Friday, November 27, 2009

An Economic Lesson from History

Thomas E. Woods, Jr. provides here a history lesson that BHO and his favorite economists need to study closely. Of course, they will not, and we will suffer the consequences, as people did when FDR and his Dems tried the same bankrupt policies. FDR and his minions hadn't learned the economic lessons of history either, even though the lesson was only a decade old in their time.

The simple bottom line of this economic history lesson from the recession of 1920 is that credit that comes from money creation is vastly different than credit that comes from households saving. Thomas Woods explains why. The federal government can't bring about economic prosperity by expanding credit that's founded on money creation. But that's exactly the plan BHO, the Dems, and the Fed have in mind.

Today's near-zero short-term interest rates are exactly the wrong prescription for economic recovery. Banks continue to acquire loanable funds at a near-zero cost, thanks to the Fed's holding down short-term interest rates (price fixing, plain and simple). The Fed's misguided monetary policy also encourages ever-growing federal government debt.

Debt costs less when interest rates are low. With near-zero short-term interest rates, the U.S. Treasury (under the direction of the 545) can keep spending money it doesn't have indefinitely. It was banks' and shadow banks' giddy, heedless credit expansion to unworthy borrowers, all founded on credit from money creation instead of households saving, that brought on the recession in the first place. Now, we're told that more of the same is the way out of the woods? Simply stupefying.

Yes, economic theory can be eye-glazing (and yes, even boring for some folks), but what we're seeing from the 545 and the Fed today isn't really that difficult to see through. Just follow the money. Who wins and who losses due to the fiscal policies (deficit spending run rampant) and monetary policies (exceptionally low interest rates coupled with financial bailouts) that are now underway?

1. Responsible savers lose; interest rates are now so low that retirees and near retirees who thoughtfully and prudently saved to support their golden years are now in danger of outliving their savings.

2. Irresponsible spendthrifts win; poorly run banks, poorly run auto manufacturers, and poorly run financial institutions (AIG, Bear-Sterns, Fannie Mae, Freddie Mac, GM --- need I go on?) are bailed out (too big to fail, you know); they get the profits, but not the losses.

3. The federal government (the 545)and other apologists for big government win; due to economic and financial crises the 545 created, we are now told that even more regulation and more government control of the economy will be necessary (to hell with voluntary exchange; dangerous, you know).

4. Middle-income tax payers and young tax payers lose; socialized health care will significantly transfer income from middle-class and young tax payers to the oldest generations in society (older folks need far more health care than younger folks).

5. Recipients of the federal governments' spending win; good time to be government contractor or a bureaucrat; good time to be in any industry the 545 favor (how do you spell "green")

6. In the end, working stiffs of all stripes will lose (that would be most of us); history shows us with abundant examples that economies that aren't based on voluntary exchange just don't work. Socialism, fascism, communism, and all other forms of government directed economies cause poverty and squalor. You can look it up.

This time it will be different, right?

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