notes "the (re) is almost no documented case of rising mortality for children under five years in the modern world".

Now I get into the heart of the matter on the deaths of Iraqi children. My first point is how can a Secretary of State say such heartless and cruel statements and get away with it? Even if it is true that she felt the deaths were worth it in the long run, how can she be so cold and heartless?

Here's a curious thing, however. According to UNICEF, between 1999 and 2002, there was some mild improvement in child mortality - from 130 per thousand live births to 125 per thousand. However, "since the war, there are several indications that under-five mortality continued to rise".

So these numbers are going to be important in the discussion later on, but for now let me look at some other related numbers...

In the late 1980s - before sanctions were imposed in 1990, and before the 1991 Gulf War - the mortality rate for Iraqi children was about 50 per 1,000 live births. By 1994 the rate had nearly doubled, to just less than 90. By 1999, it had increased again to nearly 130 - 13% of Iraqi children were dying before their fifth birthday.
IRAQI CHILD DEATHS

And...

During the 1990s, the greatest increases in child mortality occurred in southern and central Iraq, where under-five mortality rose from 56 to 131 per 1,000 live births.

Over the same period, in the three northern governorates, the under-five mortality rate fell from 80 to 72 per 1,000 live births, UNICEF said.

While some indications showed improvement in child health between 1999 and 2002, the children's agency believed that child mortality was not getting any better since the conflict started in 2003 and that the death rate among children was rising.

UNICEF estimates that there are about 6,880 deaths of children under the age of five every year in Iraq, with an under-fives mortality rate of 125 per 1,000 live births. "Little progress on child mortality"

Bringing Out the Dead is the second blog article I will discuss:

There has been the report for Johns Hopkins University, published in the Lancet, which measured excess deaths for the eighteen months from April 2003.

As Lenin quoted:

It goes on to corroborate the Lancet’s findings on pre-war infant mortality, as I hinted at earlier:

Which he quoted the following:

Some of the critics of the Lancet study attacked it because the Lancet study found an infant mortality rate in the year before the war of 29 per 1000 births, arguing that was contradicted by a UNICEF estimate of 107 … The ILCS survey estimate for 2002 is 32. (See Figure 26.)

Thus deaths caused by the no-fly war and sanctions during the 90's under the Clinton Adminstation was calculated at 130 to 125 (and was going up before the start of the Iraqi War (2003)) deaths per 1000 live births, but when Lancet counted the the deaths per 1000 of children before the war it counted it as 29. A factor of 4 difference between the two numbers to determine some important implications about US policies.
It was a good liberal way to make the US look bad at both continueing the air war and the war to overthrow Saddam. But this is a dilemna that the world will continue to face. Imposing sanctions harm the people inside the country that is doing bad things to other countries or to their own citizens. But overthrowing a tyrant will also cause innocent lives in the war. And if we provide assitance to any authoritarian government then the tyrants are the ones that benefit from the aid and not much goes to the people that need the help, and in the end hurts the people we want to help more than if we imposed the sanctions or removed the tyrants. War and assissinations are not easily accepted internationally or nationally, and who decides what countries should have regime change? Of course there will always be someone that thinks the US should have regime change (Castro).

Lastly I want to bring up two posts by Dr. R.J. Rummel at Iraqi Civilians Killed—Revisited and How Many Iraqi Civilians Killed?.

“. . . household interview data do not show evidence of widespread wrongdoing on the part of individual soldiers on the ground. To the contrary, only three of 61 incidents (5%) involved coalition soldiers (all reported to be American by the respondents) killing Iraqis with small arms fire. In one of the three cases, the 56-year-old man killed might have been a combatant. In a second case, a 72-year-old man was shot at a checkpoint. In the third, an armed guard was mistaken for a combatant and shot during a skirmish. In the latter two cases, American soldiers apologized to the families of the decedents for the killings, indicating a clear understanding of the adverse consequences of their use of force. The remaining 58 killings (all attributed to US forces by interviewees) were caused by helicopter gun ships, rockets, or other forms of aerial weaponry.”

