The Inflation and Debt Hawks Are Back and Dangerous
The intellectual and political forces that kept the U.S. from having a more complete economic recovery during the Great Depression have not disappeared. And they are jeopardizing the current recovery and future prospects once again. They are the familiar faces who warn us at every opportunity that inflation will return, that the amount of debt taken on is a catastrophe that will cost the nation's children, that government deficits are evil, that intervention in free markets will undo the capitalist machine -- and on.
They were out in force in the 1930s, challenging Roosevelt where they could. Some of us who haven't looked at the history very closely may think they failed back then, but they did not. They kept the government from spending more -- deficits never got high enough to turn the economy up rapidly. They basically forced Roosevelt to fund Social Security through a payroll tax to make it appear as if workers were paying their own way. (It is a pay-as-you-go system like every social or defense program.) They stopped national health insurance. They convinced Roosevelt, who had a bit of their boil in his blood to begin with, that inflation might come back in 1937, so he cut federal spending amid tax increases, and sent us into another severe recession. The same thinking led the Federal Reserve to raise interest rates then. Unemployment rose back almost to twenty percent.
They are still saying inflation is just around the corner. They are still here. They pass on their heritage to the next generation, and the next.
Today, the Wall Street Journal, a proud child of the heritage, issued one of its unthoughtful and willfully biased broadsides at Ben Bernanke for having said early in the crisis not to worry about the lower dollar or inflation. In its remarkable insularity, the WSJ editorialists (not the news desk) assume without even bothering to make the point that inflation is on its way and that the lower dollar is a hindrance. What a fool Bernanke.
Of course, Bernanke was completely right and they completely wrong. But they will have their influence. Down the road if not right away, America will hesitate to stimulate the economy adequately. It will forgo public investment and social programs and health care reform for fear of budget deficits. People not merely like the myopic WSJ editorialists but those who are more thoughtful and seek a broader outlook will argue that we paid a too high a price with all our debt. This, they will say, is the work of Keynesians, unionists, government lovers, New Dealers, and so on.
The debt taken on to save this economy, however, is the direct consequence of the outsized bonuses given mindlessly to Wall Street players that induced them to take on absurdly unjustified levels of risk for their own selfish gain. A government bailout was necessary or 15 percent unemployment and 12 percent drops in industrial productions were on the way. The WSJ editorial writers would probably be out looking for jobs.
We are not by any means on the way to a self-sustaining recovery. It will need a lot of help. Given the strength in numbers and the disposition of the press and some economists, that help may well be withdrawn long before it should be. The forces will claim, if there are some bright spots in the nation's sales, the economy never needed much help and that inflation is the great nemesis. We can make our own future. Unfortunately, the wrong people may ultimately get the influence. They are the nation's perennial grinches. It may be likely they will.
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The author seems to know nothing of economics or fiat money. Read the Creature From Jekyll Island.
Our present fiscal policy is unsustainable and to argue otherwise is sheer madness. Spin your argument to the Chinese. They seem to be quite uncomfortable holding all those dollars.
Jeff, in both cases the cause of the problem is the internal inconsistency of the fractional-reserve debt-money system.
Steven Lachance's paper on "How Debt Money Goes Broke.":
''A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse......"
http://www.financialsense.com/fsu/editorials/2005/1212b.html
Federal Reserve Bank of Atlanta Chief Credit Officer Robert Hemphill had this to say:
""If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.""
“A government bailout was necessary or 15 percent unemployment and 12 percent drops in industrial productions were on the way.”
Not necessarily. When the major institutions that provide the financial services required for a functioning economy were faced with imminent collapse (due entirely to their own malfeasance) most of our political establishment panicked and bailed them out.
What was not brought forth at that time or since was that what had to be saved were not the institutions themselves but the functions they provided to the economy as a whole. The Federal Reserve did step in to facilitate the commercial paper market which reinforces the contention that the institutions were unnecessary. Thus AIG should have failed and have been broken into its solvent regulated insurance side and its insolvent unregulated CDS side. Federal monies would not have gone to Goldman or other institutions and had these failed their functions would have been broken up, sold to solvent institutions or taken over by the Government. Their toxic assets would have been sold in an orderly fashion for their market prices or maintained and backed by the Government if they were held behind deposits (money market funds for example). The stockholders, bondholders and executives would have eaten the losses. Fannie and Freddy had to be nationalized and, at some cost, could have continued facilitating the mortgage markets. Thus functions would be maintained and the bad apples culled just as when the FDIC closes a bank.
