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19 Big Events: The Economics of Depression, Hyperinflation, and Deficits focus of the chapter ? In this chapter we revisit the time period which gave birth to modern macroeconomics: the Great Depression. We examine the role that both monetary and fiscal policies played in its beginnings, its continuation, and our ultimate recovery from it. ? We also examine the link between money growth and inflation in normal business cycles and in hyperinflations. A variety of policy responses to hyperinflation are reviewed; the necessity of stabilizing government budget deficits in hyperinflationary economies is emphasized. ? The U.S. budget deficit is examined in some detail. There is a brief discussion of the national debt. section summaries 1. The Great Recession: Bubbles and Bust The Great Recession of 2007-2009 is the outcome of housing market collapse. It also led to a temporary freezing of almost all types of credit markets. The house prices rose steadily in the US from late 1990s, partly due to inappropriate lending practice of financing homes beyond the means of the borrower. Securitization of loans, the practice of selling the mortgages held by the banks, was a key factor in spreading the recession beyond housing market and also beyond the US borders. Securitization works when the risks involved in assets are appropriately assessed and priced. However, neither seemed to be true for the US housing market. The derivatives market that bets on housing (and other assets) market also collapsed as a result of the faulty risk assesment of the mortgage backed assets. Iceland, Ireland and other European countries were also hit. The stock markets plunged globally and this decline was quickly reflected in the goods market and labor markets. The length and the breadth of this recession makes it harder for the countries to recover by producing for the international markets. 2. The Great Depression: The Facts The Great Depression began just before the infamous stock mark