The Forgotten Depression of 1920

Do you think government is doing to little to fight the recession/depression? Do you wish for "more stimulus" and "government spending" to revive the economy? Do you think that the Great Depression was won with deficit spending and government programs (such as World War II)?

Think again. Here is the real lesson to be learnt from the history of booms and busts during the Century of Central Banking - the forgotten depression of 1920, where government was shrunken, deflation was allowed to correct the malinvestments of World War I, and the free market was allowed to restore economic order on its own pace (which is pretty fast I might add!).

The Federal Reserve's activity, moreover, was hardly noticeable. As one economic historian puts it, "Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction." By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

So what are we waiting for? Let the free market clean up the mess we are in. The sooner, the better! Or, so says sound economic theory and history in one screaming voice.

So how about some interference?

There are those who say: The free market is not to be left unbound or without regulation and interference. It needs to be "regulated" or "adjusted" to some or this political agenda.

Fair enough. Free individuals and their companies need, apparently, a third party (or fourth or fifth, etc.) to push them in this or that direction for the benefit of something else than freedom, such as consumers, competition, environment, ethic standards, etc. Or so I hear.

But has anyone tried to compare the free market to nature? Nature is a finely tuned mechanism of preys and predators. There are those who are eaten, and those who eat. If those who are eaten are too many, then they eat too much vegetation, starve and die in huge numbers. If those who eat the grass-biters become too many, they will also starve. They will eat too much, kill off their prey, and starve.

In short, a finely tuned mechanism which always seeks a balance, but will never reach it for long. That's nature.

So how about the free market? Those who preach endless interference of the free market are almost without exception those who preach endless laizzes faire when it comes to nature. One system of natural law is to be left alone, but another to be heavily regulated by a huge, all-knowing central government.

Do I smell a lack of coherent thinking?

Taxman - The Beatles animated music video

The Beatles got the point!

Intellectuals and the Death of Capitalism

Intellectuals and the Death of Capitalism

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Destroy all computers!

I have a proposal: Lets destroy all computers of the world! Why? Because this would create an enourmos amount of "jobs", where instead of a single computer hacking away trillions of numbers to find a solution, millions of persons would do the same, using pocket calculators and pieces of paper. Right?

No, wrong. Destroying computers will not create jobs. It will destroy the productivity of all those who work with computers, and by doing so diminishing their value as employees, so that their wages would have to come down (to almost zero).

Today, there are strong voices for "protecting" industries by subsidizing them. Agriculture is a prime example. Farmers are paid by the taxpayer and not the consumer so that their livelihood is not "jeopordized" by competetion from farmers in countries where farming actually pays off. In Iceland, the state pays farmers to grow sheep for a market of 300,000 people because this "protects" the domestic agriculture from sheep growers who work in much better climate. Computers are being destroyed in Iceland in the name of job-protection, so to speak.

What if one day someone would discover the "replicator", a machine which can create food and recycle matter with no effort? Then we would not need a single farmer to grow food. Farmers would go out of business and find other jobs, which actually fulfil consumer demand. Would the European Union allow this device?

Some random thoughts

Ambition of central planners
I must admit, that despite being a libertarian, then I cannot help it but to admire those who preach big government with a great, central authority over almost every aspect of every individuals' life. I cannot imagine a more ambitions program than the program of central planning over society, be it via law and regulation, or direct force and coercion. A project doomed to fail, whether judged from reason or experience, but an ambitious one indeed!

The two groups of individuals
For me, people more or less divide into two groups (with a big gray area in between): Those who want the central government to thrive, and those who want individuals to thrive. What benefits one cause, damages the other. Its as simple as that.

Role of government, anybody?
Most people vote, or have an opinion on who should be voted, and who should not be. Depending on the choice of vote, most of us tend to categorize ourselves according to some party lines, willingly or not. For example, lets say I could vote in the USA, and voted for Republicans. Many would then call me a Republican, and hence assume I am for the war in Iraq, against homosexual marriages, for fiscal discipline in government finances, Christian, and so on. So those who vote Republican who started out voting because of one but not all of the issues will probably tend to agree with the other ones, and converge towards the "one and only" Republican party line.

But what if people did not know what the options were before going to the polls? That before voting, everyone had to draw up an independent picture of what he or she thinks the role of government, and its politicians, should be. How many of Obama votes would have then found themselves compatible with Obamas rhetoric when walking into the poll booth? Or John McCain's? Or Al Gore's? Because all of these gentlemen have preached to some extent, and then practiced in great extent, the consumption of the entire society by the State.

It seems that few people have actually sat down and thought for themselves what the government should do, and what it should refrain from doing. Does the State monopolize money because most people want to, or because no-one can think outside the box, or remember a 100 years back when no such entity as the Federal Reserve Fund existed?

I guess not

Debtors and creditors of the world

This is a very interesting website:

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html

It basically shows who are the debtors and creditors of the world. Now the creditors who have been supplying the USA with debt, used for consumption, will stop their lending, and spend on their own economies. More on this here (Peter Schiff is a genius).

The US dollar is the new toilet paper, aligning itself with the Zimbabwe dollar. The German style "careful" monetary policy of the European Central Bank will, despite the socialism of European politics, make Europe rise above the USA by many multiples as an economy.