Spot on, as usual, OP. The FUNCTIONS are important, not the INSTITUTIONS.
Where do we think money comes from? We talk about it as if it's there's only a limited amount of it and we have to make do with what we have. That's where the " We can't afford it." myth comes from. Article 1, section 8 of our constitution gives the congress the power to coin money. Our government has the authority to print all the money it needs. This authority has been acceded to the Federal Reserve, which dutifully prints massive amounts of money. The vault were the New York Fed stores its money is three football fields long and a football field wide. There is so much money there that it's transported around on robotic trucks. Here's the kicker in all of this, when the Fed "loans" money to us (our government) we owe it to back to the Federal Reserve, with interest even though the Fed had simply printed up the money. This is the "debt" that we are leaving our children. If we had an actual Federal Bank, we could manage the money supply directly printing and distributing it or taking it out of accounts as needed. Things would be much smoother.
It is only reasonable to be concerned about debt; as there appears to be no long-term strategy for at least maintaining the level of debt as a percentage of GDP, there is reason to be alarmed over the long-term outlook. I don't think there would be as many critics to the decade long binge of deficit spending we are currently in if there was any sort of comprehensive plan to control the level of debt. As of right now it appears that we have none.
"A government bailout was necessary or 15 percent unemployment and 12 percent drops in industrial productions were on the way."
You state this with certainty, where did you obtain your forecasts and what assumptions where they based upon? In addition, how does this compare with the scenario that we currently find ourselves? it appears that we are heading towards these levels of unemployment and decreases in output regardless, all that has been done is to delay the pain.
It's Very simple folks:
conservative spending and debt are good, cause they bankrupt the Government.
Liberal spending on Americans is bad, because it help ordinary people and would acutally make money in the long term.
As the growth of the financial bubble coincided with the repeal of the Glass-Steagall Act of 1933, maybe it would be wise act to reinstate it as it kept the Banks under control for 66 years.
hat tip to http://www.makeitbrief.com/avupq for the good articles
*****
Glass-Steagall Act
A 1933 act that prohibited commercial banks from undertaking investment banking activities such as underwriting the securities of private corporations. The legislation was passed to keep banks from entering into nonfinancial businesses (for example, owning corporate stock) and more risky activities. The Glass-Steagall Act was repealed in 1999. Also called Banking Act of 1933.
I am confused by this article. Are we facing inflation or deflation or does the author even know?
In today's (June 25) newsletter, Dr.housingbubbleblog.com made a well illustrated argument that our economy is deflating. Unemployment destroys the consumer base adversely affecting businesses and every other month over a million families lose their income through unemployment. American families have lost nearly 14 trillion dollars of wealth in just the housing and stock bubbles.
Section 8 of our constitution gives congress the power to "coin" money. It does so by "borrowing" it from the the Federal Reserve. The Fed. prints up the money and "loans" it to the government at a low rate of interest. This is the "debt" that we are accused of passing off to our children. It's exactly what our government should be doing when our economy is deflating. When we begin to experience inflation, our government has several remedies available, taxation, higher interest rates, increase in reserve requirements, or combination's of these. A government that actively pays attention to its money supply and takes action to correct it and keep it on track, is the answer to these boom and bust cycles we've so often experienced.
I think you missed the point of the article which was critical of the Fed's bailout of the banks at the expense of everyone else.
We've got like 5 libertarians and a couple of history buffs commenting on this article. Where are the HP mainstreamers? I guess it's hard to compose a grandiloquent paean to outrage and betrayal when the article is of the non-pandering variety.
"The debt taken on to save this economy, however, is the direct consequence of the outsized bonuses given mindlessly to Wall Street players that induced them to take on absurdly unjustified levels of risk for their own selfish gain."
This is simply wrong. Very little of the "debt taken on to save the economy" is being paid out in bonuses - so little that's it's not worth mentioning IMO. This "debt" is almost all going to plug holes in bank reserves to lend stability to the financial markets. If the holes weren't plugged, we would have continued on a deeper deflationary spiral then we did as financial institutions would have been forced to continue selling assets to remain solvent - although that would have put downward pressure on those assets, which would have forced more selling, etc. etc.
