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"Understanding the Great Depression
Explaining the Great Depression and failures of "New" Keynesian interest rate suppression policy without ideological clap trap, theory confirmation bias or political spin.
"Understanding the Economic Basics &
Modern Capitalism: Market Mechanisms and Administered
Wealth of Nations. Ricardo: Principles.
Our Government Directed Business Cycle
Kick the Bastards Out!
FUTURECASTS online magazine
Vol. 12, No. 11, 11/1/10
We clearly do not have a "free" market
economic system. Properly defined, our economic system is a "government
directed" market system with a business cycle predominantly determined by
government policies and actions.
The government has been the predominant factor in the business cycle since WW-I.
China provides the primary example of a state capitalist market system where the government owns or controls most "commanding heights" economic entities, and France provides an example of an industrial policy market system where the government picks winners and loser in important sectors.
When the government shifts from facilitating markets to influencing markets, that's when things go awry.
Through the intended and, especially, the unintended
consequences of government policies and activities, the government has been
the predominant factor in the business cycle since WW-I.
China provides the primary example of a state
capitalist market system where the government owns or controls most
"commanding heights" economic entities, and France provides an example
of an industrial policy market system where the government picks winners and
loser in important sectors. Although the U.S. government does some of these
things, it predominantly confines itself to efforts to influence markets, not
their participants. When the government shifts from facilitating markets to
influencing markets, that's when things go awry.
Undoubtedly, there is much more that can be added to this
When governments provide good governance that facilitates profit driven market directed commerce, and when governments submit to the "golden straightjacket" of market mechanisms, sound currency and limits on sovereign debts, nations prosper.
Government constraints on market mechanisms and
government policies that disable market disciplinary mechanisms have played the
predominant role in every major business cycle contraction in the U.S. since WW-I.
It was the removal of market constraints and the facilitation of market
mechanisms that played the predominant role in achieving prosperity after WW-II and
in the economic and financial recovery
from the Keynesian inflationary morass of the 1970s. It was the removal of
market constraints and the facilitation of market mechanisms that played the predominant role in
the two decades of
prosperous growth and stability during the 1980s and 1990s.
The Great Depression:
Government alternatives to market mechanisms
and government efforts to influence the markets have
been the driving forces in the business cycle since the Federal Reserve refused
to play by gold standard rules during WW-I and continued to substitute its
administered alternatives for gold standard rules during the 1920s.
standard did not fail. The rules of the gold standard were just heedlessly
abandoned in favor of political expediency and the foolish belief that human
administered alternatives could achieve superior results. See, Meltzer, History of Federal Reserve, v. 1,
Part I, "The Search for Monetary Stability (1913-1923),"
II, "The Engine of Deflation (1923-1933)"
Political expediency and ideological predilections,
of course, chronically afflict Congress. To a greater or lesser extent, narrow
political and ideological interests persistently trump the national interest and
heedlessly subject the nation to a plethora of unintended consequences.
trade war was heedlessly instigated and
maintained with the 1922 Fordney-McCumber Tariff Act
and the 1930 Smoot-Hawley Tariff Act. The trade war destroyed the international markets that were vital to the vast
agricultural sector of the economy during the 1930s, took a 10% chunk out
of the automotive market as early as the spring of 1929 and broadly undermined
the value of industrial commodities. By February, 1930, 15% of the wheat market
had disappeared and another 10% was gone by 1932.
Two Keynesian epochs:
The draining of the
vast financial strength of the U.S. after WW-II, the Great Inflation of the
1970s, and the recent Credit Crunch recession clearly reveal the economic policy madness that
periodically afflicts the government directed U.S. market system.
The Keynesians brought in by the Kennedy administration were full of conceit and hubris, and some even claimed almost scientific certitude. They promised to accelerate economic growth and "obsolete" the business cycle.
Republican governance repeatedly favors the narrow political
interests of unprincipled political
hacks. Democratic governance repeatedly demonstrates not only their own
vulnerability to political expediency but also a powerful susceptibility towards
ideological and Keynesian madness.
The publisher of FUTURECASTS online magazine responded
to the first plague by publishing "Dollar Devaluation"
(1967) accurately forecasting the devaluation of the dollar in the 1972-1974
period and the inflationary morass that would destroy 60% of the dollar's
purchasing power in the decade thereafter. A financial column was provided for some business newspapers accurately explaining and
forecasting the volatile twists and turns of the 1970s. At a time when
establishment economists were achieving an astounding record of almost 100%
failure in forecasting economic developments, the publisher's published
forecasting record was almost perfect. See, Futurecasting
Record 1, Futurecasting
Record 2, and Futurecasting
Record 3. His readers were thus forewarned in time to protect themselves -
and even to profit from - that Keynesian debacle.
Now, a second plague of Keynesian economists
has been loosed from the nation's foremost academic institution
where the virus has been incubated since being eliminated from Washington in the
1980s. Why the faculties of arts and sciences in these institutions hate their
country that much is a question that remains to be answered.
