Friday, 27 August 2010

The next Great Depression has already been YouTubed. See… [update 2]

In a more rational world, the world would have been out of economic depression in February last year.  That would be the sort of world in which those alleged economists whose theories either caused the crash (or blinded them to what was about to happen) would have been kicked to the kerb in short order. Alleged economists like the morons laughing at Peter Schiff three years ago…

Sadly, that hasn’t happened. Instead, those economists who shouted a warning that the first crash was coming—like Peter Schiff & Thorstein Polleit & Robert Blumen—are still being ignored; and all the failed economists who caused that crash are still in the van helping to cause the next one—just as they did in the first Great Depression*.  As Tom DiLorenzo and Steven Kates and Caroline Baum explain…

It’s still not too late to stop the next crash, but it will take a radical overhaul of both economics and government to avert it. As George Reisman explains…

But unless that radical overhaul happens—and even if they begin to realise that they themselves are the problem, let’s not fool ourselves into thinking any mainstream economist or politician will get the hell out of the way so it will—unless it happens, a “double dip” recession is all but inevitable, the depth and rapidity of which will be measured by the extent to which the mainstreamers are given power to continue making it worse.  Just as they did in the first Great Depression. As Peter Schiff explains,

_Quote [They] are not going to let our economy restructure. [They] are going to destroy it. [They] are going to drive it into the ground. [They] are going to wipe out everybody...[Those] are the politics...That is why I remain so negative on my outlook on the United States.

And as they say,when the United States catches a cold…

And since the alleged economists are providing no rational foundation on which non-economists can parse their own future (“they do not understand what it takes to create jobs ... and are flummoxed by their experiment in Keynesian economics not working”) many sane and rational folk are instead finding real economists to listen to—like those I link to above—and doing their own thinking about what’s coming. People like the normally relentlessly upbeat Tony Robbins, who (while still accepting some of the consumerist myths peddled by mainstream economists) begs his followers to get themselves informed about the coming Crash.

That’s the sort of advice you ought to at least listen to…

As they also say—or should—it’s time for even the alleged economists to stop worrying and learn to love depressions. Especially when they do so much to cause them.

* Back in October 2008, before the last election, I warned that all the remedies bandied about by all the alleged economist would be the cause of another crisis, just as they were when the likes of Hoover and Roosevelt used them to extend the 1929 correction for another fifteen years.

When  markets need to correct, when real savings are being consumed on malinvestments that urgently need to to closed off, then here's what you can do to make sure the necessary correction won't happen:

  1. Prevent or delay liquidation by propping up shaky businesses and shaky credit positions. (Better to flush out the malinvestments quickly, so recovery can get under way.)
  2. Further inflate the money supply, creating more malinvestments and delaying the necessary correction. (Better to maintain the currency’s purchasing power rather than dilute it.)
  3. Keep wage rates up --or keep money wages constant when prices start falling (which amounts to the same thing) -- which in the face of falling business demand is a sure recipe for unemployment. (Better to take your cut now, and give your business a chance to restructure.)
  4. Keep prices up (by means of the likes of green-plated building regulations) or add new costs to struggling businesses (such as the dopey Emissions Tax Scam), delaying the necessary corrections that will make businesses profitable again. (Better to let prices fall to the new level they need to post-crash. Trying to help recovery by artificially re-inflating prices is like backing over someone you’ve run over in your car, hoping that it will make the patient better.)
  5. "Stimulate" demand by spending on "infrastructure" projects just to make it look like the government is doing something -- when what that something actually does is to take money from profitable businesses in order to bid resources away from struggling businesses. (Better if government cuts its coat according to its new cloth, without competing with struggling businesses and raising the prices of now-much-scarcer resources.)
  6. Discourage saving and investment by increasing government spending (all of which is consumption spending) and maintaining high tax rates. (Better if government cuts its coat according to its new cloth, without taking now-much-scarcer resources away from struggling businesses.)
  7. Subsidise unemployment with make-work schemes paid out of money from profitable businesses that bid resources away from struggling businesses, delaying the shift of workers to fields where genuine jobs would otherwise be available. (Better to abolish all minimum-wage laws, so everybody who wants to work can work—and work in a job that pays its own way.)