Even though:

“When violent deaths were attributed to a faction in the conflict or to criminal forces, no further investigation into the death was made to respect the privacy of the family and for the safety of the interviewers.” Then, how did the fear of a family about the interviewees (when life is at stake, can one really trust what an interviewer promises about secrecy) bias the results.

So little evidence of coalition wrongdoing, but according to the news they paint a different picture.
Links:
Bringing Out the Dead-lenin

Democratic Peace/ Iraqi Civilians Killed—Revisited

How Many Iraqi Civilians Killed?

DDT, Global Strategies, and a Malaria Control Crisis in South America

Folk Beliefs, Locke, and Marx

Timothy Garton Ash wrote

"The cold moral calculus of reckoning victim numbers against each other always feels inhuman: more than 100,000 Kurds killed by Saddam against perhaps as many as 10,000 Iraqi civilian casualties in this war, past v present, actual v potential, gulag v holocaust."

Staged Part II

You know how Michelle Malkin claims in her book Unhinged: Exposing Liberals Gone Wild that "it's conservatives themselves who blow the whistle on their bad boys and go after the real extremism on their side of the aisle" and that "conservatives zealously police their own ranks to exclude extremists and conspiracy theories"? Orcinus

So even though this is petty complaining by both sides. There is some difference between when the liberals put bullseyes on the president than a outline of an imaginary animal. The fake donkey has even the stars and colors of a real flag where the republican stars are replaced by $ signs.

Cafe Express sells to either side or any side that customers want. Anyone can create the items in the catalog and get royalty for the items that sell. This is one reason there is over 308,000 items for anti-Bush paraphernalia. So it really is no reason to be upset over either over the top items.

But it was so important in the left wings that Faultline
and Livejournal felt it was important enough to write about it.

So is the worse the Republicans have done is to target practice at a cutout of a fake animal?



But for some real hatred at CafeExpress:

From Wizard of Whimsy.

Doctor Admits Lancet study is Fiction/Nature

The first article I want to address is located for premium members of news@nature.com
I think that most of us have heard about Woo Suk Hwang from South Korea. This one is in regard to:

A Norweigian researcher dreamed up the lives and lifestyles of some 900 people - and used them in a study on cancer. Then, last October Jon Sudbo had his results published in the Lancet.

The discovery of this deceptive scheme was discovered by accident. Camille Stoltenberg was reading the report and it refers to the Cohort of Norway that she was responsible.

The blatant nature of Sudbo fiction emphasizes questions already being asked about effectivemess of peer review, even in top journals, and about who should be resposible for cathing the fraud.

So what does Lancet think about these two recent developements...

Richard Horton , editor of the Lancet, insists his journal is not at fault. "This is all so similar to the Hwang thing that we have just been through," he says wearily. "Peer review is a great system for detecting badly done research, but if you have an investigator determined to fabricate an entire study, it is not possible to pick it up." The mechanism of peer review at his journal is currently being examined as part of the largest study ever conducted into the process.

Well if there really is no way to find a complete fraudalent study, then the system needs to be changed!

"Journals scolded for slack disclosure rules" article talks about conflict of interests in studies reported on and patents applied for.

Should the patents be granted, the scientists could make a fortune from the techniques. But no disclosure of these potential conflicts of financial interest appeared in either of the Science papers, nor in a 2005 Nature paper about a cloned dog that also bears both men's names.

So how big is the problem?

Critics say the Hwang debacle has exposed general shortcomings in the journals' conflict-of-interest policies. In July 2004, the Center for Science in the Public Interest released a report on papers in four journals over three months. The report found that authors had failed to disclose conflicts of interest in 8% of the articles; a finding that spurred several journals, including Environmental Health Perspectives, to alter their policies.