The Bush (II) Republicans surrendered to political expedience and abandoned the successful policies of the 1980s and 1990s. They couldn't resist the temptation to loot the public treasury and undermine market disciplinary constraints as favors for their supporters.
The Bush (II) administration and its three Republican
Congresses inherited an economy that had regained its position of world
leadership and financial strength - much to Keynesian astonishment. There was no secret about the economic
policies that had enabled the U.S. to recover from the Keynesian inflationary morass of
the 1970s. There was no secret about the economic policies that maintained two decades of increasing prosperity interrupted by only
two short and shallow recessions. These policies were referred to as the
"golden straightjacket," since they produced prosperity broadly over
time but imposed discipline on politicians that the politicians hate.
FUTURECASTS had provided its
readers with accurate forewarning of the inevitable results of this conduct.
onset of a serious recession, now called the "Credit Crunch," probably
before the 2008 election, was clearly forecast. Such factors as the Fannie Mae
and Freddie Mac bubbles, the bank lending bubbles, debt leverage bubbles, the
housing bubbles and the constraints in the energy markets and much more had been
clearly explained as early as February, 2003. Further explanations and warnings followed.
See, Eleventh Annual
Review of FUTURECASTS Issues.
However, recovery will be troubled, disappointing
and short. By trying to protect us from the impacts of bursting bubbles,
the government in its usual ham handed way has prevented the markets from
liquidating the mess. Banks still struggle with toxic assets and unperforming
mortgages and other debts. The surplus housing inventory has still not
cleared. Fannie Mae and Freddie Mac, now under explicit government direction,
cost the taxpayer tens of billions of dollars each quarter. They insanely load
up on low interest mortgages that will decline in value by hundreds of
billions of dollars when mortgage rates return closer to market levels. The
Federal Reserve also now has in excess of a trillion dollars in low value
FUTURECAST has thus fulfilled its primary obligation
to its readers. It is now up to the electorate to keep kicking the bastards
out - churning their elected officials - until the Keynesians are again sent
packing so some sanity can be restored in Washington
and those willing to make the hard decisions that will be needed to restore
economic and financial health, stability and strength are able to guide
government economic policy.
Confusing the credulous:
Keynesians excel at the production of excuses for policy failures.
Reality always perversely refuses to conform to Keynesian expectations.
Keynesian are heroically unconcerned about the additional trillions of dollars of sovereign debts that they now assert is necessary to make their stimulatory efforts succeed.
Keynesian policies always send the nation into financial decline. Its adversaries and potential adversaries always prosper and expand their influence during periods of Keynesian madness. The nation's problems always ultimately reach "ungovernable" levels. Gold always rises.
Suddenly there are discussions about a minimum unemployment level consistent with non-inflationary growth that has inexplicably risen above 6%. This comes straight out of the Keynesians 1970s playbook. Why does this always seem to happen when Keynesian policies are pursued?
Budgetary deficits are simply never enough to
do the job of stimulating the economy, and monetary inflation ultimately always
fails to fulfill Keynesian expectations of reduced unemployment and restored
prosperity. The current economic contraction is always different in unexpected
ways that prevents realization of the benefits expected from Keynesian policies.
policy makers are never skilled enough to properly execute Keynesian policies.
It's all the fault of evil speculators! It's all the fault of the markets! The markets inexplicably fail to respond properly to
Keynesian policies. Reality always perversely refuses to conform to Keynesian expectations.
If $2 trillion in budgetary deficits is
insufficient, there should be $4 trillion. And trillions more during the next
recession and the one after that. Nobody but a Keynesian can be stupid enough to
expect that political leaders will ever pay down any substantial amount of this
debt in between recessions. However, Keynesian stabilization efforts inevitably
increase economic instability as debt loads and monetary inflation increase.
The Keynesians now set the bar for success at an extraordinarily low level.
The Keynesians brag that there has not been another
Great Depression. They thus set the bar for success at an extraordinarily
Keynesians are rightly embarrassed by the undeniable failures of their policies during the 1970s and so strive to direct attention elsewhere.
Today, some pieces of the Great Depression puzzle are actually in place,
but thankfully not the primary pieces. Sovereign debt loads have increased massively, and
China pursues mercantilist policies that weaken the finances of its debtor
nations. However, there has been no great war since the 1940s, and the
"naïve" U.S. somehow managed to preside over a far more enlightened
peace process after WW-II than the more "sophisticated" European great powers at
Versailles. Most important, globalization gives debtor nations the opportunity
to earn the wherewithal to service their debts and small nations the opportunity
to flourish within the broad global market.
Ignored is the failure of Keynesian-type
policies during the New Deal. There was, after all, still almost 19%
unemployment in 1938, after six years of New Deal budget deficits, monetary
inflation and industrial policy experiments. The New Deal not only retained all the worst of the economic policies
of the previous Republican administrations, but they added new constraints on
the economy, even attempting to subject the whole economy to a system of cartels
against the public interest. They insanely adopted inflation as a "cure"
for economic problems, and in several ways massively reduced the efficiency of
the economy. Ominously, inflation as a remedy is again part of the economic
madness in Washington.
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Copyright © 2010 Dan Blatt