Poor Economic Understanding
By Tommy Leung on March 2nd, 2009 in Economics, Public Policy, Randoms
I may not have a degree in economics but, neither do these AP writers who wrote about recessions turning into depressions. As someone who reads a great deal of works from the Austrian School of Economics, there is just an enormous amount of misinformation in that particular AP article.
The article wastes time by going into what defines a depression. I don’t see how the terminology is going affect the real situation that people are facing. So while the article tries to define what a depression is, it makes many economic fallacies.
“Morici says a depression is a recession that “does not self-correct” because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.”
There are no such things as recessions or depressions that do not self-correct. They always self-correct. The depression or recession can also be called a correction. It is a correction on a massive scale due to the massive boom created by artificial means–eg: arbitrary interest rates set by a central bank.
When stock prices go up to astronomical levels in respect to the company’s earning potential, then there is a bubble. When that bubble bursts and the stock price pulls back, we call it a correction. It is exactly the same when entire industries or economies are in a bubble and that bubble bursts. A correction is taking place. To try and stop the correction is trying to maintain an illusion.
The free market is always looking to reach equilibrium. It is when governments intervene and disrupt the market’s natural movement of capital that lead to booms and the eventual busts. The only time a recession or depression does not self-correct is when the government tries to stop it. The government may be successful in the short-term to stop the correction and create another artificial boom but, that will only lead to a bigger bust later.
“Policymakers and economists note there are safeguards in place that weren’t there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.”
It is true that these programs are in place. Whether they are safeguarding anything is open to debate. Deposit insurance may sound nice but, it just means banks can be more reckless with depositor funds. It also means depositors can care less about the soundness of a bank because their money is “safe”.
Unemployment insurance also sounds nice but, it just keeps people unemployed longer. There is less incentive to find a job with any urgency if you are going to paid to do nothing.
The last “safeguard” is perhaps the worse. As the dollar is no longer tied to gold–or anything of value, massive inflation is very possible. This is where every safeguard is meaningless. If the government can just print the money, they are debasing the value of every dollar in existence and newly created. So it wouldn’t matter if you got the $250,000 from a failed bank because it won’t buy $250,000 worth of goods and services.
In the worse case scenario, you might only be able to buy a cup of coffee with it. What good is that?
“Most postwar U.S. recessions have come after the Fed has increased interest rates to cool down rapid economic growth and inflation. Later, the Fed lowers rates and helps restart the economy, with the housing and auto sectors — both sensitive to interest rates — leading the way.”
Does nobody ask why this is necessary? Why does any entity need to stimulate or cool down an economy? Why do we give such powers to a central authority? From that fact alone, we can see that the culprit in creating economic crises is the Federal Reserve!
At its whim, it can create booms and busts. Unfortunately, the Federal Reserve only has the illusion of control over an economy. Market forces are always more powerful than the manipulations of a central bank. We are currently witnessing a time when the Federal Reserve’s tools are all useless.
And there are no guarantees the massive economic stimulus package and series of bank bailouts will stave off a nightmare recession, or worse.
Sadly, all the bailouts and stimulus packages are going to make things worse. Barack Obama is likely going to be regarded as a worse President than Bush when it comes to economic prosperity. There was no way he could have avoided it. All the spending and policies of years past had already decided his fate.
He had a chance to at least start the economic recovery by cutting spending and shrinking the size of the parasite known as government. Instead, he chose to to do the opposite and make a bad situation worse. Everyday that the government continues this suicidal policy of bailouts and spending, the deeper the economy will sink into depression.
By Tommy Leung| Tweet |
Tags: bailouts, central banks, depression, federal reserve, free market, recession, spending