Links:
Communists

Journals scolded for slack disclosure rules

Genocide and the West. posted by lenin

Kennedy Family-the new Don Quixotes of the USA

I can almost hear Robert F. Kennedy Jr. sobbing when he wrote: Attack Polluters, Not Environmental Leaders. So why do the Kennedys oppose the wind farms off the Cape of Nantucket Sound? I think the article "The Wind and the Willful" basically covers the excuses and why the excuses are hollow.

But one point I read about before was that the spot that was choosen for the wind farm was because a small strip of sea is controlled by the Federal Government. As such the Bush Administration could push through the permit process and less obstacles to approval.

P.S.:
I came accross the article A Turbine in Yellowstone? which Kennedy also opposed but the article talks about cell towers being put up and not Turbines. I just have to say that cell towers and the communication that is transmitted saves lives, especially in a wilderness area.

Their picture:


And the reality of cell towers when needed:

From Cell Towers and More Cell Towers.


Links:
And another editorial by ROBERT F. KENNEDY Jr.:
An Ill Wind Off Cape Cod

NYTimes' Tierney on Kennedys, wind farm subs

Summary of Posts

I think it would be nice to have a summary of the posts to help me find topics and to show some topics I have covered. And do not worry that it will not start with a complete listing. Without further ado...

1-25-06 Lancet
How Lenin uses whatever data that suits his view of the world.

1-24-06 Peak Production of Silver/Gold
Inspired by Roger and talks about siver and gold not being good long term investments.

1-22-06 Staged Part II
So is the worse the Republicans have done is to target practice at a cutout of a fake animal?

1-20-2006 Doctors Admits Lancet Study is Fiction brings up some minor issues about publishing reports. This is to lay the ground work for some other points in the next post.

1-19-2006Kennedy Family/Don Quixotes of the USA
A short post that links to two editorials by Robert F. Kennedy Jr. that he tries to explain why he opposes wind mills near his families vineyards. The other link is to gist that shoots down most of Robert's reasons.

The Great Depression
1-14-2006 The Great Depression Part 2
Psuedo Economist Explains The Great Depression: actually this is the first of two parts and the first one is history of how the problems started.


Government Regulations-Free Markets
1-03-2006 Why Governments Cafe Standards Should be Repealed

Alaska/ANWR:
12-23-05 Should We Bugged About Not Drilling in ANWR? This is an obvious answer to me. Yes drill in ANWR!

12-23-05 Shallow Gas Coalbed Methane/Property Rights: an alternative use of property rights through a process of bidding to get the most optimal decisions.

GPI/GDP
12-20-05GDP Myth Why Growth isn't Always a Good Thing
The last of the GPI/GDP analysis, that just has some points on three articles, including one by Thom Hartman.

12-19-2005 GPI Part Four

12-6-2006 GDP/GPI Part Deuce
The second entry on GDP/GPI discussions.

12-03-2005GDP/GPI (Genuine Progress Indicator
Introduction to the discussion on GDP/GPI idexes.

12-18-05Blair: Globalization
A summary of 3 articles. First Blair and how globalization helps society by being a force from the choices of consumers. Second dispelling the myth that terrorists are downtrodded. Third, George Will's take on environmentalism/collectivism and drilling in ANWR.

12-18-05 Crazy French

12-17-2005 GPI part 3
A discussion on the failings of the GDP, point by point of the proponents of GDP criticism and my responses for each point.

12-16-2005 Santa's Terrorist/How the left is Wacky
An interview with Sam Seder on CNN and how his responses are wacky.

12-14-2005 The most Interesting conversations on Thom Hartman's Board

12-12-2005 Bush Speech and the Resistance wants us to Stay
Press release and analysis of President's speech before he gave it and the Iraqi Resistance wants us to stay with 88% wanting the coalition to stay at least for the mean time.

12-10-2005 Mugabe no Crisis, UN lying/Mugabe King of the losers
Just too funny that Mugabe said many other African countries were worse off than his. Who wants that to be their only thing to be proud of?

