Economic Depression: cause and a solution

Cause:
Economic depressions and hyperinflation are unstable collapses in asset value or monetary value. Depressions wipe out the debtor’s ownership and hyperinflation wipes out the saver’s cash. An economic depression is often followed by hyperinflation as happened in Germany and other countries. Either or both instabilities can lead to political chaos.

A depression wipes out deep debtors first and as fear grows it successively wipes out even the minor debtors. Fear carried by the opportunistic media and fed by opportunist politicians, short sellers and asset buyers drives a relatively healthy economy into these economic instabilities. Recent Congressional testimony is an example of gross political opportunism. They drove the markets to break through their previous lows knowing full well that the lame duck Congress did not have any votes to act. They just wanted the opportunity to score political points and make the Fed and Treasury Secretary look dangerously foolish. So all the Congressional leadership accomplished was to make Americans even more fearful. It is evident that the three automakers need to restructure first before government loans make any sense. Congress opened mouth and inserted foot again just as the President elect was starting to do some positive things to allay fears and give signs of government competency.

It is easy to understand a home owner with 10% equity and 90% debt is wiped out when the home price drops more than 10%... if payments become a problem. It is easy to understand that as a depression grows more and more people become unemployed and can no longer make payments on debt. During a depression the panic causes people to stop buying and therefore layoffs increase enough to reach 25% to 40% unemployment in advanced economies and 90% in the third world.

Next the people with 80% mortgages are wiped out and the 70%, 60%, 50%....down to 10% mortgages when values drop 90%.

In the equities markets the investors liquidate to try to reduce debt to zero as soon as possible because if equities drop 90% as they did in the great depression you are given a margin call even if you only started with 10% margin.

Solution:
The solution is to recognize the instability when it reaches a threshold and then remove the fear factor and remove the reward for opportunism. For example if inflation exceeds 1% in any month or the core price index changesa at an annual rate of 20% or if housing or equities rise or fall more than 20% within a year, then the debt and asset values become locked together for that change. That means if a stock or house increases or drops say 50% in value the dept also drops or increases 50% in value.

Example 1922: House worth $20000 mortgage $18000, and then the house value drops 50% to $10,000 so the locked in mortgage drops 50% to $9000 and the homeowner preserved equity of equal value and did not default. Relative value relative to currency is preserved and opportunism is defeated

Example 1935: House worth $20000 mortgage $18000, and then the inflation hits 100% and value increases to $40,000 and the mortgage rises to $36000. Again value relative to currency is maintained for the particular asset.

The solution needs to have different factors for different major asset classes such as equities, homes and commercial properties and are class averages no tied to particular houses. The solution is not executed until the sale of the asset. Debtor and bank equally share the risk upon the sale of the asset when the threshold is reached so that banks and short sellers do not have an incentive to destabilize the market completely. They are limited to a threshold of 20% within a year before they share in the consequences.

The solution requires everyone use their intelligence shut their mouths and stop being politically or economically opportunistic.