Thursday, 8 April 2010

“Conditions left unchanged will invite a credit boom and, inevitably, a bust” [updated]

Some exceptional links indicating that while it may yet be too late, economic sense is slowly going mainstream, among commentators and even Fed officials, if not yet politicians. Gerard Jackson reckons,

    _quoteGiven the America's horrible fiscal condition I cannot see how higher interest rates can be avoided. The demands now being made on the economy by government must result in a significant reduction if not an actual end to the rate of capital accumulation exceeding population growth. This can only mean a general fall in real wages. furthermore, the government — or a government — will be driven to use inflation to engineer a very large partial default

Driven? They’re compelled:

    _quoteObama has nominated Janet Yellen to be vice chair of the Federal Reserve. This is very bad news for the US economy and signals that Obama intends to pursue a purely Keynesian approach to government. . .
    “Janet Yellen is an inflationist first and foremost. She has made it abundantly clear that all of her policy suggestions will be geared to promoting an inflationary policy. Like all Keynesians she seems congenitally incapable of grasping the dangerous microeconomic consequences of inflation for investment, jobs and the standard of living. She is in fact a very dangerous woman.

But there is at least one senior Fed official (sounding like an Austrian economist) who seems to know what time it is::

    _quote A senior U.S. Federal Reserve official said on Wednesday that interest rates kept too low for too long encourage risky financial behavior and recommended raising borrowing costs to prevent another boom and bust.
    “ ‘I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings,’ Kansas City Federal Reserve Bank President Thomas Hoenig told a group of business people.
    “ ‘While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust,’ he said.”

Too right.

Inflation won’t save America: it will only dislocate the capital structure, continue to prop up malinvestments, and destroy whatever pool of real savings still exists.  Not to mention the destructive effects of a cheap dollar:

    _quoteWhy a "cheap dollar" would not save the US economy: Do the advocates of a depreciating dollar think that by merely increasing exports the US would enjoy rise in per capita investment, especially in view of Obama's crippling fiscal policies? Have these people ever given any serious thought to the actual nature of economic growth?

And the proven preference now of Warren Buffett’s bonds over US Treasuries are simply a sign that investors are now seeing the inevitable: the U.S. government is on its way to bankruptcy:

_quoteWhen it becomes clear that the U.S. government can not make good on its mounting debt obligations by taxing its citizens, its creditors, fearing the debasement of the dollar and therefore the value of their investments, will go from friends to foes, from eager buyers of those treasury bills, notes and bonds to eager sellers. It won't be pretty.

Leaving Nancy Morgan to draw a conclusion that seems almost unavoidable:

_quoteUnder the leadership of my fellow baby boomers, there is a very good chance that the America that we all know and love could end up on the ash heap of history. . . My generation could well be the first generation in American history to leave [the] country worse off than we found it.”

The conventional wisdom of the baby-boomers has been proven destructively wrong on just about everything, hasn’t it.

Just as a recovering alcoholic first needs to confront reality, effective recovery requires immediate recognition of the reality of the problem.  Sadly, if Yellen’s appointment isn’t a sign that faking economic reality via inflation is still the order of the day at the White House (just as it is here in John Key’s office), the Chairman of Obamas’s Council of Economic Advisors shows that full-blown, hog-tied, piss-blind evasion of reality may be next.

Whatever pragmatists and politicians might think, economic reality is not infinitely malleable.  There will be a reckoning, whether Summers and his clique of alleged economists recognise that or not.

UPDATE:   Perhaps to help relieve the unrelenting pessimism suggested by focussing on the destruction that has been and is continuing to destroy America—in other words, what is—to focus here on what could be and should be, and (at one time in history) almost was. i.e., Capitalism Without Guilt: The Moral Case for Freedom, a compelling 2009 lecture to London’s Adam Smith Institute on the necessary moral revolution that is needed if capitalism is to survive—or even to be discovered. (Part 1 of this 11-part video is below; the complete series is available on a single YouTube Channel.)


    _quoteCapitalism [explains Yaron] has an undisputed record of wealth generation, yet it has always functioned under a cloud of moral suspicion. In a culture that venerates Mother Teresa as a paragon of virtue, businessmen sit in stoic silence while their pursuit of profits is denounced as selfish greed.
    “Society tells businessmen to sacrifice, to serve others, to ‘give back’—counting on their acceptance of self-interest as a moral crime, with chronic guilt its penance. Is it any wonder that productive giants from John D. Rockefeller to Bill Gates have behaved as if profit-making leaves a moral stain that only tireless philanthropy can launder but never fully remove?
    “It is time America heard the moral case for laissez-faire capitalism.
    “Two centuries ago the Founding Fathers established a nation based on the individual’s rights to life, liberty, property—and the selfish pursuit of his own happiness. But neither the Founders nor their successors could properly defend self-interest and the profit motive in the face of moral denunciation. The result has been a slow destruction of freedom in America, leading us to today’s economic mess.
    “In this lecture, Ayn Rand Center Executive Director Yaron Brook demonstrates how Ayn Rand’s revolutionary ethics of rational self-interest supplied the moral foundation that previous proponents of capitalism lacked. Dr. Brook explains why individual rights are crucial for capitalism’s survival—why productivity and profit, the ‘selfish greed’ that conservatives abhor, are not vices but cardinal virtues. He explains why the world must reject sacrifice and ‘national service’ and instead proudly embrace the radical individualism their lives and happiness require.”


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  1. The conventional wisdom of the baby-boomers has been proven destructively wrong on just about everything, hasn’t it.

    Yup. The asylum's now theirs! Save yourself.

  2. Part 4 of Dr. Brook's talk, he criticized Libertarians for giving up too easily. He thinks that concentrating on promoting non-coercive interactions is not enough.

    Can Libz elaborate a bit more on the point that Brook made?


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