12-09-2005 Chinese and Kelo Decision
The Chinese also have concerns about property rights, just as the US does. But the democracy of the USA allows chances for peaceful settlement of rights, where the Chinese citizens felt they had no choice but to take up arms.

12-09-2005 Corruption Trap
How young democracies have politicians with a credibility gap.

12-08-2005 Ahmakinejad Remove Israel to Europe
More stange/crazy stuff from Mahmoud Ahmadinejad.

12-08-2006Pact Signed for Prototype of Coal Plant
A zero emission coal plant has no positive response from environmentalists.



More later...

The Great Depression Part 2.

To understand why the Great Depression happened we should take a quick look at what the prevailing philosophy of economics was at the time (Classical Economics). The main point of Classical economics is that the supply curve of an economy always tends toward full employment of labor and capital. The money supply and thus aggregate demand only control the price level (inflation) and can not change the output level of the economy. And yes many theories also believe as such in the long-run but see that the transition can be long especially considering sticky wages (Sticky).

Thus since the government had little control over the economy (monetary or fiscal controls) it was best to let the self-adjusting tendencies to correct the economy than have destabilizing government policies.

Before progressing to Keynes, let me address the monetarist theories. The monetarists took some of the same philosophies of classicalist but expanded and showed that a stable money supply is best for long term growth and stability. The stable money supply was defined as constant growth rate for the money stock (M1, M2, M3) no matter what shocks to the system there may be. So set it on auto pilot and watch the economy grow.

Monetarist propositions are:
1. The supply of money is the dominant influence on nominal income.
2. In the long run, the influence of money is primarily on the price level and other nominal magnitudes. In the long run, real variables, such as real output and employment, are determined by real, not monetary factors.
3. In the short run, the supply of money does influence real variables. Money is the dominant factor causing cyclical movements in output and employment.
4. The private sector of the economy is inherently stable. Instability in the economy is primarily the result of government policies.

Even though at first the Federal Reserve tried to add liquidity to the banking sector in the end they let the money supply decline. This was shown in the last post and link and the fact M1 declined by 26.5% and M2 by 33.3% between the dates 1929 to 1933.

Without getting into the minutiae of Keynes let me explain some basic theory. First we need to start with identities of what factors drive the economy.
Y=C+I(r)+G
S+T=I(r)+G
So the GDP(Y) is made up of Consumption, realized Investments, and Government spending.
Savings plus Taxes equal realized Investments and Government spending.
In the classical and the monetarist versions, T=G since no deficit or surplus of the government budget. Then S=I(r) tends toward equilibrium in the long run. A shortage of money for lending causes the interest rates to rise until an increase in savings to correspond for the increases in Investment spending.

But to repeat Keynes:

this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

So now one problem with S=I is that if interest rates are too low then a rise in interest rates will not change the marginal propensity to save, which is also referred to as Liquidity Trap.


So what does this all mean? What caused the Great Depression?
1. First and foremost was the drop in money stock. Which actually led to deflation, causing money to increase in value relative to tangible assets or products? Why put into savings when the rates were too low?
2. No FDIC to insure deposits. And the central bank not lending liquidity when the system needed it most, thus it caused a loss of confidence in the banking system as a whole. As was shown in bank runs and the number of banks that became insolvent and thus bankruptcy was the only choice.
3. In a simplistic way Savings did not equal realized Investments. Expectations of the future based on what had happened before dictated that consumption was low and savings was mostly in cash. Banks that had excess reserves did not lend out as much because of fear of run on banks and liquidity problems. And lastly even with low interest rates businesses failed to increase investments based on expectations. Since there was some unintended investments (increased levels of inventory at first), latter periods showed less willingness to increase investments.
4. Fiscal policies of the US government exasperated the problem. Increasing the marginal tax rates during the depression:

Marginal income tax rates were raised from 1.5% to 4% at the low end and from 25% to 63% at the top of the scale. A huge tax increase by any measure.

