There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig von Mises; Human Action: A treatise on Economics, Regnery, 1966, pg. 572.
The New York Times reported yesterday the Fed has cut the interbank interest rate to “near zero.” That would be something south of a quarter of one percent. Investing $100 at that rate would earn you two bits a year. You could call that zero. It doesn’t matter much, though. They also report that banks aren’t borrowing from one another these days anyway. Can you blame them?
That means the Fed is out of bullets and the Indians have them surrounded. The Times, with no hint of irony, tells us the gnomes at the central bank are going to “have to reach for new and untested tools in fighting both the recession and the downward pressure on consumer prices.”
Considering that it was the old, tested tools that delivered us to this great unraveling, I’m curious about what the new tools might be. I’m also curious about why the Fed wants to save us from the scourge of falling consumer prices. Try making your own list of things you think are too cheap.
Fortunately, the Times tells us just what the Fed has in mind. They call it a “new phase of monetary policy.” The bold new plan is to print “vast amounts of money…” . Wait a minute. Wasn’t that the old plan? Isn’t that how we got here?
On Bubbles Greenspan’s watch alone the money supply tripled. Since the Maestro’s retirement, Helicopter Ben has stuck with the plan. But printing money is so 1920s. Today we borrow it into existence. It appears miraculously as electronic digits in our online account. And we’ve borrowed an unimaginable mountain of the stuff in the last 20 years or so. Unfortunately, rather than investing it in new farms and factories, we blew it on sushi, granite counter tops, and stock in youmustbekidding.com.
Despite the Fed’s bold new policies, Mr. Market has his own ideas about what to do about too much debt. The problem with money created out of thin air is that it eventually must return whence it came. If history has been consistent on only one thing, it is that every experiment with unbacked paper money and excessive credit has ended in economic disaster for the country conducting the experiment. There are no exceptions. If printing paper money could make a country rich, Zimbabwe would be the land of plenty instead of a fascist hell hole.
The primary difference between previous paper money disasters and this one is that the earlier ones, like the one in Zimbabwe, were confined to the state issuing the currency. The United States has done what no country before it has been able to. We’ve exported our inflation to the world. This has served to allow our experiment to continue long past the time when it would have failed if confined to our own borders. We were bankrupt long ago, but we owed everyone so much by then that our creditors decided to keep the game going so they wouldn’t have to admit it. So they continued holding our checks (dollars), pretending they could cash them whenever they wanted to.
The final phase of that extended borrowing binge is now arriving. We’re too broke for even our biggest creditors to fail to notice. The Fed can fight it all it wants, but it’s like fighting to keep from hitting the ground after you’ve leaped from the roof of a tall building. The laws of physics won’t be conned. Neither will the laws of economics.
What is most disturbing is that the guys who installed the diving board on the roof, bankers and politicians, are claiming with some success that greedy, under regulated business people shoved them off. Having engineered a disaster of biblical proportions our leaders now claim that only granting them sweeping, unprecedented power will save us. Does anyone believe that? I’m trying to picture how the people who run FEMA, the BATF, and the IRS will do running the nation’s insurance, mortgage, and automobile industries. It’s not a pretty picture.
I’m trying to think of why we should give billions to guys who ran America’s car industry into bankruptcy. If they knew how to make money selling cars they’d be doing it now. That’s why no bank will lend them money. You wouldn’t either, but your representatives are happy to buy a few votes with your money.
The current crisis is the result of long years of what Bill Bonner called buying things we didn’t need, with money we didn’t have from people we didn’t like. Of course we’re in trouble.
The borrowing and spending binge was the problem. Recession is the solution. More borrowing and nationalizing American industry will only prolong the disease, and could easily kill the patient. The solution is to declare bankruptcy and start over, hopefully having learned you can’t borrow yourself rich.
The Fed and the government can’t save us from the poisonous effects of borrowing too much by giving us another dose of poison. People and countries get rich the same way, by producing more than they consume and investing the savings productively.
This crisis never could have occurred without the Federal Reserve’s monopoly over and inflation of the U.S. money supply. Giving still more power to central bankers and the politicians who serve them will only make our problems worse.