As Murray Rothbard points out in America's Great Depression (from which I draw the above seven points) when you list logically the various ways that government could hamper market adjustments and hobble the adjustment process, you find that you have precisely listed the favourite "anti-depression" arsenal of government policy.

I said in 2008 all these variants of stimulunacy would be used, and would fail. And as Tom DiLorenzo explains above, each of them was and did—just as they were in the First Great Depression. Expect to see them all used here.  Again.

UPDATE 1: And you thought I’m being pessimistic?  Check out Egon von Greyerz from Matterhorn Asset Management [hat tip Foundation for Economic Growth]:  “There Will Be No Double Dip

_QuoteNo, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced.  But this will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer…

UPDATE 2: A couple of readers emailed asking me about some reading I might recommend to help them get informed.  Here’s some web articles:

  • ‘The global financial/economic crisis: causes & solutions’ – David McGregor
  • 'Great Myths of the Great Depression' - Lawrence Reed [sixteen-pages in PDF]
  • 'Saving the Depression: A New Look at World War II' - Mark Skousen
  • The Dangerous Return to Keynesian Economics’  - Steven Kates
  • ‘Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Returned After the War - Robert Higgs
  • ‘Economic Recovery Requires Capital Accumulation, Not Government "Stimulus Packages"’ – George Reisman
  • ‘Production vs Consumption’ – George Reisman
  • Is Deleveraging Bad for the Economy?’ – Frank Shostak
  • ‘Lord Keynes & Say’s Law’ – Ludwig Von Mises
  • More articles at the Mises Institute’s Bailout Reader
  • More articles at the Ayn Rand Center’s Response to the Financial Crisis
  • And here’s some books (linked, where possible, to online editions):


    1. In that context - some great news from California:

      Hundreds of thousands of children will lose their healthcare. Five thousand state workers will be laid off. Massive cuts will decimate education at every level. Social services will be slashed. Two hundred and twenty-nine parks, out of a total of 280, will be shut down. Even some of the state's landmarks may go on the auction block to raise money.

      with any luck - where California goes, the rest of the US will follow!

    2. What I want to know is what to do to prepare for it. Who sells gold and silver in New Zealand? What other assets or investment stratergies should be accumulated?

    3. About that piece "There will be no Double Dip": the people behind it want to sell you gold. Is it surprising that they're predicting global hyper-inflation? Beware the Agenda ...

    4. On the subject of collapses see
      bgaede We are the last generation of humans ,on youtube.

      The guy has some entertaining vids Einstiens Idiots as well.

    5. Why why why why why why is our government prepared to chip in literally HUNDREDS OF MILLIONS of dollars of OUR fucking money to bail out some crooked/stupid/geriatric/demented/deluded/criminal/incompetent/thieving (delete one or more) old fart and his crooked/stupid/geriatric/demented/deluded/criminal/incompetent/thieving (delete one or more)cronies in the South Island?

      This kind of idiotic thinking MUST be a huge poart of the problem that western capitalism faces, surely?

    6. Oh, hang on... I think I understand it now. Let me see if I have got this right.

      Its because, despite the mindless idiocy of the people who have 'invested' in this crooked/stupid/geriatric/demented/deluded/criminal/incompetent/thieving (delete one or more)company, it would be a TEWWIBLY bad look if these crooked/stupid/geriatric/demented/deluded/criminal/incompetent/thieving (delete one or more) people were brought to account and made to suffer for their blindly moronic actions.