5. So going back to our identities. If S+T=I(r)+G and S does not equal I(r), then the government could increase spending and/or reduce taxes. And this would be done by either borrowing from the public, inflows of capital, or from the Federal Reserve Board monetarizing the debt. Luckily we have many such safeguards in place through unemployment insurance and marginal tax rates.
6. Not that I agree with this statement:

”The over-stimulated economic euphoria of the 1920s.”

but wanted to address it anyway. The problem was not over-stimulation per se, although it did show that maybe more things could have been done, the real problem is after seeing the beginning of the collapse that the Government (Fiscal, Monetary policies) look for ways to let the economy change in a more gradual way. Sudden shocks whether deserved or not is of little consequence when unemployment is 25%.
7. "The sudden rise of global protectionism leading to the collapse of world trade." I don't have time to explain all the vast benefits of free trade here. But even if Jason was correct that as percentage of our GDP went from 6% to 2% percent, which can have drastic effects on an economy in the short run. Since over the long run exports(X)=(I)mports, this could mean a reduction in employment of industries that export of 4% of the total employment. In today’s terms it would mean 9% UE vs. the current 5%. That would be considered a major recession if not depression in today’s terms.
Also since trade was costly to transport and thus was not as much as today, then even if a small percentage of the economy, it would be of vital importance to the economy. Either products that can not be produced here with little substitutes or that had extraordinarily high cost to produce here.
Even today oil imports are only over 1% of GDP (April 05). Oil Imports as % of GDP

But can anyone guess the problems we would have if the oil imports stopped completely without warning. Of course no one in the world wants this other than terrorists.

So I am sure that I missed some points, but hopefully it was of interest to you.

Links:
Index of Macroeconomic Topics

P.S.: Hank had brought up some interesting points.
One of the reasons for having active monetary and fiscal policies is to try and reduce destructive business cycles. One problem with Keynesian policies is that politicians only see that the cup is half full. They always like the fiscal stimulus but fail to use fiscal policy as a dampening effect on the economy. During the late 90's (blatant hindsight) Clinton and Congress should have raised taxes. Which taxes is a major consideration, but still important to consider the possible tax increases.

Luckily Monetary policy is more divorced from politics and as such you can see the Fed has been raising rates quit a bit to cool the possibility of inflation.

I would say that the New Deal had positive effects but was sharply reduced in 1937 to cause another recession. Of course the degree of improvement can never be determined since monetary policy had a lot of influence to get us out of the Great Depression also.

And no you are not off, Hank.

A Psuedo Economist explains the Great Depression.

Let me first start with a little history. (1)
Pre-1929: The over-stimulated economic euphoria of the 1920s. (2)
Low margin requirements (10%) with low interest of less than 1% created speculation of continuous prosperity. Then the stock market collapsed, taking many people that owned stocks on margin to loose not only principle but to be negative in their assets.




1929-1933: Monetary Collapse caused by the Federal Reserve allowing the money stock (M1) to decline by 30%.



1930: The Demise of Trade manifested through the Smoot-Hawley Tariff Act created unemployment in the USA. It was a case of everyone wanting to promote their exports but not allowing imports and thus international trade dropped considerably during this period.




1932: “Marginal income tax rates were raised from 1.5% to 4% at the low end and from 25% to 63% at the top of the scale. A huge tax increase by any measure.” (2)

1933: Launching of the New Deal along with increasing the money supply and more regulation of security markets and deposit insurance initiated.
One of the economic advisors stated “This is the end of Western civilization” in reference to the US leaving the gold standard. But this allowed the US to control the money supply more closely.

1937-1938: Restrictive Monetary and Fiscal Policies created a jump in unemployment from 14.3% to 19.1. “The Federal Reserve tightened monetary policy by doubling the required reserve ratios on deposits.” (1, page 643) Fiscal policy was implemented by raising taxes and spending reductions.


1. Richard T. Froyen, 1986 Macroeconomics, Second Edition, Macmillan Publishing Company
2. What Caused the Great Depression of the 1930's?

