Posted on 12/17/2008 5:13:47 AM PST by IbJensen
Let’s get right to the point — if the government continues on its current policies of expanding the money supply, propping up failed businesses, bailing out consumers with stimulus checks and intervening in business by lawless actions such as rewriting loan contracts, the American economy will enter a never-ending and ever increasingly destructive depression. These policies have failed the test of both theoretical economics and practical application.
They stem from a complete misunderstanding of our Great Depression, both what caused it and how we escaped it. The myth of these times lives with us today in the political sphere and, unfortunately and incomprehensibly, in mainstream economics. It is not so incomprehensible why politicians cling to failed Keynesian policies. John Maynard Keynes’ prescription of massive public intervention in economic affairs dovetails perfectly with the political class’ proclivity to exercise power.
But It is the eternal shame of mainstream economists that they would rather sit at the foot of these tyrants and justify their destructive rule in exchange for a pat on the head and access to the limelight.
The Roots And Appeal Of Keynesianism
Keynesianism has been described by Murray N. Rothbard, author of America’s Great Depression, as childishly simplistic and lacking of essential explanations of critical aspects of economics, such as capital theory. Keynesianism has its roots in Marxism — that capitalism overproduces goods and services, leading to price collapse, business bankruptcy and unemployment. The solution to this lack of demand is for government to step in and rescue capitalism through public works and regulation. You can see why this prescription is so attractive to our political class, who relish a high-sounding rationale for their exercise of power and control over our lives. Thus, we get massive public debt, boondoggle bread-and-circuses mega-projects, and legions of regulators who are ever telling us why the economy failed in the past but have no clue to how to make it work in the future.
But this is not all! In the days before central banking and fiat money, the king was limited to his exercise of power by his ability to extract money from the populace, for government can spend only what it extracts from society. Prior to government’s ability to print money and force it upon us, this meant that kings risked popular revolt from heavy taxation and/or they were forced to float foreign loans with powerful private banks, pledging real collateral such as crown jewels and colonial properties.
But this changed when central banking combined later with the destruction of the gold standard. Now governments could extract resources via the printing press, all the while using every means of propaganda (including sycophant mainstream economists) to convince the gullible public that it was saving the nation from the evils of capitalism.
Of course, all this meddling and money pumping causes massive inflation, but the time lag for this to occur is so long that its cause is little understood. Then the political class attempts to cover its tracks with show trials of hapless businessmen, who are labeled as enemies of the people for being forced to raise prices. Eventually the economy collapses.
The subsequent deflation brings both business and personal bankruptcy. Of course our political class fails to understand this phase of the tragic cycle they unleashed, so now they engage in a futile attempt to fight these symptoms with even more money expansion and even more stringent regulation. Welcome to the never-ending depression!
But, you may say, our last Great Depression did end, and it was government that ended it.
Wrong! The Great Depression ended after World War II, when the worst of the New Dealers had left office and the worst of their production destroying policies had been scrapped. Only then did the American economy improve. The exigencies of the war made it clear that the New Dealers’ attack on business had to end in order to increase war production. But the real economy did not improve until after the war, for no nation can feed, cloth, and house itself with war materials. Even propagandistic movies of the time cannot hide the shortages that were a part of every day life in wartime.
The Austrian Explanation And Prescription
Austrian School economists have explained not only of how America escaped the Great Depression; they have an explanation for the cause, too. Importantly, Austrian economists go deeper into the causes than the Keynesians; for example, they know that deflation is a part of the “secondary depression” and is not to be confused with the true cause of the bust phase of the boom/bust cycle. It was bank credit expansion in the 1920s, made possible by fiat money expansion by the central bank (only a decade old!), which produced the Roaring ‘20s. The Fed intervened throughout the 1920s to drive interest rates below their nature level. This caused the capital structure of the nation to change in a significant way, spurring more long-term investment than could be sustained in the absence of real savings.
In fact, when the Fed lowers the interest rate it encourages more spending and even less savings than before. This savings/investment gap eventually reveals itself in higher prices and losses in these longer-term businesses. The only solution is to stop expanding the money supply so that resources can be redeployed more in tune with consumer preferences. But, despite the myth (promoted by Milton Friedman and the Monetarist School economists) that the Fed collapsed the money supply, the Fed pumped millions of excess reserves in the banking system, all to no avail.
The money supply shrank as businesses paid off loans and postponed investment. (Does any of this sound familiar today?) Had the Fed ceased its money pumping and had Hoover, and later Roosevelt, kept their hands off the economy, the nation would have experienced a sharp but short depression. But the Fed kept pumping reserves, driving the interest rate almost to zero and intervened often and erratically in the economy, which so frightened and confused the business community that it stopped investing altogether. (This phenomenon has been explored most recently by Amity Schlaes in The Forgotten Man and has been the life work of Robert Higgs, author of Crisis and Liberty.)