      Added to this, it is vitally important that the crooked/stupid/geriatric/demented/deluded/criminal/incompetent/thieving (delete one or more) person who has lost track/embezzeled/frittered away/stolen/burnt/melted down/buried (delete one or more) all this money should never be held to account for his actions otherwise the 'market' might lose confidence.

      Is that it.... or am I somehow missing some vital piece of the puzzle here?

    7. the whole story hasn't been told yet Dave, perhaps there is 25% of the funds under management missing, how is this any different to the returns being garnered from the actual invested money in most Kiwisaver accounts (they are only making reasonable returns because the govt is subsiding them with a $1200 kicker every year).
      what needs to be looked at is the recovery rate on the subsidized farm recapitalisation loans. Is the money truly lost, or will it be repaid? Only time will tell. If the government forces the issues and tries to recoup the money too early from the farmers who did conversions then in all likelihood the answer will be no.
      The success rate of the various farm conversions that these funds have been used for needs to be looked at. Hubbard himself stated on Friday that he was disappointed that he didn't have a chance to answer some of the queries in the report prior to it's publication. what is starting to come out though is there seems to be a desire by the statutory managers to strip him of everything. If SCF goes under it can only have been compounded by the govt's actions effectively taking a struggling business, but in all likelihood viable and forcing it into a position where it needs to be bailed out because it can no longer meet its liquity and lending covenants, thus becoming non-viable; Is that good governance?

    8. The YouTube videos are very informative.

      One question about malinvestment mentioned in vids that I want to ask here. Isn't capitalism about business risk-taking? If that's the case then malinvestment is not a misallocation of resources as the definition given by Austrian economists.

      To establish a business, say start-ups, potential investors must take the conservative view that the risk is too high, therefore they should not invest because to do so, it is misallocation of their resources. If we take that view, then the first group of investors who jumped in to take a bet in the Google founders search engine idea or Sun Microsystems' founders’ computer hardware start-up idea, wouldn't have poured money into them, simply because to do so, it would have been a malinvestment. There are many other success stories like those mentioned above (i.e., early investors taking a high risk in pouring money into those high risk start-ups) of which could be regarded as malinvestment/s.

      People cannot foretell in advance of what products that they may like to see available in the market, but when some entrepreneurs take a bet (via taking risk) by providing something consumers haven't been made aware of that they may want to buy/use. Can we call entrepreneurs' efforts in taking risks by betting that a new product that they're going to produce will have a high demand in the market as malinvestment? If not then why not?

      If there is no such thing as malinvestment (or something to be avoided), then it means that entrepreneurs/investors have the ability to read people's minds. That is, they decided before hand that a specific product or some start-up ideas are not worth investing in, because to do so, it would be a malinvestment exercise, since they already read minds & know in advance that people won't buy such products they're thinking of producing. Google search engine was an idea that even early net users never realized that something they needed badly. They thought that AltaVista (a primitive search engine compared to today’s technology) was there was to search engine (the way it was suppose to be). They never thought that search engine could be improved dramatically. Brin/Page then came along with their search engine idea, in which they were knocking on some investors doors looking for funding. Some jumped in and provided them with funding and some took the conservative view not to take risk in putting money into a high-risk start-up like Google. Those who refrained from investing early in Google regretted it years later. They thought it would have been a malinvestment to put money into a start-up idea of 2 unknown (business-wise) Stanford students.

      Is malinvestment practice an anti- capitalist term used by Austrian economists without them realizing it?

    9. Tom Hunter says...

      PC has frequently referenced the topic of deflation being a good thing, with references to the late 19th century in terms of huge gains in productivity and consequences such as deflation and wealth increases across society.

      As such I wonder what you all think of the following article in "The Futurist" -

      In this piece the author argues that high-tech (IT and biotech) now forms 1.5% of total GDP and is causing deflation, to the extent of absorbing the $1 trillion created by Bernanki and co. He further argues that the rate of productivity in this sector is itself increasing and he lays some bets on what will happen when these industries occupy 3% of US GDP.

