When you are pouring water into a container with one unsteady hand, and at the same time you are pouring a strong acid into the same container with the other unsteady hand, then the question of whether there will be a violent reaction is sort of up in the air. I would say that, with the simultaneous application of two contradictory economic policies, there is the same uncertainty, and without more study than I feel like giving it, I could not say what was attributable to what in those times. I will volunteer that I looked at the curve available on Wikipedia and saw that there were several comparable spikes in the last century or so. It struck me that the most severe drop in inflation, from about +24% to about -1% occurred between 1920 and 1921, and I can't remember any great event to tie that to. You presumably will be able to explain that one.

Karl Marx: History repeats itself, first as tragedy, and then as farce.

Phil: The most severe drop in inflation, from about +24% to about -1%, occurred between 1920 and 1921, and I can't remember any great event to tie that to. You presumably will be able to explain that one.

LeRoy: No problem. The U.S. economy (indeed, the world economy) experienced an exceptionally severe recession in 1920-1921! According to the Wikipedia article which you can access by Googling on 'The Post World War I Recession', the fall in economic output was actually more severe than during the Great Depression (!!), albeit much more short-lived. By Googling on 'The Recession of 1920-1921', I found another source of information on this economic downturn, which I quote below:

A general deterioration of economic conditions in the United States was evident by the spring of 1920. Programs and procedures put in place during World War I had in many instances been removed or modified after the armistice, which resulted in a certain amount of economic dislocation.

In particular, U.S. manufacturers had built up large inventories of goods, but the consuming public was unable to absorb them. At the same time, American exports to overseas nations dropped sharply at war’s end, which deepened the plight of industry.

The results of the recession were high unemployment, a broad series of business bankruptcies and generally falling wages for those Americans who kept their jobs.

Most severe of all, however, was the protracted fall of farm prices — an event that would continue to a greater or lesser extent throughout the decade; when the 1920s later began to roar, few farmers joined in the prosperity. Their effort to gain relief was a frequent appeal during the era, but one that often fell on deaf ears in Washington.

Overall economic prospects improved for many during 1922, which is often cited as the beginning of the great boom. However, the return of prosperity would not go on uninterrupted, because several reverses hit sectors of the economy from time to time in the years before the great market crash of 1929.

LeRoy: So, the very sharp fall in inflation that occurred in 1920-1921 took place for essentially the identical reasons that inflation fell sharply in 1980-1982: namely, a very severe recession. This simply supports what I have been saying all along: that to bring high levels of inflation under control, you basically need to go through a nasty economic downturn. I know of no other way to do it. All the more reason, then, to avoid getting into a high-inflation situation in the first place! Unfortunately, we show every sign of doing just that, with headline inflation last month at 5%. [And that, using the government's rather questionable numbers.]

And here I thought you would remember the Great Recession of 1920-1921, Phil, being a teenager at the time.

[I DO hope you can take a joke.....]

Eventually the banks will recover, and go back to their risky practices--unless you think they will self-adjust. You've got an insolvent Fannie Mae handing out, not $417,000 mortgages, but $730,000 mortgages--thanks to Congress. The govt. can tell banks to lend, and prop them up not to fail.

Seems like Obama could have another issue if he wanted one:

<link>

Genedio: The govt. can tell banks to lend, and prop them up not to fail.

LeRoy: With regard to the first clause of your sentence, I think this is true, but only to a small extent. I do think that one cause of the sub-prime mortgage crisis was the government 'telling' banks to provide mortgage loans to poor minorities, in the interest of eliminating racial discrimination in home lending; prior to that, banks were 'red-lining' certain communities as not being good credit risks. Well, the path to hell is paved with good intentions, as they say. This is another example of the Law of Unintended Consequences. I also agree with you that it was ridiculous for Congress to increase the size of the mortgages that Fannie Mae could underwrite: a perfectly transparent attempt to shore up the housing market and prevent a larger decline in prices---which will ultimately be unsuccessful.

But I think the credit crunch is going to get much worse before banks suddenly start feeling like throwing cash around so freely again---don't you? I believe that during the long stagnation, the Japanese government was desperately trying to get its zombie banks to start lending again, without much success.

The link you provided seems very relevant to the top-post I just submitted here in Bottom Line, and I am looking forward to your comments on it, as well as those of others...

diogene:

I would love to say I could do better; but then, I would be running for president . . . wouldn't I?