Why the Government's CAFE Standards for Fuel Efficiency Should Be Repealed, not Increased

I think that the above link has such good information, I am not sure if I can add to this study, but will try.
HOW CAFE INCREASES RISKS TO MOTORISTS

A 1999 USA TODAY analysis of crash data and estimates from the National Highway Traffic Safety Administration and the Insurance Institute for Highway Safety found that, in the years since CAFE standards were mandated under the Energy Policy and Conservation Act of 1975, about 46,000 people have died in crashes that they would have survived if they had been traveling in bigger, heavier cars. This translates into 7,700 deaths for every mile per gallon gained by the standards.

Being an economist, I may be cold but no matter what level of protection is provided there is always a payoff in lives vs. costs. The only question is if these costs outweigh any benefit derived from CAFE standards.
So based on the standard of:

The standard for passenger cars is currently 27.5 miles per gallon; for light trucks, it is 20.7 mpg.

the incentive is to produce lighter trucks and SUV's than larger cars that would be more fuel efficient but still have better gas mileage and be safer. So:

according to Graham, government studies have found that making small cars heavier has seven times the safety benefit than making light trucks lighter.

WHY CAFE FAILS TO REDUCE CONSUMPTION

As the author of The Wall Street Journal article notes, "[s]ince 1970, the United States has made cars almost 50% more efficient; in that period of time, the average number of miles a person drives has doubled."

The article refers to the "rebound effect" as the effect that after a short period of time, that lower costs of one factor will lead to increasing the use of that factor of production. In economic terms it is the Marginal Productivity of Capital(MPC) equals the MP of Labor.

The budget effect of changes in the costs of budget items will also alter consumption patterns. Of course not all people will change behaviors like what I describe but enough to make a difference in the level of consumption. The theory would be that households allocate a certain amount in their budgets to transportation, food, housing, entertainment, etc. As one budget line gets either more or less expensive then households adjust the amount of the consumption level rather than reallocate and adjust the budget lines. For example, when transportation costs are lowered then households would consume more units of this budget line, and when costs rose households will try to adjust other budget lines in the short run but would want to adjust consumption down in that budget line to reflect higher costs.

WHY CAFE STANDARDS DO NOT IMPROVE THE ENVIRONMENT
If the above assumptions are true then this statement is true just on the fact of increased consumption. And by switching to lighter materials will lead to higher amounts of some pollutants.

Nor will increasing CAFE standards halt the alleged problem of "global warming." Cars and light trucks subject to fuel economy standards make up only 1.5 percent of all global man-made greenhouse gas emissions. According to data published in 1991 by the Office of Technology Assessment,

A 40 percent increase in fuel economy standards would reduce greenhouse emissions by only about 0.5 percent, even under the most optimistic assumptions.

Another good link: These People Need Slapping.

People who want a big vehicle (for whatever reason) cannot get a large one built on a car frame, only on a truck frame, for in this manner the manufacturers can meet the limits for the fleet they sell. But something built on a truck chassis is less efficient in its fuel consumption than one built on a car chassis.

CAFE actually decreases the fuel efficiency of the American vehicle fleet by pushing people into buying the inherently less efficient truck based machines.

One small market that I have watched is the station wagon market and how after CAFE standards no manufacturer wanted to sell these.

CARS VERSUS LIGHT TRUCKS
Many of these units, however, were minivans—which are classified as light trucks—that replaced station wagons for family transportation.

And this is really funny: Inexpensive Program Killed Because it Threatened Country Squire
This:

Was threatened by:

In those days, Carrousel was a $67 million dollar program. Petty cash to a big car company like GM or Ford or Chrysler. But Carrousel was never to see the light of day. It died when Ford's research showed it would cannibalize heavily from the Country Squire station wagon then a Ford family jewel. Threatening the Country Squire was verboten and Carrousel (and MiniMax - not so much of a threat) was shelved only to be seen a decade later behind Ford's Truck Engineering building resting on four flat tires with its paint peeling.