Socialist swallowing of truth

Capitalism has been as unmistakable a success as socialism has been a failure. Here is the part that's hard to swallow. It has been the Friedmans, Hayeks, and von Miseses who have maintained that capitalism would flourish and that socialism would develop incurable ailments. All three have regarded capitalism as the 'natural' system of free men; all have maintained that left to its own devices capitalism would achieve material growth more successfully than any other system. From [my samplings] I draw the following discomforting generalization: The farther to the right one looks, the more prescient has been the historical foresight; the farther to the left, the less so.

More here. Yes, its probably difficult to swallow ones own words, but great men acknowledge their failures, and earn my respect by doing so.

Skattmann (Icelandic)

In 1989, Icelanders had a Leftist government. Now, after the collapse of the international financial system, more and more Icelanders are beginning to long for another one. This video should deter at least some of them, I hope.

Who was right and who was wrong?

Peter Schiff is probably the hardest working preacher of sound economics in todays media. So what does he have to say about the future of the dollar? Look no further: http://www.youtube.com/watch?v=S8HRRQ6JkCw

Air pollution - the libertarian remedy

The remedy against air pollution is therefore crystal clear, and it has nothing to do with multibillion-dollar palliative government programs at the expense of the taxpayers which do not even meet the real issue. The remedy is simply for the courts to return to their function of defending person and property rights against invasion, and therefore to enjoin anyone from injecting pollutants into the air.

Quote taken from For A New Liberty - The Libertarian Manifesto, Chapter 13. The greens and leftists have NO solutions to the problems of pollution. Libertarians, on the other hand, do.

Solution suggestion: Do nothing!

When it was realized that many paper bank notes were just that, their values began to collapse, many to zero (the same amount of gold you could get for it), and the money supply contracted at a ferocious rate. From the fall of 1818 to the beginning of 1819, demand liabilities at the central bank fell from $22 million to $12 million (Dupre 2006, p. 272) and the total money supply fell about 28% (Rothbard 2007, p. 89).

Insolvent banks and overextended debtors alike collapsed, while prices, no longer pumped up by the bubble, raced downward to their equilibrium. As the money supply cleansed itself of the bad apples, time and effort had to be paid so that the flow of funds could adjust back to their best uses, following prices as their guideposts. It was a massive, countrywide downturn, and introduced a slowly industrializing America to a new experience — mass unemployment.

Compared to now however, the state and federal politicians did basically nothing to "help" the economy recover from the Panic of 1819, yet by 1821 the economy had begun to get back on its feet, which must seem a stunning outcome to anyone burdened with a degree in economics.

The quote above is taken from this article about the recession in USA in 1819. The political policy measures taken in this recession compared to the "action filled" recessions of 1929 and today's recession give a very strong indication of what politicians should do today to get us out of the recession: Nothing.

Well, repeal some laws, e.g. tender laws, but basically whatever it takes to fiddle as little as possible with the economy. A lesson that points the way forward? Yes. Lesson learned? No.

There Will Be (Hyper)Inflation

Commercial banks can be expected to put their excess reserves to use, because base-money balances do not yield any interest: banks need to generate income to be in a position to pay interest on their liabilities (demand, time and savings deposits, and debentures).

Extending loans is one option. However, in an economic environment of financially overstretched borrowers, banks might be hesitant to increase their loan exposure vis-à-vis households and firms. In fact, it might be increasingly difficult for banks to do so given that equity capital has become increasingly scarce and costly.

So commercial banks may wish to monetize government debt, as the latter does not require putting equity capital to use. The government then spends the additionally created money stock on politically expedient projects (unemployment benefits, infrastructure, defense, etc.), and the money stock in the hands of households and firms rises.

If, however, commercial banks decide to refrain from additional lending, and even call in loans falling due, the government may decide — as another drastic, but logically consequential step of interventionism — to nationalize the banking industry (or at least a great part of it). By doing so, it can make the banks increase the credit and money supply.

Alternatively, the central bank could print additional money, distributing it to households and firms as a transfer payment.

I can not recommend this article strong enough. It is a must read in today's monetary climate.

Condemned monetary policies practiced in Western Europe?

The following is from a statement from the The Reserve Bank of... (name of country follows quote)

As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests. That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide. Yet there are telling examples of the path we have...For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

..Zimbabwe! Source.

At least now we know where the modern day, Western monetary policies are coming from, right?

Words of warning (from 2005)

So in conclusion, while we can be fairly optimistic about the US economy in the short run because of the likely boom in business investments and in the long run because of its still comparatively market-oriented economic structure, the imbalances created by the Fed's cheap money policies make a sharp recession likely in the medium-term outlook. However, if this likely sharp recession will induce an extremely destructive response in the form of protectionism, higher taxes and spending, or high inflation it could make the long-term outlook more pessimistic. (#)

So, what's it gonna be?

Written in 2004 (by an Austrian, of course)

"[Asian central banks] increasing purchases of U.S. assets make them increasingly vulnerable to heavy losses if the dollar falls, but the increasing U.S. current account deficit forces them to increase their purchases to prevent their currencies from rising. The longer this unsustainable process is allowed to continue the heavier losses that will be inflicted on both sides."
- America's Unsustainable Boom

More here. I love Austrian economics. I wish more journalists and pundits would do the same.