      However, his key argument for this seems to be as follows:
      So what we are seeing is the gigantic amount of liquidity created by the Federal Reserve is instead cycling through technology companies and increasing their earnings. The products they sell, in turn, increase productivity and promptly push inflation back down.

      and therefore he argues (it seems to me) that the Fed printing trillions will merely kick the productivity along.

      Hmmmm - something flawed here perhaps!

    10. @Falufulu Fisi: You misunderstand malinvestment.
      "Malinvestment is always the result of the inability of human beings to foresee future conditions correctly. However, such human errors and the resulting malinvestments are most frequently compounded by the illusions created by undetected inflation (q.v.) or credit expansion (q.v.). From the viewpoint of attaining maximum potential consumer satisfaction, every political intervention, other than that needed for the preservation of the market society, must lead to malinvestment."

      Malinvestment is not just bad investments. They are are investments that would not have happened without the artificial credit creation of the banks. It is this creation of credit out of thin air that causes a whole rash of similarly bad investments that inflate each other in the boom, and feed upon each other in the bust.

      For example, the houses whose prices rise in the boom only because the injection of all this "counterfeit capital" has caused a bubble. Yet when the tide goes out and debts are called in and the bust begins to happen, it's apparent that the value was never there, and the optimism across that whole class of investment was illusory.

      You can see the net result of this in housing subdivisions across the States, and in holes in the ground from Queenstown to Ponsonby to Orewa.

      Or the businesses at the early stage of the capital structure who have expanded on the back of all this counterfeit capital, and whose share prices are going through the roof because of projected profits.

      Yet as time progresses, these businessesbegin to find that everyone else is experiencing the same artificial boom, hiring the same factors of production as they are (bidding up the prices of everything they're buying) and lowering the prices they can charge once projects are finished.

      The result is both a bust, and a rash of unfinished projects--unfinished because the resources didn't exist to finish all the projects that were started only because of the injection of all that counterfeit capital, and because the businesses themselves can't survive once interest rates begin to rise.

      You could see all this happening during the Dot.Com boom and bust.

      If you want to read more about the effect of how govt's meddling with interest rates effects Time Preference & causes Boom and Bust, read Gene Callahan's great illustration of the process here.

      And if you want charts with that, complete with moving parts that explain why it's whole **classes** of investment that are affected, then check out Roger Garrison’s excellent Powerpoint presentation.

    11. @Tom Hunter: A few flawed things.

      I don't exactly say that "deflation" is a good thing. Deflation, properly defined, is not falling prices but a contraction in the money supply--just the sort of monetary contraction that is experienced in a fractional reserce system after a crash.

      That sort of contraction is not good, but it can only happen in a fractional reserve system without a commodity standard. And when it does happen, I say that letting prices fall to match the new, lover, level of money around is the best way to quickly liquidate losses and (because one woman's prices are another man's costs) open up veritable springs to profitability that can set things going again.

      And I say, too, that when things are going well and production is increasing, that should be reflected in gently falling prices--just as it did in the late nineteenth centuruy when the fruits of the industrial revolution were really kicking in worldwide and productivity was going through the roof.

      Mind you, when central banks mis-define inflation as rising prices and deflation as falling prices, then they fail to see the benevolence of this. When increasing productivity causes falling prices (as it did in both the 1920s and the 2000s) the central bankers instead see this as an opportunity to start pumping out more "counterfeit capital," since by the way they measure things this means that prices are kept "stable."

      So with this in mind, I'd suggest that what you're seeing with the example you cite is the gigantic amount of liquidity created by the Federal Reserve cycling through technology companies and increasing their earnings NOW, leading to possible problems later along the lines a cite above (in my reply to Falufulu Fisi) and because their falling prices allow the Fed to keep pumping up the money supply while still pursuing their damaging goal of "price stability."

      As as we've said before, "price stability is chaos."

    12. Tom Hunter said...

      Thanks for the replay PC.


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