There are also all the mandated pollution control technologies.....Honda has a lean burn engine that meets the emission standards without any further modification, no feeding exhaust back into the engine and so on. But because the use of such technology is mandated, that engine must have them, reducing the fuel efficiency. As, of course, such technology reduces the fuel efficiency of all American cars and trucks.

This is interesting since if the greatest threat to mankind is greenhouse gases then we should scrap the pollution control measures (except for specific areas) and go for energy efficiency at all costs. Including if we pollute the air with smog, this will cause a cooling effect on the earth by blocking the sunlight.

And Tim sums it up pretty well:

The real answer is to scrap the CAFE standards, scrap the mandated technology solutions, allow any technology that meets emissions standards to be used and whack $1 on the federal gasoline tax.

PS (4-7-06): CAFE rule: sound and fury, signifying nothing

Through the UCS “Extreme Auto Makeover” campaign, and other alerts from our colleague organizations, over 100,000 Americans took the time out to weigh in on the administration’s proposed rule and ask for real improvements that would have genuinely addressed America’s “oil addiction” problem to which the President himself admitted. The result: even with the projected steep and sustained increase in oil prices from the Energy Information Administration, NHTSA found a way to tweak their own assumptions in order to keep the final rule an almost exact carbon copy of their flawed proposal.

Of course, the administration is pushing this squandered opportunity as an historic achievement. It is vital that Congress realizes that the public is not buying the President’s spin, and understands the depth of disappointment Americans have for this side-stepping of responsibility at such a crucial time. The expectation for Congress must now be clear—step up and fill the oil security void left by the administration’s rule, or be complicit with Bush’s tough talk--no action approach. If you want to vent your spleen to your Senators and Representative, click here to send them a letter.

Simple enough, there is no need for government regulation if all consumers choose the most fuel efficient vehicles for their needs. There is an SUV hybrid. It is much easier to scream at politicians than to tell yourself to consume less gas. In the end misery loves company. If others should not consume gas, then as long as regulation keeps us all miserable then they will feel better.

Links:
Why the Government's CAFE Standards for Fuel Efficiency Should Be Repealed, not Increased

These People Need Slapping.

Banning of Slacker 1960

My error. Somebody sent me a complaint about his HUGE post, I looked at it
and thought it was a teenage troll, and banned the user. Just unbanned him.

-----Original Message-----
From: Ronald Rutherford [mailto:]
Sent: Saturday, November 19, 2005 6:56 PM
To: thom@thomhartmann.com
Subject: Banning slacker 1960???


Dear Thom:

I was hoping that an explanation of why to ban "slacker 1960" from the
ThomHartman blog was made?
Here is his profile:
http://www.thomhartman.com/cgi-bin/ubbcgi/ultimatebb.cgi?/ubb/get_profile/u/
00006316.html
I read through most of his 49 posts, and I do not see any reason to ban some
one.

This is what he wrote to me:
Ron slacker here, will no longer be able to speak w/ you, seems I have been
banned by the thomhartmann board. Cant figure out why though, must be just
facist's . The only post I have made in the last day or two was the
stupidretard post i cut and pasted from one of miles post's. I bet he was
not banned. Just wanted to let you know what became of slacker,
@yahoo.com

Sincerely,
Ronald Rutherford

Sue Nethercott <106214.1601@compuserve.com>

Hi Ron,

Thread drift is natural. :)

I'll try to get it back on course where it is, first.

Feel free to start a new thread on any spin-off ideas that come to you.

Sue

----- Original Message -----
From: "Ronald Rutherford"
To: <106214.1601@CompuServe.com>
Sent: Tuesday, May 16, 2006 7:58 AM
Subject: Reopen thread on Dam.


>
> Dear Sue:
>
> I had a chance to look through the whole thread on dams and I realized
that
> it has lost its direction.
> I would reopen in another thread but since it was your creation then it
> would be better for you to do so. And I promise for one to only post
> relavent material to your class material.
> Sorry.
>
> Sincerely,
> Ronald
>
>

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