The article refers to the behavior created by those obscene bonuses, not the cost of the bonuses themselves. The holes being plugged exist only because risks taken were unconscionable and not supportable by any financial or economic principle, but by the greed and exuberance of the street..
People rewarding themselves for hapless, ignorant and catastrophic decisions, continued making catastrophic decisions.
"The debt taken on to save this economy, however, is the direct consequence of the outsized bonuses given mindlessly to Wall Street players THAT INDUCED THEM to take on absurdly unjustified levels of risk for their own selfish gain."
The statement is not reasonably refuted.
And what is wrong with deflation.
isn't it better when things cost less?
It is also better if people save and do not overconsume which is what inflation tends to encourage. Inflation clearly encourages consumption and then overconsumption. Deflation encourages savings which is good.
And then the inflationists argue that if people do not overconsume there will be no jobs. This is just plain crazy. How can relying on overconsumption ever lead to a healthy economy.
There are no 'inflationists.' Deflation causes employers to close because they don't recover production costs. It's nice to see deflation advocacy out of a contrarian impulse. We have such stimulating public debates in this country.
Deflation driven by a loss of demand for goods and services caused by unemployment becomes a downward spiral that will only be stopped by hitting a bottom. It becomes destructive to businesses and can destroy our economy.
The economy didn't turn down because the federal government cut spending. In fact, federal spending was barely cut at all plus state and local spending increased more than federal spending decreased in 1937 and 1938. The big reason that federal spending was up in 1936 was because of the soldiers bonus checks, and we can't give out huge amounts of stimulus checks every single year, can we?
One big reason for the 1937-1938 depression was a massive drop in business investment. And that resulted from the undistributed profits tax and a wave of strikes, unionization, and increased wages because of strikes or threat of such throughout the country. It's hard to invest when your workers are striking, isn't it? It's also hard to invest when your profits are decreasing because of massive wage increases. It's been widely quoted that FDR blamed big business for the 37-38 depression. He thought business was getting back at him. And guess what? They did.
I have never seen unions blames for the 1937 recession. Very creative.
The wave of strikes in 1936-1937 is well documented. And during a strike, companies aren't producing, and GDP is a measurement of how much the economy as a whole produces. The 1970 recession was also mainly caused by the big GM strike. FDR himself is quoted many times as saying the recession was caused by the corporations, as they stopped investing. And the drop in investment, of course, had a lot to do with the huge increases in labor causes and the tremendous amount of labor unrest which was occurring.
dugan is a revisionist
his "theories" are based on current talking points of right wing think tanks and revisonist economists and historians
and contradict everything one ever read in history and economics both in and out of school
When the people fear their government, there is tyranny; when the government fears the people, there is liberty.
~Thomas Jefferson
hat tip to http://www.short.ie/g264dk for the good articles
For an excellent understanding of the role our government played in turning a mild recession into the Great Depression I refer you to a really good article. History seems to be repeating itself.
http://mises.org/story/3515
For corporations that are "To big to fail", can we seriously consider them to be a part of the market? If you knew you could not fail, wouldn't you start taking more risks knowing there is no downside since you are protected by governement bailouts. As far as I'm concerned any corporation that is "To big to fail" should be nationalized.
Gotta love the von Mises Institute. Stated goal "to undermine statism in all its forms". While Ludwig von Mises is rightly considered one of the great economic thinkers, outside of libertarian circles, the von Mises Institute of Auburn, Alabama is well out of academic economic mainstream thought. Their published views on the great depression are not widely held. "Fringe" is one word.
The Austrian teachings on the Great Depression are not widely held because the majority of mainstream economic thinkers are nothing more than court historians in favor of the government in order to keep their jobs. All you have to do to see this is look at Helicopter Ben, Housing Bubble Krugman, and nearly the entire staff of CNBC.
Today if you try to save money in a savings account, you get like a half percent interest.
This means your average Joe cannot save money without losing value as the cost of food and the needs of life are rising faster than this rate of interest.
An environment where people can't save is lousy, so your article by any kind of logic must be dead wrong.
Bank accounts as investment vehicles. That's new.
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