Tuesday, August 5, 2014

The Same Old Story?

The remarkable thing in the present situation is not the fact that we have just passed through a period of credit-expansion that has been followed by a period of depression, but the way in which governments have been and are reacting to these circumstances. The universal endeavour has been made, in the midst of the general fall of prices, to ward off the fall in money wages, and to employ public resources on the one hand to bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes. This has had the consequence of eliminating just those forces which in previous times of depression have eventually effected the adjustment of prices and wages to the existing circumstances and so paved the way for recovery. The unwelcome truth has been ignored that stabilization of wages must mean increasing unemployment and the perpetuation of the disproportion between prices and costs and between outputs and sales which is the symptom of a crisis.

This attitude was dictated by purely political considerations. Governments did not want to cause unrest among the masses of their wage-earning subjects. They did not dare to oppose the doctrine that regards high wages as the most important economic ideal and believes that trade-union policy and government intervention can maintain the level of wages during a period of falling prices. And governments have therefore done everything to lessen or remove entirely the pressure exerted by circumstances upon the level of wages. In order to prevent the underbidding of trade-union wages, they have given unemployment benefit to the growing masses of those out of work and they have prevented the central banks from raising the rate of interest and restricting credit and so giving free play to the purging process of the crisis. 

Source: Ludwig von Mises, "Theory of Money and Credit", 1953, p. 15

Does it sound contemporary? It's the same old problem. Is this not a proof of the saying that history repeats itself? Mises was describing the economic situation from 1926 to 1929. They got it wrong during those years. They blamed the market! They looked to governments to provide answers. The answers given were artificial stimulus and the use of public funds to stabilize wages and prices. They prevented economic recovery. They increased unemployment. 

How about the response to 2008 global economic crisis? Once again, the market was blamed. We heard of QEs. The goal was the same. The good thing is that we have an advantage today that they didn't have in the 1930s; it is the fast and free flow of information made possible by the Internet. More people now know the real cause and looking for answers. But the main story remains the same. How long will people buy the demagogues' rhetoric? How I wish something will change this time. The sooner the better. 

But so far, instead of looking for economic solution, those in power provided the only answer they know, political solution. They resort to political action to solve an economic problem. Will it work? 

They no longer want to repeat the mistake that happened in the 1930s. They thought the Fed then did not print enough paper money. That's why this time, they're committed to a prolonged pumping of "artificial stimulus" to boost the economy. This means more spending as a way out of economic slump. 

If a drug addict asked you for help, will you give him more drugs? That makes him feel better. At least for a time. But actually, you are killing him. That's exactly what they're doing with the economy. This "artificial stimulus", which we call today "quantitative easing" has the same effect on global economy. It appears that the "patient" is once again normal; the economy "has recovered". It even gives us an appearance of growth. As a short-term "cure", so far, we're just doing fine, but in the long run, I doubt . . . 

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