So what is government to do? Nothing! It must not prop up capital destroying businesses. It must not intervene to disrupt the movement of labor from failing businesses to those meeting the needs of the consumer.
This redeployment of labor becomes what the Austrians call “frictional” unemployment. It is tragic, but its cause is the previous expansion of credit not sustained by savings. Some real investment will be lost and must be abandoned, though. This is a loss of capital that can never be recovered. But the longer the government expands the money supply the more malinvestment it produces and the worse will be the inevitable bust. But the bust — and the business failures and unemployment that are its main symptoms — are necessary and inevitable. They are an indication that the economy is fixing itself, shedding itself of capital destroying businesses and supporting profitable firms.
All government intervention to ameliorate this process, especially intervention to prolong the artificial boom, causes even more damage to the economy. Therefore, at the present time our government is, unwittingly, doing everything it can to destroy more capital and make the inevitable bust worse. When it finally comes to its senses (if it ever does!) businesses will fail, unemployment will rise, and prices will fall.
If left unmolested, this purging of the malinvestment will end eventually, the capital structure of the nation will again tend toward equilibrium, business activity will pick up, unemployment will drop, and the economy will recovered. But this can happen ONLY if government stops its interventions.
They know much more than you give them credit for. You see, ‘Rats NEED emergencies and hardships and fear so they can expand their power over people’s lives. It is Bush who is the idiot for going along with them on the insane $700 billion bailout of firms that deserved to fail.
The crash was in ‘29, Hoover had not been in office one year yet. How could he have caused it?
klinton was a budget balancer? Do you know that NOT ONE of his budgets was used to balance the budget? That from ‘95 forward, WHEN the budget was balanced and a surplus was projected, each and all of his budgets were declares DOA, thrown out and replaced with budgets written by Republicans?
The crash did not cause the Great Depression.
The crash was the beginning of it.
Your explanation makes sense to me.
Umm... The author didn't say anything about Kenya.
Read a little closer. The author was talking about Keynesian policies, not Kenyan politics.
John Maynard Keynes, economist.
Equally important is that after World War II the USA was literally the “last man standing”. The rest of the industrial world was all but demolished by the war, and even ‘victors’ like Britain were effectively bankrupt. In such an environment the American economy was effectively the world’s economy, with a “clean field” in which to expand.
Yup and when the boys came back there was a great deal of pent up demand. Once goods were available again the economy really took off after the war.
I thought the birth certificate issue has been settled?/sarc
After WWII the continental European physical capital base was destroyed and local credit and currency system valueless. The Germans were living on 800 calories a day with strict rationing. Central Europe had a barter economy.
England wasn’t in much better shape. John Maynard Keynes had been running the economy from the ‘30s until he died during the war. English industrial productive capacity really was very low. Food rationing in England continued until 1949, as I recall, and was strict. For instance, there was a pint of milk a week for babies and toddlers and none for anyone else. Strikes were endless.
Japan, of course, was nothing but fields of rubble. I have seen them.
Russia and China pulled out of the world economy with Communism.
The result was, if you wanted to buy something, like enough wheat to make a loaf of bread, you had to buy it from the Americans. Since you had no money you had to beg for a loan up front. If you wanted a bulldozer, steel girders, ship engines, a car or truck, an airplane, or a loan, you went to the Americans.
Americans had the nuclear weapons, which, to the people of the era, was like Americans being from the far future, as if they were the alien from “The Day the Earth Stood Still”. The most serious mojo there can be.
There was a rather severe post war recession in the USA. The solution was to loan money to all sorts of foreigners so they could buy American made products. See the “Marshall Plan”.
This all worked because the world wanted the US dollar. The USA had immense prestige in those days. (And almost all of the gold in existence was in Fort Knox.) The dollar was literally “as good as gold”. The world is still packed full of hoarded US$100 bills. This, of course, made it easy for Americans to cherry pick physical assets all over the world, many of which were very profitable.
As a result of all this interest rates world wide could be held at below market equilibrium without intolerable inflation (due to US$ hoarding as a “reserve currency” by individuals, banks, and governments. Just like during the Clinton Era as the Chinese came on line.) It felt like increasing prosperity to most people, and to most Americans things got more prosperous without seeming effort or cost. If you weren’t alive in the 1940’s you can have no idea of how hard Americans used to work.
I remember the 90’s and what we had to do to push Clinton to get a real balanced budget.
But he had the opportunity to really expand the govt in 1993-94 and instead of HillaryCare, we ended up with stupid little things like midnight basketball and Americorps.
Obama wants to go all the way. We don’t know what we’re really in for but it will be very bad.
Thank you very much.
I was born in 1947. My parents were fanatically frugal. At 95 they both still are.
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OMG. My mistake.......dispite the similarities. LOL
And Obama being from there and all.....
If the shoe fits, throw it.
I could have easily done the same thing.
Merry Christmas!
It appears now that chaos will be the order of the day and not only in our markets but in our streets.
Stay armed and vigilant.
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